Monday, February 16, 2009

Sacramento Meltdown

NOTE: We've moved! Visit us at the California High Speed Rail Blog.

Note: Rafael contributed to this post as well.

As the LA Times reports, the state of California still doesn't have a budget after a 30-hour marathon session in the state senate. Lawmakers on both sides were so exhausted many fell asleep at their desks.

That means pretty soon CHSRA officials will no longer get paid, their consultants are already being offered IOUs. If the impasse is not resolved, the HSR project could be seriously delayed unless the Obama administration awards some stimulus funds directly to the authority, bypassing the deadlocked state legislature. It's conceivable that might happen, but politicians from other states will wonder if it's wise to spend anything at all on such an ambitious project in a state whose own funding depends on a budget process that is broken beyond repair. As an indication of things to come, consider that the national media are now lampooning (starting at 2:10) the whole thing as the political equivalent of a horror movie, the production of which the proposed state budget would subsidize. While they mention why lawmakers are asleep, the mere fact that it has come to this means the Bear Republic is now the front line in this era of serious financial crisis.

It should be noted that Prop 1A and the HSR project are not to blame here. Our bonds haven't even been sold yet. Of course, the longer this crisis goes on, the more costly it is going to be to float those bonds, and that means less money for high speed trains and tracks.

But perhaps the worst possible outcome of this mess is a proposal that is likely to be on the May 2009 special election ballot. It's a "hard spending cap" - a far-right effort to ensure that the spending cuts that are being made can never be reversed. It's actually worse than that, as it would prevent the state from ever taking on a major new project, regardless of its level of popular support, regardless of its need, and regardless of its ability to pay for itself.

The way a cap like the one proposed works is this: spending is only allowed to grow by a rate determined by population growth and inflation. If those numbers are 0, then no spending growth is possible. The cap might allow for 5% growth in spending, but only meet the educational and social services need of those new people and the higher cost of doing business thanks to the inflation. ALL state spending is subject to this cap, even something like high speed rail.

In practice what this means, as the state of Colorado discovered when their cap hit hard earlier this decade, is that government programs have to fight each other. If California wanted to spend $2 billion of the Prop 1A bonds in, say, 2012, then $2 billion in corresponding cuts have to made elsewhere in the budget. HSR would be pit against schools and hospitals. I don't know about you, but that's not a good situation for us to be in.

Worse, the spending cap means that California will have to make further cuts in coming years even above and beyond what Governor Arnold Schwarzenegger proposes, and that's itself a set of rather conservative spending plans. The California Budget Project shows what the impact looks like:

In short, a spending cap like the one proposed could be catastrophic for the California High Speed Rail project. The Legislature has already voted to put it on the ballot in May. Defeating it is going to be a high priority for HSR supporters and transit advocates around the state.


bossyman15 said...

This is not good. Not good at all.

Unknown said...

How would a bond sale require a cut to a program being paid from the general fund?

Tony D. said...

You're the expert on things like this Robert, but I'm with Ben and his questioning: Bond sales vs. paying from the general fund? I realize the interest and principle need to be paid from the general fund, but that's already factored into the budget (correct?). Can you explain?

In short, I just can't see a spending cap being the possible death of our HSR dreams; or any other bond-paid infrastructure for that matter.

Aaron said...

I'll leave it to Robert to be more specific, but my understanding is that a spending cap is just that - a spending cap. Doesn't matter where the money comes from, could come from the Feds, could come from bond sales, could fall from the sky, the proposal limits all spending. So even if someone donated a few billion dollars for HSR (obviously not going to happen, but go with me here), the expenditures would all have to fit under the spending cap.

In short, it's a spending cap, not a revenue cap.

It would discourage all infrastructure investment because the idea of such investment is that you have a potentially significant up-front expenditure that in future years provides public benefits - spending caps assume that governments do nothing other than their year-to-year expenditures.

It's a good thing New York didn't have a spending cap in the first half of the 20th Century; if it had, NYC would not have its world-class transit system.

