Wednesday, February 11, 2009

Squaring the California Budget Circle

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

The LA Times reports that the lack of a California state budget is forcing the Governor to consider actions beyond making payments in IOUs and furloughing state employees for two days a month. Specifically, he claims to be out of options and is threatening to start handing out pink slips - in effect, six-month(!) notices - to 10,000 state employees starting as early as this Friday, Feb 13.

State senate Democrats are working on a counter-proposal that would avoid layoffs by increasing revenue via a package of emergency measures that would be in force for two years:

- increasing the state sales tax by 1%
- raising vehicle license fees from 0.65% to 1.15% of the value of the car or truck
- raising state gasoline tax by 12 cents per gallon
- collecting a surcharge of 0.25% of state income taxes owed

Of these, the proposals to raise the cost of operating a car or truck make the most sense to me. However, rather than increase the gas tax - which is tied specifically to highway infrastructure - I would advocate a "carbon fee" for gas and diesel that would actually start at $0.10 and then increase by $0.02 each and every month for ten years. At the end of the period, the fee would reach a whopping $2.50 per gallon - over and above existing taxes! Analogous carbon fees would apply to other fossil fuels, e.g. natural gas used in electricity generation. All of these would contribute into the general fund.

To compensate for this regressive measure, I would cut general sales and payroll taxes as soon as budget constraints permit, possibly followed by additional tax cuts later on. I realize that increasing the cost of fuel and other forms of energy is anathema to most Americans and, Californians are no exception. However, it is also the only proven way to make high fuel economy cars pencil out while also encouraging transit-oriented development, transit ridership, bicycle use, telecommuting and renewable electricity generation. Note that having a high fixed component in the cost of a unit of energy shields consumers from volatility in the underlying commodities. Fuel and utility bills would be higher to begin with, dissuading consumers from taking on excessive mortgage debt they can no longer service if the price of oil should rise sharply. Cheap energy boosts economic growth only until the inevitable asset bubble bursts. In the long run, it is a curse rather than a blessing.

Predictably enough, none of the Republicans in the state legislature has agreed to any tax hikes whatsoever, least of all those on gasoline. As card-carrying neo-Hoovers, they instead insist on spending cuts irrespective of the macroeconomic context. For their part, Democrats are loath to accept job losses in the highly unionized public sector. Unfortunately, the state has no leeway, as it is constitutionally required to balance its budget. Only the federal government is allowed to run deficits.

The bitter irony is that federal aid to states is exactly what "moderate" Republicans and Democrats in the US Senate have been cutting from the stimulus bill, arguing that states have failed to keep their spending in check in recent years. In effect, Congress - that paragon of fiscal rectitude - is forcing governors all across the nation to do the exact opposite of what their stimulus bill is supposed to achieve.

Meanwhile, MSNBC's Rachel Maddow points out that prisoners are the only people with a constitutional right to adequate health care. Three federal judges are about to rule that California's prison population of approx. 160,000 is currently underserved. That would force the state to either embark on a massive prison construction spree or, to release almost 60,000 inmates over the course of the next two to three years. The latter course of action is strongly opposed by, among others, the influential prison wardens' union.

The 2008-2009 state budget includes $10.3 billion for the Department of Corrections, which works out to approx. $64,000 per inmate per year. The RAND corporation estimates that the 1994 three-strikes-and-you're-out law alone is responsible for about half of that.

As we have discussed previously on this blog, the perennial and rapidly deepening budget crisis is very much relevant to the success of the HSR project. Prop 1A may have passed in November, but actual appropriation of the bonds is subject to the rules laid down in AB3034, which means they are part and parcel of the state budget fracas.

Fortunately, there might be a way for California to solve multiple problems at once: give selected inmates sentenced under the three strikes law the option of "exceptional parole". The idea would be to let them earn regular parole and their eventual (early) release while avoiding the need to construct new prisons. The program would involve several years of manual labor on various infrastructure projects, possibly including HSR construction. It would be a hard way to eek out a living, but an honest one.

