LAO: Real Budget Pain to Endure

I was reminded of an old saying in politics while reading the new report released this week by the Legislative Analyst’s Office (LAO): “a billion here, a billion there, pretty soon you’re talking real money.”

Over the next 18 months we face a $20.7 billion gap in the state’s General Fund: $6.3 billion in the current budget year and a $14.4 billion gap in 2010-2011. A $21.3 billion out-year budget gap follows in 2011-2012.

Most of the current budget gap originates in the failure of some of the solutions we adopted as part of the July budget revision, including the governor’s proposed sale of the State Compensation Insurance Fund (SCIF), losing court cases relating to budget solutions, and failing to reduce prison costs. The $14.4 billion gap for 2010-2011 results from losing one-time solutions in the current budget and more realistic forecasts for next year. And, the gap grows to $21.3 billion in 2011-2012 because the temporary tax increases adopted last February will sunset – a one-cent sales tax increase and a 0.25% income tax surcharge on all income brackets.

In order to close the budget gap, the LAO recommends a four-pronged approach of early action, long-lasting solutions, assessing budget priorities, and new revenue options.
Simply cutting $20.7 billion from the budget, as some Republicans have proposed, means eliminating basic programs that literally keep Californians alive. The day the LAO’s report was issued, the governor declared he would not consider new tax revenues as part of the solution.

Consider these figures. Our 18-month $20.7 billion budget gap is more than we spend on higher education ($10.547 billion) and corrections ($8.21 billion) combined. It is over 80 percent of what we spend on all health and human services programs ($24.95 billion) and nearly 60 percent of what we spend on K-12 education ($35.04 billion).

Therefore, gravity of the budget decisions before us is extreme. And, the decisions we make now will function as a new budget baseline for years to come because our state revenues will not pick up in the mid-term. The revenue returns of a more precipitous economic recovery elude us because of what economists call a “U-shaped recession.”

Furthermore, the public is just now beginning to see the results of the cuts we made last summer—classrooms are larger, state colleges are getting more expensive, DMV offices are closing, state parks are closing, and courthouses are closed one day a month, already resulting in a severe backlog of cases. The public must be asked to weigh in on how much more it will tolerate.

Since the budget pains will be here to stay for a while, the budget decisions ahead of us must be made out in the open with significant public input. And, every solution available to us must be on the table.

Fight Continues to Save IHSS

460,000 individuals across California rely on in-home supportive services (IHSS). Sadly, some of them will face real life or death situations because of the administration’s ongoing assault on the program.

Last May, the governor proposed to help close our state’s historic budget deficit by reducing IHSS caseloads by 90%. Had we adopted it, this proposal would have returned seniors to nursing homes and institutionalized disabled individuals. Such treatment of our seniors and disabled Californians is not only inhumane and in conflict with public policy in this state for the past several decades, but it is many times more costly than in-home care. The Legislature, therefore, rejected the governor’s proposal.

In subsequent Big 5 negotiations, however, the governor demanded changes in law to address what he considered fraud in the IHSS system. As part of the final budget deal, he demanded substantial changes to the enrollment process for new IHSS providers and anti-fraud requirements, such as fingerprinting, for recipients of IHSS. At the governor’s request, these changes were to be implemented on November 1, 2009.

But the administration has severely botched implementation of these changes. Here is what we know:
• The Department of Social Services (DSS) has been giving counties – who implement the IHSS program—incomplete, incorrect and conflicting information about the new IHSS laws that took effect on November 1;
• The “final” and still incomplete guidance issued to counties detailing how to comply with the law was issued by DSS at 10:21pm on Saturday, October 31;
• Counties have not been provided the necessary materials and resources to meet the new IHSS requirements – such as background checks on in-home care workers;
• 28 counties representing 86% of the IHSS caseload indicated that they will have difficulty meeting the requirements imposed by DSS;
• Without action, IHSS providers may not be able to provide services to clients already enrolled in and eligible for IHSS; and
• Numerous seniors and disabled individuals throughout the state have been unable to obtain the IHSS services they need, at risk to their safety, their well-being, and in some cases, to their very lives.

On October 28, I held an Assembly Budget Committee hearing on the chaos that resulted from the incomplete and conflicting guidance provided by DSS. Counties testified that they had been unable to meet the deadlines set by legislation because of their inability to obtain guidance and resources to implement the IHSS changes. Nevertheless, DSS testified that as of November 1, it would not be paying any new providers for their services. This meant that many IHSS recipients would go without care.

I crafted emergency legislation, Senate Bill (SB) 69, to help clear up this mess. It was a simple bill, requiring DSS to convene a stakeholder process prior to implementing any changes to IHSS. It also delayed implementation of such changes until 60 days after the stakeholder process completed so that counties as well as IHSS clients and providers had time to prepare.