Having said that, the CA budget is so arcane that I'm not going to pretend to be an expert in it. Having said that, my gut feeling is that the proposal will fail pretty spectacularly in May, assuming it gets on the ballot at all, since it probably violates the single-subject rule, requiring that ballot measures have only one purpose, and this one having many, including changes to tax structures as well as this spending cap. I imagine the more likely result is that we find ourselves right back here again this summer, but I'm still waiting for the Field Poll to weigh in.

Aaron said...

And by the way - if my understanding of how a spending cap functions is correct, such a spending cap ignores the fact that bonds spread out the cost of a project over a series of years. Through bonds, California will spread the cost of HSR over 30 or more years, but the actual cost of construction will have to have room made for it in the budget during construction, rendering the bond process itself nearly pointless.

Actually, let me try to rephrase this in a simple way, before I confuse myself.

Let's say you want to buy a condo in Downtown LA for $300,000, so you can walk over to Union Station every day to watch the pretty trains :). So you go to the bank and, under normal economic circumstances, they give you a 30-year loan whereby you pay $2,000/mth for the next 30 years. So you don't need to have $300,000 in the bank - you just need to be able to budget $2,000/mth out of your salary.

If you were subject to a spending cap equal to your yearly salary - let's say $150,000 - you wouldn't be able to buy that condo, since you technically spent $300,000 on it - doesn't matter that you spread the cost out over a number of years, you're not allowed to spend any more money than you earned that year, end of story, have a nice day.

As I said, if I'm wrong on how this works, please call me on it - this is really a very complicated issue.

Robert Cruickshank said...

Aaron is correct. The spending cap is a limit on how much the state can spend, period. His analogy is the right one.

James said...

So, worst case comes to pass and California is in a straight jacket and government is restricted. Could a case be made that would attract private investment in the HSR system? The HSR entity would pay minimal taxes on profits or property for the first x years (or ever). The government would do its part to clear the regulatory path and execute eminent domain. The project would still need financing and the Banks are threatened to be nationalized so who would invest in such a project?

HSR and many other projects would die. It would be all the state government could do to run the schools and fill the pot-holes and provide basic services not to mention keep the prisoners fed. Next time we have a 100 year flood, by the spending cap we should just evacuate the delta. We have to afford the CDF in the fire season. Instead of the whole government why don't we just put the Republicans in a straight jacket?

Aaron said...

The prisoner crisis isn't going to be with us indefinitely - the Feds have had Quite Enough of this, and it looks like they're going to force the state to start releasing people en masse.

A spending cap wouldn't last permanently - it would either be prevented from coming into force by failure of the May vote, or it would die by voter repeal after the state faced a crisis and was unable to handle it due to the cap.

In the event it did last, HSR would die - there isn't any way to invest in this kind of a project under the cap - as you observed, the state will be hard-pressed
to maintain even basic services under a cap, and no outside investor would get involved in a process that the state couldn't back up.

I hope I'm not overly confident, but I have trouble imagining this thing surviving the May vote. But the side-effect of the May vote will be to re-open this budget crisis. Pick your poison.

Tony D. said...

Playing devils advocate and optimist: I'm not saying I agree with Republicans and their proposed spending cap, but for the sake of HSR and other bond-funded projects, I'm sure such a cap would have fine print exempting bond expenditures; thus avoiding Aaron's "condo scenario." I would think even the state GOP realizes that bonds need to be sold in order to finance large infrastructure projects.

If they don't realize this or the cap is hard against bonds, then the state GOP is out not only to destroy HSR but state government/services as we know it; that's pretty evil if you ask me.

Aaron said...

Tony, that's pretty much it. Really, you should read Calitics.

The GOP in California is much further to the right than the GOP in most other states, and yes, they are out to, as Grover Norquist said, drown government in the bathtub. They are against bond measures as an ideological matter because they believe that bond measures fund things that should be accomplished by private enterprise, and while I certainly have personal issues with ballot-box budgeting, it is the system that we presently live with and must work within.

We're not dealing with the Massachusetts or even New York GOP here. And we have about 4 months to convince Californians that this spending cap is not simply a matter of balancing our public checkbook, and quite frankly, fighting the spending cap is unfortunately about as crucial as fighting for 1A was.

Anonymous said...