Housing would be in temporary guarded trailer parks set up close to work sites and enclosed by gates and fences. Thanks to heckuvajob Brownie, FEMA still has nearly 100,000 brand new trailers left over from hurricane Katrina, purchased at a cost of $3 billion. Their formaldehyde outgassing problem could be adequately addressed for the purposes of exceptional parole by simple modifications that ensure adequate ventilation at all times, even in winter. The number of participants in the program per trailer would depend on its size, but there would be no overcrowding. Outside of working hours, exceptional parolees would be confined to the fenced-in area, effectively a form of house arrest. This would be enforced with ankle collars with wireless electronics to track their whereabouts.

Exceptional parolees would remain entitled to health care, but the cost of providing it, housing, food, utility hookups etc. would all be garnished from wages. By law, the work must be both voluntary and compensated, otherwise it amounts to a form of slavery. In practical terms, however, participants in the program would receive very little cash.

Violations of house arrest, absenteeism, feigned illness, deliberate destruction of trailers or other property and, justified complaints from foremen - employed by commercial construction companies - would all be reasons to impose sanctions, up to and including a return to prison. On the other hand, those who persevere would gradually win parole privileges and eventually, their freedom. Meanwhile, they would acquire marketable skills in the construction industry.

Admittedly, the above is just a sketchy outline of how an "exceptional parole" program might work. Feel free to poke holes in the concept or, to make suggestions of your own, in the comments.


Anonymous said...

On the surface its a great idea that would have worked in the 30's but a lot has changed over the years. Major construction projects are no longer built by armies of unskilled workers swinging picks. Now it takes a much smaller workforce skilled in operating heavy equipment. Most of those released would be non-violent drug offenders, I don't think many engineers and construction workers would be very excited about their new co-workers....

Spokker said...

Haha it's a fucking blog for a fast train and now we have to think of ways to deal with prisoners?

Fuck it. I refuse. It is criminal that there hasn't been an agreement on a budget yet.

At what point does the population say enough and physically remove its incompetent government? The 20,000 workers who are about to lose their jobs sounds like a good start.

THEY SHOULD PUT RAFAEL IN CHARGE. He has thought more about these issues than anyone in Sacramento. Christ.

Rafael said...

@ anon @ 6:57pm -

the only reason heavy equipment features so heavily in modern construction projects is high union labor rates. If you suddenly have a pool of cheap labor, you can afford to revert to less sophisticated techniques. This is especially true early on, when vegetation must be cleared, holes dug for fence posts and catenary masts etc.

Besides, the diesel engines on most heavy machinery still aren't equipped with particulate filters, let alone urea injection systems to deal with NOx emissions. Mandatory retrofit work will make this gear less available just as infrastructure programs are accelerated to stimulate the economy.

There are, of course, other projects exceptional parolees could be deployed in. Clearing the undergrowth from forests near inhabited areas to reduce the risk of wildfires would be one obvious labor-intensive activity with long-term benefits for the state budget. Installing drip irrigation systems on Central Valley farms would be another.

crzwdjk said...
This comment has been removed by the author.
Anonymous said...

Your idea does make some sense. There was, after all, one country that not only didn't suffer from the Great Depression, but in fact had economic growth, and a large imprisoned labor force was a big part of their solution. Am I accusing you of proposing Stalinist tactics? Why yes, that is exactly what I am accusing you of. Anyhow, the real reason construction work has involved more heavy machinery is because machinery allows for much more uniform and better controlled work. You really do need all sorts of fancy measuring gizmos to ensure that your track is really finely enough aligned for HSR. And no matter how many people you throw at the job, you still won't be able to replace an earth-pressure-balance TBM. Not only will a lot more construction workers die, but there's a significant risk for the people on the surface too, if the tunnels are dug by hand instead of TBM.

