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Budget Confusion in California: How Big a Gap Do You Want It to Be?

By Mark Paul
Senior Scholar
New America Foundation

As usual, California faces a budget crisis. And just as predictably, Californians are mired in budget confusion.

How big is the crisis? a conscientious citizen might ask. The answer is: As big as you want it to be. Just take your pick. An "$8 billion budget shortfall," reports the San Jose Mercury News. "A $10 billion gap," says the Sacramento Bee. Gov. Arnold Schwarzenegger uses a more technical description: "$20 billion out of whack," he recently said.

This cacophony of numbers and nouns is a big piece of California's budget problem. Not only does California routinely fail to balance its budget, it can't even talk straight about its finances.

In normal accounting and common understanding, a budget is balanced when spending doesn't exceed revenues in a budget year. If revenues are greater than spending, the difference is a surplus; if spending exceeds revenues, the difference is a deficit. Revenues are the proceeds of taxes, fees, and interest on investments.

But not in California. Here, state leaders (and the press) variously and promiscuously refer to the state's budget problems as a "shortfall," a "hole," a "gap," and a "deficit." Sometimes they actually mean to talk about the annual deficit. More often than not, though, they are referring to an amalgam of the state's cash reserve at the beginning of the current year, a current year deficit, a projected budget year deficit, and the desired reserve for the budget year. As UCLA Prof. Daniel Mitchell, who's campaigned tirelessly (and, alas, so far unsuccessfully) for budget transparency, points out, California's bad habit of talking about this "shortfall" confuses a stock (your savings account) and a flow (your paycheck), obscuring the true size and nature of the state's deficit. Most households understand that if they earn $50,000 a year and spend $100,000, making up the difference from their savings, they don't have a balanced budget. California doesn't. Even if it spends more than it collects in taxes, California counts the budget as balanced if has sufficient cash reserves to make up the difference.

To understand how badly confused California is, just imagine what national budget discussions would be like if the same loose terminology were used in Washington. News reports would be talking about Washington's "$5.5 trillion budget shortfall": the $350 billion deficit for the current year and the projected $200 billion deficit for the 2009 budget year, all topped off by the $5 trillion of outstanding public debt rung up by Congresses and presidents since they powdered their wigs and buckled their knee britches.

California is also confused about the meaning of "revenues." For example, at a recent budget conference, Thomas Sheehy, a deputy director of California's Department of Finance, was asked whether Schwarzenegger would consider raising revenues to balance the budget. Sheehy replied that the governor's budget, in fact, already included new revenues: $3.3 billion from the sale of deficit bonds!

Don't try this at home. The cash advance you take out on your credit card isn't revenue. It's debt. And so, of course, is California's borrowing to cover up deficits. When the top people in the state's finance department think debt is revenue, you know California's fiscal problems go all the way to the bone.

Getting the accounting right isn't just a cosmetic nicety. It's essential to making good decisions. In 2003, former Gov. Gray Davis hyped the size of the state's budget problem, talking about a $38 billion "shortfall." He apparently believed the bigger the stated challenge, the more likely California would be to tackle it. He was half right. Californians were indeed appalled by the size of the "shortfall." But they responded not by supporting Davis' proposed solutions, but by recalling the feckless leader who'd let the problem grow so big.

Now Schwarzenegger seems to be taking the same path, talking about a budget that's "$20 billion out of whack," the equivalent of one dollar out of every five in the general fund budget. He apparently hopes to bludgeon lawmakers into budget action. It's more likely, though, that exaggerated figures will only make Californians throw up their hands in hopelessness.

In fact, California's real problem is more manageable: an annual deficit of about $5 billion to $8 billion a year. That amounts to about a half penny on a dollar of state output and is about the same magnitude as the state's annual cost ($6.1 billion) for Schwarzenegger's car tax reduction in 2003. Schwarzenegger has spent much of the year trying to sell Californians on various kinds of budget reform, most of them with little relevance to the crisis at hand. But he doesn't need anyone's consent to insist on budget transparency and clarity. Budget reform could start right at his own desk.

Mark Paul, senior scholar at the New America Foundation, was formerly deputy treasurer of California and deputy editorial page editor of the Sacramento Bee. This article was originally published in New America Voices, and is republished with their permission.

Posted on May 08, 2008

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