All the things that need to happen in Cali to get the budget under control are not going to happen.

revisit and adjust prop 13, never happen
remove illegals from the prison system and turn them over to the feds to pay for... never happen
sue the feds for not doing their jobs on immigration.... not gonna happen.
remove the mandates for education spending so it doesn't suck up half the entire budget.... never gonna happen.
and get rid of the initiative process all together... never gonna happen. Get off petroleum and onto nuclear power so we can make a profit on it....never happen.Cut prison spending by stopping the war on drugs and three strikes, never happen. AS a native of 40 plus years, I have to say that Californians are now completely bi polar as a group. This problem is entrenched and will not change. Things will continue to be done this way for eternity. We will be fine in the good years, and we will go through this again in every recession. It isn't going to change.

Andrew said...

Is there any movement to get rid of the god-forsaken 2/3's rule? If not, maybe we should start gathering signatures for a ballot initiative.

Rafael said...

Correct me here if I'm wrong here, but the state of California only has control over spending revenue it raises and money it borrows itself.

Moreover, the constitution only requires that the legislature balance its annual budget, i.e. that revenue coming in that year covers expenditures and debt service in that year. If you take on a loan, the full amount is spent quite quickly but the fiscal consequences are spread out over a much longer period. That's the whole point.

Given the constitutional requirement for balancing the annual budget regardless of the condition of the economy, there may be value in restricting the sale of fresh bonds to capital projects, aka investments in the future. In practice, that translates to infrastructure (new works, earthquake retrofits, reinstatement after accidents/acts of God).

Long-term loans to cover running expenses in social services should be avoided, that's asking for trouble down the road. The state does habitually take out bridging loans to cover expenses in the early month of each calendar year. This is because the filing date for a given calendar year happens to be April 15 of the next. The practice is risky in that revenue projections can prove overly optimistic. Also, even short-term credit markets can seize up, exposing the state to excessive usury. The best way to manage that risk is to build up and maintain a sufficiently large rainy day fund.

Of course, you can argue if the 8th largest economy in the world should be subject to an annually balanced budget in the first place. In the middle of a severe recession, it might be more useful to require balancing over e.g. a governor's four-year term.


However, the state has no legal authority to tell local government or the federal government or non-government actors how to spend revenue they raise and money they borrow themselves. By that, I don't mean that non-state actors can do anything they like willy-nilly, just that once a permit is issued, the state cannot prevent others from funding project implementation just because it has hit a fiscal wall.

Example 1: the federal government spends billions on maintaining military bases all over the state. The state of California cannot tell it to cease and desist just because it has hit a fiscal wall.

Example 2: let's say the federal government were to grant the consortium of counties (JPB) funding Caltrain operations some federal stimulus funds to permit electrification of the line. County voters decide to cover the difference with municipal bonds to be serviced by a hike in county sales taxes for some number of years. The state of California cannot tell the federal government and the JPB to cease and desist just because it has hit a fiscal wall.

I could go on, but I hope you see my point. Assuming a spending cap were approved, the state of California might have to reject offers of federal funding that are tied to matching state funds. However, if federal grants were made directly to non-state actors, e.g. counties or local government associations, the state would simply have no say in the matter (except for the permitting process).

Putting counties in the driver's seat is far from ideal, but it would allow California to limp along by marginalizing the role of its broken state budget process. This is roughly analogous to how a tree deals with a canker.


A better approach by far would be to eliminate the 2/3 rule for the budget. In the near term, that would almost certainly put the liberal CA Dems in charge and, they would raise taxes rather than cut services or stop taking on new infrastructure projects.

However, amending the constitution would cut both ways: if voters sour on Democratic rule, the CA GOP will quickly shift to the political center to take advantage. Pragmatists would defeat diehard ideologues in many primaries because politicians much prefer being in power to being powerless in opposition.

In the same vein, the possibility of actually losing their majority to suddenly moderate Republicans at the next election would be a powerful moderating influence on CA Dems.

The 2/3 rule was intended to knock heads together because both parties are permanently forced to govern in coalition. In California, it has actually done the opposite: each party, especially the GOP minority, has become increasingly dominated by hardcore ideologues whose only real power lies in obstruction.

Anonymous said...