Rafael said...

@ Spokker -

the real problem is that the California constitution is a recipe for budget gridlock:

- assemblymen and senators are elected to represent geographic districts they then gerrymander to virtually guarantee their re-election for many years to come. Statewide party lists would eliminate districts but also open the door for additional political parties. In Germany, any with less than 5% of the popular vote get no seats at all.

- representation by geography means politicians cannot specialize in any one policy area, so instead of at least a handful of competent technocrats you get mostly dilettantes and blowhards. That can't be avoided entirely but designated subject matter experts do tend to raise the level of debate.

- the governor is elected directly, which means he has veto powers but no inherent majority in the legislature. Indirect election by the legislature, with a constructive vote of no confidence, avoids this. However, stable majorities often require that two or three parties negotiate formal multi-year coalition agreements, which can take weeks or even months.

- in California, 80% of discretionary spending is determined by single-issue ballot initiatives that too often ignore long-term fiscal impacts and/or unintended side effects. In general, referenda are actually a lousy way to govern.

- both houses must nevertheless pass a balanced budget by a 2/3 majority and the governor must sign off on it as well. This is a central function of government and should require only a simple majority, preferably headed up by an indirectly elected executive branch.

- the state constitution can be changed at any time by a simple majority of the electorate via a ballot initiative. Common sense suggests that the foundation of an edifice should be harder to change than its upper floors.

- in practice, both parties in California have to co-operate at all times, regardless of election outcomes. Much the same is true at the federal level. Representative democracy only has a chance of working if voters can give one set of politicians a clear mandate to govern and the opposition bears little or no responsibility for anything that happens until the next election. There are inherent risks to such a system, but they are arguably smaller than the one California has right now.

Rafael said...

@ anon @ 7:39pm -

please, Stalinism. That's ignorant and insulting. What I'm proposing would be voluntary, hardly a gulag. No inmates would be forced to sign up, instead the terms and conditions would have to be defined such that enrolling in the program would be preferable to a life behind bars.

And of course, the parts of construction projects that require special skills, e.g. the precise positioning of rails or controlling TBMs, would be unsuitable. However, there's still plenty of unskilled or low-skilled work involved in construction projects. Just think of station buildings, for example.

Anonymous said...

So, you smoke a joint, the government catches you and locks you up. Now you have the "voluntary" choice of sitting in an overcrowded prison, or largely unpaid and dangerous work on a state construction project. I wouldn't exactly call that voluntary. On a more practical note, I doubt the construction companies and unions would be at all happy about any of this.

Anonymous said...

I'm in dire need of comic relief.

Anonymous said...

What about a bunch of "Chinamen" and Irish? Makes about as much sense.

Matt said...

please anon. We all think the three strikes rule is dumb. But what are you going to do about it.

The fact is our state government is broken, bad. Way beyond the Federal government. As much as I appreciate the effort Rafael, and it is not a completely bad idea, we are beyond small fixes and patches. We need an overhaul. We need something completely different government system in California. A Unicameral party proportional? Maybe bicameral. Something. Whatever the case is it needs to change, and I am not talking about ObamaChange (TM). I am talking about real government overhaul.

Spokker said...

How bad does it have to get before a population takes up arms and physically removes the California state government?

With 20,000 state workers to lose their jobs soon, that sounds like the start of a sizable militia.

Hypothetically speaking, of course. I like to play out revolutionary scenarios in my head sometimes.

Robert Cruickshank said...


Sorry I chose today to get sick.

I write about the budget crisis a lot over at Calitics. I don't think it's too much to say it's the best online resource on state politics. (The best online resource on the state budget is, of course, the California Budget Project).

We shouldn't get too deep in the weeds here on the vagaries of the budget, although it is wise and necessary to talk about its effect on high speed rail.

