California Budget…Ewww!!!

The NEW Caifornia State Bird

Inquiring minds are looking into California’s future and seeing huge deficits widening to $28.1 billion over 18 months. That according to Governor-elect Jerry Brown as he readies himself to takes charge of the most-populous U.S. state next month.

Calfiornia State Controller John Chiang said a cash shortage, which was averted earlier this year only by a federal bailout, may once again force the use of IOUs by July.

“I don’t want to say it, but this could mean IOUs and more tax-refund deferrals,” Chiang said.

Chiang, who contemplated the use of warrants this year amid a record 100-day budget impasse, issued $2.6 billion of the IOUs to vendors in July 2009 while waiting for lawmakers to pass a spending plan. Brown, a Democrat who takes office Jan. 3, faces a widening gap after negotiators closed a $19 billion deficit for the current fiscal year, which ends in June.

Chiang projected that the cash shortage will deepen to $3.5 billion in August and $4.6 billion by September. He said he’ll have a better sense of the state’s cash position once Brown proposes a budget, due next month.

Governor-elect Brown added:

“California is facing a very serious budget crisis,” Brown said. “This latest increase comes from actions that are taking place in the Congress that will have an effect on California.”

The numbers are, quite simply, horrid:

The deficit estimate takes into account a $2.7 billion drop in projected estate-tax receipts, and compares with the most recent forecast of a $25 billion gap for the period, Brown said today at a public meeting of state officials. The cash accounts may be short by $2.3 billion within eight months, Chiang said at the meeting in Sacramento.

Please remember that the architecure of California’s tax system has been set up to collect taxes in a very specific way. Before this economic downturn began (2005) 50% of state revenues were from personal income tax. Of this, 48% were from people making $480,000 a year. Where are these people now? Many were in the real estate, financial services, entertainment, restaurants, etc. These are not doing nearly the business they were.

About another 25% of the state’s revenues were from sales taxes. Quite simply, those people who used to make hundreds of thousands of dollars a year are no longer spending anywhere close to what they were.

The main problem California has is that it didn’t take care of its revenue base and now must find another paradigm to run its state with.


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