@rafael that pretty much sums up the mess. I wonder if a simpler solution might be either to create a spending formula for the state that is tied more closely to revenue realities, like a COLA for the state. The state must also have more flexibility in spending. The education budget in particular is just too large a piece of the pie. This state needs, more than anything, considering our financial and geographical place in the world, is a first class infrastructure.

Rubber Toe said...

This is slightly off topic, but it does relate to the proposed methods of closing the budget gap.

The idea of getting money from a private corporation as a sort of cash advance for being able to run the lottery for several years is completely brain dead.

1) This is nothing more than a one time gimmick to generate funds to burn up now, assuming that the "recession" will have come and gone by the time the next budget is due. The recession will still be here.

2) Any assumptions concerning how much such a one time deal would generate are incorrect. Those estimates were made before the current recession kicked in. People who don't have jobs won't be buying lottery tickets, they will be trying to feed their families.

3) Is it really a good idea to intentionally raise money from a group of people who are basically poorer and less educated than the general population? This becomes doubly important when the marketing of the lottery is turned over to "professionals", whose only purpose is to increase revenue to make their investment pay off. Their increasing their revenue means less money in the pockets of anyone here in California. No company is going to give us $5 billion unless they are sure that the investment will pay off considerably more than that down the road. It is essentially one big "payday loan" for the state, with the cost being the additional money the company will make above and beyond what they paid the state for the privilege.

All of the above 3 point to the state getting less money over time than had they not done it. And, they also guarantee that come June 2010, or even earlier if this last year is any indication, it will be clear that there will be another enormous budget deficit either looming for the upcoming year or already upon us as the ongoing recession further reduces state income.

I have to agree with others that have posted that a hard spending cap is lunacy. There was a recent LA Times article I believe where they analyzed where the state was spending it's money and why the areas that were growing were growing at a rate higher than the inflation rate. I don't have a link for that article though.

I have said before and I will say it again. Whether the CA HSR project ever gets built has more to do with the global/federal/state economy than anything to do with prop 1a. If the Feds/State aren't reasonably solvent/functioning going forward then there will be no HSR here, even given the $8 billion stimulus commitment.


Alon Levy said...

The problem with letting counties take over more spending is that their ability to run deficits depends on their credit rating, which depends essentially on how rich they are.

Rafael said...

@ Alon Levy -

precisely, that is why government at the state and federal levels ensures there are de-facto transfers from rich areas to poorer ones. It's a matter of social equity and political cohesion. Those rich areas are only rich because there is a single national market for the goods and services they produce.

Sure, there are exports as well, but just look at the difficulties the EU has had to overcome in creating something that is gradually approaching a single market: elimination of internal trade tariffs, harmonization of industrial standards, primacy of EU laws over national ones, tax harmonization (e.g. floor rates for fuel taxes), the creation of an EU parliament alongside the council (representatives of the member nations), the creation of the Euro, integration of national transportation infrastructure planning via TEN-T etc. etc. etc.

The US doesn't have a lot of these problems, nor does it have to deal with translating everything into about two dozen official languages. Considering the opportunities California has, it is mindboggling that its citizens have saddled themselves with such a stupendously counterproductive constitution.

Anonymous said...

I can't speak to California, but it's clear to me that the blog author has no idea how Colorado's cap works.

Colorado has a REVENUE CAP and BALANCED BUDGET REQUIREMENT. The state cannot collect more revenue than population growh + inflation (it cannot raise taxes) without an election. Federal funds DO NOT count against the revenue cap.

Measures placed on the ballot (like your high speed rail project) must be bundled to a revenue source (a tax).

Colorado's current budget hole stems from the fact that in 2004, Colorado voters voted to suspend TABOR until 2010. Thus when times are good, the government grew. TABOR is successful because it restrains the growth of government when times are good, meaning cuts aren't so painful when the economy turns sour.

Our voters, when asked, have been more than willing to fund big infrastructure projects. In 2004, the Denver metro area voted to tax itself the tune of $4.6 billion to fund the biggest mass transit project in the US since the construction of the DC metro. And the Colorado Department of Transportaion is studying our own high speed rail system. If deemed feasible, the proposal would go on the ballot with a dedicated funding source (probably a sales tax). The legislature couldn't touch the initiative once it got through.