That in mind, I have a few things to say:

1. Rafael's prisoner proposal is just not going to happen. First, the legal system is not likely to tolerate that use of prison labor. Second, even if it would it's a bad idea - construction projects should be used to provide jobs to working Californians, at a decent wage. Giving them to prisoners is just bad economics.

2. The budget mess is best resolved through a combination of three things: A) broad taxes, which appear to be in the emerging deal; B) significant cuts to the prison system, including abolition of the three strikes rules and legalization of certain drugs; and C) Federal aid.

The US Senate, morons that they are, gutted C, and B isn't yet politically practicable in the state. A is going to be a part of the solution, but so are massive spending cuts, which will merely exacerbate the economic crisis here.

Keeping all the above in mind, what does this mean for HSR (the reason we're all here, of course)?

A hard spending cap must be avoided at all costs. A persistent Republican demand is that, in exchange for taxes, a cap be put on how much the state can spend each year. It would be a hard cap, like the kind Colorado had. All state spending would be subject to it, including high speed rail.

So if the state wanted to spend $2 billion on HSR construction in, say, 2012, and that exceeded the cap (which it likely would) then either the spending can't happen, or something else has to get cut in the budget.

That's a very bad outcome, because it pits HSR against schools, health care, prisons, etc. I know Californians support HSR, but when it's 10,000 teachers vs an HSR project still in its infancy? Yikes, I don't want to have that fight.

From the perspective of HSR, the best move is to eliminate the 2/3 rule on budgets and prevent a hard spending cap from being implemented. I also believe that's the best move generally speaking for the state, but if our HSR project is to move ahead, both conditions will need to be satisfied.

All reports indicate that state funding for public transit will again be gutted, on top of the $3 billion or so in cuts that have already been levied on public transit agencies since summer of 2007. That hurts HSR too, because for our system to be as successful and transformative as possible, we need well-funded transit systems to provide service to HSR stations.

So I would suggest that when we discuss the budget crisis, we do so with HSR at the center. And if you want to have a more wide-ranging discussion, you're always welcome at Calitics.

Anonymous said...

Sorry off topic...BUT I read in the SFGATE that the high speed rail money in the stimulus bill is 8Billion!!??? is this correct?

Rob Dawg said...

A hard spending cap must be avoided at all costs.

Robert, why? Is it because you accept that HSR is a discretionary expenditure in this environment?

Is it because we all implicitly know that CAHSR would never meet a hard cap for completion?

A stable and solvent government can afford things like HSR. Why are you eliminating one path to that goal?

Anonymous said...

Well I feeld bad for state workers getting laid. It won't be any of the politicians or their aids who get screwed it will be thousand of ordinary working californians being thrown out of a job and adding to the unemployment rate. These are people who don't make much, and likely will start losing their homes. Not a good move. I'm sick to death of this governor and these handful of republican reps. who use the same obstructionist tactics year after year after years in their attempt to protect the rancho mirage country club set who are to busy playing gold and getting lit by noon everyday.

Anonymous said...

as for the prison problems. One, we are paying to house a huge number of illegals that are the responsibility of the feds, it was the feds who struck down prop 187 and the feds who have failed to secure the borders and these illegals in prison should be bused to DC and dropped on their doorstep. Thats about a third, and another third is the folks in there for drug offenses who should be in treatment no in prison. remove those two aspects and there is no problems.

Anonymous said...

( whoops-i mean I feel bad for state workers getting laid OFF)

Alon Levy said...

Rob: you don't need a 2/3s rule for a solvent government. Canada managed to run surpluses for 12 years in a row with only a simple majority needed for the budget.

Alon Levy said...

Now that I'm thinking about it more, I can't see how using prison workforce will do any good. The track record of contractors at guaranteeing prisoners' human rights is terrible; usually the conditions aren't much better than slavery. Politicians' and voters' track record is just as bad: not only do they consider being nice to inmates a sign of weakness in itself, but also they are unlikely to pay market rates when they can get away with paying half as much.