Hidden Consequences of Bad California Budget Deal Earlier This Year Deserve Scrutiny

The second proposal was billed as an expansion of the state’s rainy day fund, however, a closer look reveals that it is a restrictive new spending cap that would significantly curtail state spending on vital state programs.

The proposal would require the state to transfer 3% of General Fund revenues into a budget stabilization fund until the balance in the fund reaches 12.5% of General Fund spending (the fund balance is currently capped at 5%).

Beginning in 2010-11, transfers would be required every year unless General Fund revenues are less than the prior year’s General Fund expenditures, adjusted for population growth and per capita personal income growth.

Transfers could be made from the fund in years in which they are not required to be made into the fund, however, one must wonder if the reserve in the rainy day fund would ever be spent in the event of a “rainy day” budget year. According to the California Budget Project, if the proposal was in effect this year it would have forced more than $2 billion in additional spending cuts in 2008-09—a year in which the state faced a $17 billion budget deficit.

This proposal would lock in state spending at a historically low level and have the effect of placing an arbitrary cap on state expenditures that does not account for changing economic circumstances, caseload growth, increasing health obligations for the baby-boom generation, and other demographic factors.

By restricting state spending during tough economic times, the proposal would place greater burdens on working California families, the poor, seniors and the disabled when they can least afford it.

Furthermore, by tying yet more knots in a budget process that is already restrictive, the plan would do nothing to prevent future budget crises.

The expression, “when you are in a hole, the first thing you should do is quit digging” comes to mind when examining the $1 billion in corporate tax giveaways included in the budget agreement.

The budget agreement temporarily suspends two tax breaks for big business—the use of net operating losses and business tax credits—to raise money in 2008-09 and 2009-10 but then grants a series of new breaks beginning in 2010-11. This arrangement is essentially a short term loan to the business community that sets state taxpayers up to pay huge dividends—on the order of $1 billion a year—in the years to come.

Few have closely examined these “hidden consequences” of the budget deal. But on closer examination one must have serious doubts about whether they should be a permanent fixture in the California budget process or not.

David Kersten is an independent consultant who specializes in public policy research and analysis.