If California had measures such as these, it would not have a $40 billon hole to fill in its budget and would not be the laughing stock of the country. Rather than trash Colorado, California would be well advised to follow its example.

Rafael said...

@ anon @ 7:42 am -

the model you suggest sounds a lot more rational. California actually uses ballot initiatives to allow voters to decide if they want to take on extra taxes to pay for specific infrastructure projects. And where they were asked to approve them at the county level in November, they did - by 2/3 majorities: LA's measure R (omnibus transportation incl. a lot of transit upgrades), Santa Clara's measure B (BART extension) and Sonoma/Marin's measure Q (SMART train).

Unfortunately, California also requires a 2/3 majority in both houses of its legislature (or eligible signatures equal to 8% of votes in the previous gubernatorial election) to get an initiative on the ballot. The former is the way complex propositions like prop 1A tend to get onto the ballot.

The problem is that the California GOP is so ideologically opposed to any form of new taxation for anything that HSR would never even have made it onto the ballot if it had been tied to a tax hike that would have provided a dedicated source of funding. Even if they had, a hike in state taxes would have required a 2/3 majority of voters.

So instead, prop 1A called for the sale of GO bonds, which are serviced out of general taxation. Propositions based on GO bonds can be passed by a simple majority. In principle, that's a rational way to go, but only if there is enough economic growth to naturally increase revenue or, other spending is cut and/or general taxation is raised. Dedicated taxes

And this is where the California model has broken down. The state grew for decades without any major infrastructure spending. In 1994, voters approved the "three strikes and you're out" law that has since caused prison population to roughly double, causing severe overcrowding and massive increases in state spending. Then Govs. Wilson and especially, Davis made a hash of the privatization of the electricity industry, ripping another big hole in the state budget. Simultaneously Gov. Davis gave public sector employees big pay raises, which made the hole bigger still.

By the time he was recalled, the state of California was on financial life support and, its infrastructure was either crumbling or capacity was missing. Gov. Schwarzenegger has sought to address both of these issues, but has had to deal with the intransigence of his "fellow" GOP politicians on the tax hikes that are ultimately needed to fund an aggressive program of infrastructure spending: levees, earthquake retrofits/bridge replacements, highway maintenance and expansion and now, high speed rail. And the state hasn't even got around to dealing with what is arguably its biggest problem: the huge mismatch between where people choose to live and where there are natural sources of fresh water.

Meanwhile, the Dems have been willing to agree to spending cuts but not enough of them and then only in combination with new taxes, with the difference papered over by yet more debt.

Add to that the recent massive decline in the tax base and, you've got fiscal armageddon. The heart of the problem is not the lack of a spending or revenue cap, it's that infernal 2/3 rule on the budget and tax hikes. It has got to go, everything else is paper on top of paper to cover the cracks that have now grown into chasms.

Only after one set of politicians is unmistakably in charge of setting both tax and spending levels will voters be able to hold them to account at the the next election. Nothing moderates a political party's policies more effectively that the prospect of losing any say over the budget (or the prospect of regaining control of it).

To have a chance of working, coalition government have to be voluntary, not de facto mandated by unrealistic thresholds for consensus. That's true of California and a couple of other states. It's also true of the US Senate, where a mechanism intended to ensure the opposition's voice can be heard has been hijacked into one for killing bills it doesn't like.

Anonymous said...

I apologize if i sounded belligerent earlier.

Sounds like you need a constitutional convention. I don't envy your problem. The country needs a strong CA.

No matter what the outcome of the budget negotiations, I would expect the same problem to arise next year no? Every year brings a budget crisis. And I think spending is definitely the cause. Spending in the state has risen 45% since the Governator came to power. It's simply impossible for the growth of government to outpace economic growth by that much. California already has the highest sales taxes and the highest income taxes in the country. After these HSR bonds (and bonds for future projects the people will no doubt vote for) are issued, the situation will only get worse since, from what I gather, the funds to pay for these will come out of the CA general fund.