SB 69 required a two-thirds vote of the Legislature because it included an urgency clause so that it could take effect immediately. SB 69 easily passed the Assembly with a unanimous 68-0 vote on November 2. However, working with the administration, Senate Republicans withheld their votes and killed SB 69. I suspect the letter of opposition circulated by DSS to each Senator (enclosed below) had something to do with that. This opposition was unexpected, especially since I crafted the bill based on testimony provided by John Wagner, Director of DSS at my October hearing.

Subsequently, on November 5, I held a second hearing to determine what, if anything, the administration had done to clear up the chaos it had caused in IHSS. The administration effectively thumbed its nose at the Legislature and at the many IHSS recipients in need of services because the Secretary of Health and Human Services and the Director of DSS refused to attend the hearing. I can only conclude that the governor is satisfied with the way his administration has handled these changes to IHSS.

DSS has a history of cooperating with the counties and implementing complex changes in an orderly and professional fashion, sometimes even delaying implementation past the deadline set in statute. The focus has been on getting it right and preventing lapses in service. Why DSS has departed from its stellar record is baffling. It appears that the governor intends to achieve his desired cuts to IHSS indirectly through so-called “reform.”

Until the problems plaguing IHSS are resolved, I will keep pressing every avenue available to me to find a solution. There is real suffering, pain, fear, and even death if we fail to come together and act for the common good.

Water Bond Makes Bad Budget Worse

On November 4th, the State Legislature passed an $11 billion water bond. This action has been widely described as an historic achievement. Unfortunately, this is true for all the wrong reasons.

This bond was crafted behind closed doors, never received a public vetting, and was passed on the fly in the middle of the night by legislators who lacked an adequate analysis of it. It brings our debt burden to historic new levels. And, for the first time, it requires the public to finance half the cost of new dams and reservoirs benefiting private interests.

By passing this bond, the Legislature is flirting with financial disaster. Already, the state is unable to pay for services demanded by Californians. We’ve just gone through three horrific state budgets to close a $60 billion gap. And, more troubles lay ahead. We face an $8 billion gap next year and a $15 billion gap after that. Servicing the debt on an $11 billion water bond will make our bad budget situation worse.

For more information, check out my remarks during the debate about the water bond on the Assembly Floor.

IHSS "Reform" Disaster

On October 28th the Assembly Budget Committee convened an oversight hearing on the Schwarzenegger Administration’s botched implementation of its own proposals to reduce fraud the governor claims is in the In-Home Supportive Services (IHSS) Program.

IHSS provides medical, nursing, and day to day living assistance to 460,000 elderly and disabled in their own homes. It has proven itself a less expensive and more effective alternative to nursing home care while enabling individuals to live with dignity in their community. Please watch the video to see how this program is needlessly under threat. That’s why I am pushing through emergency legislation to prevent the imminent collapse of the IHSS program.

BNRT—Not a European Vacation

The proposal by the Commission on the 21st Century Economy (COTCE—rhymes with “gotcha”) to scrap the California tax system and replace it with the Business Net Receipts Tax (BNRT) is riddled with problems and full of questions without answers. It begs the question—how stupid do they think we really are?

Few people understand how the BNRT works and no one knows how it will impact California. Some compare the BNRT with the European Union's Value Added Tax (VAT). That’s like saying the Oakland Raiders and Manchester United both play football.

On the surface, both tax systems sound similar. The proposed BNRT would be imposed as a percentage of a business’ gross receipts from the sale of goods and services, minus the business’ purchases of goods and services from other businesses (which have already been taxed). A VAT is a tax on manufacturers at each stage of production on the amount of value an additional producer adds to a product. This cost is typically passed on to the consumer in the end.

A key distinction between the VAT and BNRT lies in the fact that California is a state, not a sovereign nation. So, the BNRT lacks a critical element of Europe's VAT—the border adjustment. The United States Constitution prevents California from implementing a border adjustment because that interferes with interstate commerce, which can only be regulated by the federal government.

This creates an enormous problem for California businesses. Europe’s VAT system ensures that products made in Europe are taxed at the same rate as products made abroad by placing the VAT on products entering Europe and rebating the tax for those products leaving Europe. However, under the United States Constitution, businesses without a nexus to California cannot be taxed by California. Thus, California products will be subject to the BNRT while products made elsewhere will enjoy a competitive tax advantage.

The BNRT’s problems don’t end there. Most importantly, the BNRT reduces incentives to create jobs in California.