Were I a California Republican and as a fiscal conservative, I would be willing to trade the 2/3 requirement for tax increases in exchange for a Colorado system. Linking tax measures to new spending measures so that people see the cost of the programs they're supporting is a natural restraint on the growth of government.

So to summarize the Colorado system:

1. Balanced budget requirement

2. Taxpayer Bill of Rights - Revenue increases by no more than the rate of population growth + rate of inflation

3. Simple majority required to raise taxes on ballots. The legislature votes by simple majority for which measures get placed on the ballot.

4. Spending measures must be tied to tax measures (no bundling of initiatives)

5. You would need to rescind the requirement that 40% of CA's budget would go to education. The conflict between this and a similar requirement in Colorado that expires in 2012 was what you were referring to when you said that "Colorado discovered when their cap hit hard earlier this decade." If you want to increase funding for education, ask the people for a tax increase.

Aaron said...

You guys may want to take this over to Calitics, we're getting pretty far afield here...

I will say that it's quite a bit more complex than that, since California has also transferred a good deal of responsibility to the state rather than the county, and because California is more of a nation than a state. California isn't Colorado.

Brandon in California said...

I am still looking for greater detail concerning the approved budget; however, the AP (via the San Diego Tribune) reported some details of the compromised budget.

I am most interested in transportation funding; however, education is noteworthy too.

Select info from the AP piece:


The plan would raise up to $12.8 billion through June 2010 by imposing a variety of temporary taxes. The higher taxes would be in effect for two years. The taxes would remain longer – through the 2013-14 fiscal year – if voters approve a state spending cap during a special election in May.

Here are the specific taxes:

– Increases the state sales tax by 1 cent on the dollar, generating $5.8 billion through the next fiscal year.
– Raises the fee for licensing vehicles to 1.15 percent of market value, up from the current .65 percent. The move is projected to generate $1.5 billion. A portion of the fee will be dedicated to local law enforcement.
– Raises the state personal income tax rate by 0.25 percent, generating $3.7 billion in the next fiscal year. If the state receives more than expected from the federal government, the increase in the rate would be reduced to 0.125 percent.


Reduces state general fund spending by $15.1 billion through the end of June 2010 by forcing education and social service programs to absorb much of the pain. Among other cuts, the budget proposal:
– Reduces education spending by $8.6 billion over two years, likely forcing schools to lay off teachers, slash salaries and postpone spending on construction and textbook purchases. The proposal also would give districts greater flexibility in spending money that is normally dedicated to specific programs.

Economic stimulus

– Allows unlimited public-private partnerships on state transportation projects through 2017 and ...
– Speeds up construction on 10 state public works projects, 5 local transportation projects and ...
– Removes environmental hurdles and accelerates permit approval for 8 state road projects through 2010.

Rafael said...

@ Brandon -

so they took out the $0.12 gas tax hike?

Brandon in California said...

Yes, they took out the gas tax.

I liked that one. I'd prefer it over a sales tax increase. Society needs disincentives for driving cars. However, the VLF almost doubles.

I am uncertain about one thing... whether the AP piece provides the latest compromise relative to the initial budget proposal. Or, it represents all major changes relative to the previous budget.

I'd like a better understanding of where/how transportation and transit funding is affected. It's drastic... but how and where? More specifics desired.

Either way, I am sure I'll have a better understanding by the time I fall asleep tonight.

Anonymous said...

Jim said that "education is too large a part of the budget", but California has been 47th in education spending per capita and I think is about to go to 49th.

The cap is a terrible idea. I think in general, the people of the state may be willing to agree that these formulas where 1/2 the budget must be spent on education and 2/5 must be spent on prisons and 1/3 must be spent on roads and 1/4 must be spent on health care and 1/10 must be spent on state offices and ... just doesn't add up. But if the Governator pushes for it, it may be harder to defeat.

Anonymous said...

I don't understand how we can be #1 in taxes and #47 in education.

Anonymous said...

Do you have details on this (link?)

[quote]– Allows unlimited public-private partnerships on state transportation projects through 2017 and ...
– Speeds up construction on 10 state public works projects, 5 local transportation projects and ...
– Removes environmental hurdles and accelerates permit approval for 8 state road projects through 2010.[/quote]