The Commission’s proposal provides a tax deduction for payments to independent contractors, but not for employee wages. It’s almost as if the Commission was trying to find a way to punish California workers. Under this proposal, California businesses would be taxed for keeping employees on their payroll. The logical result is that California businesses will turn to out-of-state labor contractors who hire workers in California and then contract them out to California businesses. Thus, Californians will have even less stable employment and we would see fewer jobs created here.

Adopting the untested BNRT proposal requires blind faith in the Commission’s promises that it will somehow benefit California, despite all the evidence to the contrary. It’s like quitting your dull, but reliable job because a late night commercial promises you can make $100,000 working from home.

Who benefits from this proposal? California workers don’t benefit. California’s small businesses don’t benefit. California corporations don’t benefit. Any benefit to California’s taxpayers is entirely speculative. The only certain beneficiaries from this proposal are out-of-state businesses, large, multi-state or multi-national businesses, and out-of-state labor contractors. Was this really the purpose of the Commission on the 21st Century Economy?

Many economists love Europe's VAT and extol its benefits to the European economy. But don't be tricked into believing that the proposed BNRT will bring these or similar benefits to California. The greatest lessons Californians can learn from Europe regarding the BNRT are the lessons learned the hard way in the casinos of Monte Carlo.

The Volatility Monster—Be Afraid, Be Very Afraid

As Californians suffer through the worst recession in decades, the Commission on the 21st Century Economy and the governor are seeking massive tax cuts for the super rich. How can such an outrageous proposal be sold to unemployed, underemployed, and underpaid Californians? By calling this giveaway a “reform” to our budget crisis.

The Commission and governor suggest that the source of our budget woes is a sinister monster called--(cue scary music)--“revenue volatility.” As their story goes, if we slay the revenue volatility monster all our budget problems will disappear. So we have no choice but to give very rich people jaw-dropping tax cuts.

Their rationale is that Sacramento cannot responsibly manage a one-time spike in revenues because the revenue volatility monster tricks the Legislature into committing to long-term spending of money the state does not have, thereby condemning California to years of budget stalemates, and tough choices between higher taxes and painful spending cuts. The inference is that these tough choices can be avoided if the state changes its tax structure to eliminate the volatility monster.

Here is the real volatility problem. Very rich people pay a lot of income taxes when they make lots of money in good economic years. Their income taxes go down in recessions because they earn less money. Equity markets, stock options, bonuses, and capital gains depend upon the health of the economy, and with the economy, are volatile. Volatility is not limited to the State of California; we have seen the same volatility across the nation as the richest of the rich have begun to accumulate wealth and income at proportions not seen since the 1920. As a result of accumulation of income in a few hands, the state collects more in income taxes because our personal income tax (PIT) is progressive.

About half of California's General Fund revenues come from the PIT, a progressive tax which increases as amount of taxable income grows. Although the PIT revenues have gone up and down throughout the years, since 1989 it has increased by an average annual rate of 6.7 percent. This outpaces the growth of other taxes, such as the sales tax. Most economists support a progressive tax system – even Adam Smith praised its merits in The Wealth of Nations. And, almost all tax systems in the world contain progressive elements.

The Commission’s report proposes reducing volatility by reducing the tax burden on the wealthy. The Commission proposes flattening the PIT tax structure by reducing the number of tax brackets from six to two. The new tax rate would be 2.75 percent for taxable income up to $56,000 for joint filers ($28,000 for single) and 6.5 percent for taxable income above that amount. Under this proposal, a person struggling to eke out a living on $28,001 will pay the same rate (6.5 percent) as someone earning $2,800,001. If we just don’t tax upper incomes much, voila—we slay the volatility monster.

The benefits to the wealthy don't stop there—the higher income earners still get the benefits of mortgage deductions, property tax deductions and charitable contribution deductions. On the flip side, the Commission’s report recommends we eliminate child care deductions and dependent credits which benefits low-income taxpayers. For some families this leads to a tax increase—a family of four making $65,000 per year with $15,000 of itemized deductions and special credits worth $500 for child care would see their PIT liability increase by a whopping 437.7 percent

This is classic supply-side, “trickle down” economics. The Commission’s report assumes that the super wealthy and corporations which benefit directly from their proposed tax cuts will translate the cuts into lower prices and more investment. In fact, some have argued that lowering the tax rate is going to spur so much investment that overall tax revenue is going to increase. But we’ve heard that tired sales pitch before when the Reagan and Bush federal tax cuts didn’t result in tax revenue increases.

“Trickle down” economics has been thoroughly discredited. The true response to solving the volatility problem is to make sure Californians are fully employed and decently paid.

The Commission proposes reducing PIT revenues under the fig leaf of stabilizing revenues. Using this logic, if California just stopped collecting taxes, the problem of volatility would be solved forever.

VOTE YES--OR ELSE

During the last session, the Legislature worked diligently on big issues, including renewable energy, balancing the budget, and water. Unfortunately, the governor has done little to move the ball forward on these issues, other than to issue demands and now, to tell the Legislature, “vote yes--or else.”

Now, he has taken 700 bills hostage in an attempt to force a deal on a water bond benefiting some Californians, but paid for by all Californians. Something is very wrong with this picture.

The Legislature is keenly aware of the urgency of the crisis faced by agriculture, fisheries, and communities dependent on the Delta for their drinking water. During the final days of session, the Legislature came very close to passing 2 bills on water, both of which it continues to work on. One bill would set substantive policy for the Delta; the second bill would put a water bond on the ballot for voters to consider.

As complicated as the substantive policy is, the funding is just as problematic. The proposed general obligation bond for dams and conveyances burdens the state’s already over-stretched General Fund by $780 million annually. In a year when we cut billions of dollars from the state’s General Fund, decimated state services, nearly closed state parks, furloughed state employees and backed away from the state’s long-standing commitment to higher education, adding another $780 million annually to finance bond costs is fiscally irresponsible. We need the governor’s help to identify better ways to pay for this.

On October 5, the governor suggested to the Senate President Pro Tem that the Legislature withdraw nearly 700 bills now on his desk awaiting signature. The clear inference is that if they are not withdrawn, the governor will make good his threat to veto them because he has not yet gotten his way on water.

The veto power overrides the work of the Legislature which represents the will of the people. It is an extraordinary power and should not be exercised capriciously or casually. This governor, however, has repeatedly abused his veto power and threatens to do it again.

Last year, the Governor vetoed over 400 bills, 136 of them with a generic veto message, because he was unhappy after protracted budget negotiations.

Soon after, the state saw an unprecedented drop in General Fund revenues and we were forced to make billions of dollars in painful cuts to services. Public hearings were held, the Big Five met, an agreement was reached with the governor, and was passed by the Legislature. The governor promptly vetoed funding for several programs, including domestic violence shelters and HIV/AIDS prevention. A lawsuit is pending to challenge the legality of these vetoes. Legal or not, these vetoes violated the agreement between the governor and the Legislature, put the safety of many Californians at risk, and jeopardized the public's trust in the governor.

In September, the governor gave Californians another taste of how far he would go. He asked the Legislature to withdraw all bills pending on his desk so that he could evaluate what had or had not passed before deciding whether to sign or veto bills. The Legislature did not withdraw Assemblymember Cook’s AB 264, a unanimously passed bill to honor Vietnam veterans. He then vetoed the bill out of spite.

This brings us to the governor’s most recent threat to veto the bills currently on his desk. Like last year, many of the bills threatened by the governor save the state money during this dire recession. Some correct flaws in existing law or make life easier for Californians. All of them deserve serious consideration. Yet he threatens to veto them without regard to their merits because he hasn’t yet gotten exactly what he wants on water right now. Vote “yes” on the water bill—or else.

Assembly Majority Leader Alberto Torrico has announced that he's writing to the Attorney General, urging him to investigate the governor's use of intimidation to influence legislation as a form of extortion. Whether the governor’s clumsy attempt at hostage-taking is illegal remains to be seen. It may constitute misconduct and, at minimum, is an abuse of his executive powers at the expense of all Californians.

Instead of bullying, now is the time California needs its governor to step up to the plate and work cooperatively with the Legislature to find ways to solve our water problems without mortgaging our future.

Tax Reform for Billionaires

The Commission on the 21st Century Economy, tasked with crafting proposals to modernize California’s tax policy and ease the volatility of its revenues, released its final report today. Leona Helmsley would be proud.

Helmsley – a billionaire New York City hotel operator and real estate developer sentenced to prison for tax evasion – famously said, “Only the little people pay taxes.” With all the tax cuts being proposed by the Commission for big business and the wealthy, her observation will be true in California.

If adopted, the report’s recommendations – available here – would dramatically reshape tax policy in California and place the burden squarely on our already over-burdened, underpaid, and under-employed working families. These recommendations include:
• Reducing the number of tax brackets from six to two. The new tax rate would be 2.75 percent for taxable income up to $56,000 for joint filers ($28,000 for single) and 6.5 percent for taxable income above that amount;
• Eliminating the 8.84 percent corporate tax and the $800 minimum franchise tax;
• Eliminating the current 5 percent state sales tax, with the exception of the sales tax on gas and diesel fuels which would continue to be dedicated to transportation;
• Establishing a new tax, not to exceed 4 percent, applied to the net receipts of businesses. Small businesses with less than $500,000 in gross annual receipts would be exempt from this tax;
• Creating an independent tax dispute forum – This forum would provide taxpayers with a forum for resolving disputes with the state; and
• Increasing the state’s Rainy Day Reserve Fund from 5 percent of revenues to 12.5 percent and restricting the government's ability to use the reserves.

By flattening our tax policy, these recommendations coddle CEOs and billionaires while kicking California families to the curb. No wonder the Commission shut the public out of the process to complete its work in secret.

It is equally important to note what is not recommended by the report, but would have contributed to increasing and stabilizing the state’s tax base: a new carbon tax, an oil severance tax, extending the sales tax to certain services, and requiring corporate-owned real estate to be reassessed at market value on a regular basis.

California families are struggling to make ends meet. This recession has produced record unemployment, fueled massive wage reductions, and resulted in huge sales declines. Increasing the tax burden on hard-working families cannot fairly and reliably fill the huge revenue gap created by reducing income taxes on the wealthy and eliminating corporate taxes.

Tax reform decisions are too important for experimental guesswork. But this is exactly what the Commission’s report is urging. While the Commission asserts that its proposals will create a tax structure that will more reliably support state services, that assertion is unsupported by the available evidence. In fact, the Commission has thus far refused to make available to the public studies and information that form the basis of its proposals. Adopting the Commission’s proposals would be playing Russian roulette with California’s future.

Children Paying Price from Governor’s Blue Pencil Cuts

When signing the budget revision in July, the governor vetoed hundreds of millions of dollars worth of services the Legislature fought to protect.

Across the state, counties are reporting that must adapt to these cuts by eliminating positions of Child Welfare Services (CWS) workers who protect children. Consider these examples:
• Contra Costa County is holding 70 CWS positions vacant agency-wide and closing offices.
• Tulare County laid off 55 CWS workers; and
• Sacramento County is considering eliminating 212 positions in CWS.

How much protection will the most vulnerable children in California lose? Counties are only now beginning to sift through the details of how the cut will impact each local county department and then we will find out how many children will fall through the cracks.

Cost of Inaction on Corrections Reform

Anyone not prepared to support corrections reform legislation must justify that position against the inevitable cost of inaction: K-12 education, higher education, human services, and health care will pay the price if we don’t control corrections costs. They must also justify their position against the bloated inefficiencies of our corrections system which could be keeping Californians safer.

Every part of the state budget has faced enormous cuts over recent years, except corrections. In fact, the corrections budget has consistently been the fastest growing part of state spending. It is now the 4th largest area of spending, comprising nearly 10 percent of our state budget.

What does California get for its money? We spend more on corrections than any other state but we have the highest recidivism rate in the nation – approximately 70 percent. And, without experiencing a massive spike in crime, 1 in 36 Californians today is under control of our corrections system compared with 1 in 69 in 1982. Basic reforms to our corrections system are long overdue. They will save us money and make California a much safer place.

On August 20, the Senate narrowly passed ABx3 14. It saves $524 million in corrections spending by enacting various reforms to focus our incarceration system on violent offenders, including:
· Adjusting property crime thresholds for inflation;
· Changing three wobblers - petty theft with a prior, check-kiting and receiving stolen property - to misdemeanor offenses;
· Establishing a Sentencing Commission in California to establish new sentencing guidelines by July 1, 2012;
· Establishing alternative home custody with electronic monitoring for inmates with less than 12 months to serve on their prison terms or for inmates over 60 years of age; and
· Enacting a series of reforms to our parole system.

Unfortunately, this legislation lost momentum. As negotiations continue to reach a corrections agreement, where is the outrage in this debate? Failing to enact corrections reforms shows a perverse preference for putting the burden of future budget cuts on the backs of productive Californians and the working poor of our state. Failure also risks losing control of our prison system to the federal government.

After fighting tooth and nail to keep CalWORKS, Healthy Families and CalGrants this year, I encourage the advocates for these and other programs to fight for corrections reform. If we fail, it is their programs that will pay the price.

According to the Legislative Analyst’s Office, in General Fund dollars, each year we spend approximately $46,000 per prison inmate and $248,000 per youth incarcerated in California. Compare these figures with:
· $5,888 per child in K-12 education;
· $3,721 per student enrolled in community college;
· $6,612 per student enrolled at CSU and $12,756 per student enrolled in UC;
· $5,707 per child in our foster care system;
· $1,408 per participant enrolled in CalWORKS; and
· $435 per child enrolled in Healthy Families.

Is this really the kind of state you want to live in?