States Under Fiscal Pressure: California
Can't tax everything that moves if nothing moves
In my last post, I looked at the general call for the U.S. federal government to ramp up the money printer more and shovel those funds to the states. Now, I’m going to look at specific states and the fiscal pressure they’re under.
I originally intended to highlight Illinois first, but something caught my eye this morning, so California is getting covered first.
Opening Up Because the State Needs Activity to Tax
Evidently, Governor Newsom has backed down a bit from prior pronouncements:
Gov. Gavin Newsom announced a dramatic relaxation Monday of health standards to reopen the state, a move that could allow nearly every county to proceed more quickly, and he offered the possibility of pro sports returning — without fans — by early June.
The announcement marked a significant departure from strict criteria Newsom laid out just over a week ago that would have prevented most large counties from reopening and came as residents have become increasingly restless to return to normal and some business owners have defied rules to stay closed.
There are two major aspects to think about for states in opening up, and neither is about the “science” of how the epidemic may rage again.
The first one, which I don’t touch on much on the blog, but I’ve been saying to many people: there are limits to power. If one over-reaches beyond what most people will put up with, you can find yourself, as a leader, losing whatever power you could have retained.
I don’t want to get into anecdata, but I have been darkly amused listening to friends yelling about whatever restrictions being loosened and being so surprised that people were flocking outdoors when the weather was nice after being cooped up for so long….. and then commenting that they had just had to get out of the house! While some people do have trouble understanding that other people may behave differently from them, I have chuckled to see that some people have trouble with the concept that other people may do the exact same thing as they for the exact same reason!
No, it’s not political – it’s just human psychology. It doesn’t even require protests. People will just start go doing things.
The second one is that, unlike the federal government, they don’t have a money printer, and they really need tax revenue.
Governor Newsom of California announced yesterday that he is relaxing the statewide lockdown sooner than he had said he would.
What gives? I think Newsom is finally recognizing tradeoffs. He started the fiscal year with an expected budget surplus. He now expects a state government deficit of $54.3 billion. He had wanted a bailout from his Democratic California partner Nancy Pelosi. Her $3.2 trillion bailout passed in the House by a narrow 208-199 vote but is probably dead on arrival in the Republican-controlled Senate.
My guess is that he understands that he’s not getting a big bailout. So he can’t shift the cost onto the shoulders of federal taxpayers.
I think this second factor is driving these decisions far more than the first. We will see below some of the initial results for tax revenues for California, and what they have had to do so far to deal with that drop in revenue.
For what it’s worth, all states are open now, to a certain extent. The pressures aren’t unique to California, obviously. Some states are obviously harder-hit by the virus in terms of cases and deaths [California is not one of those states, right now.]
But, frankly, given how humans have behaved throughout history, it doesn’t require any specific scientific results to realize people are going to start being active again. Heck, read the information on how the Soviet black market worked in books like To Build a Castle — even when the punitive machinery of the USSR, they couldn’t keep people trading and being active in business. The question is whether the state got a cut… and it can’t while things are officially closed down.
California revenue impact: about 37%
California faces $54B budget deficit
California faces a $54.3 billion deficit as the coronavirus pandemic hammers the economy, the state’s worst budget gap since the Great Recession, state finance officials said Thursday.
The shortfall is almost 37 percent of the current $147.8 billion general fund budget and foretells widespread program cuts absent a federal bailout. K-12 schools and community colleges stand to lose $18 billion alone and are clamoring for money to adapt campuses to a new social distancing reality.
Yeaaaaah, good luck with that.
The bulk of the deficit comes from a projected $41.2 billion revenue decline over the next 14 months, a drop from the ebullient outlook the state had just four months earlier, according to the Department of Finance. Forecasters believe the state’s big three tax sources — personal income, sales and corporations — will plunge about 25 percent.
As usually happens in a recession, the state will likely see soaring demand for health and human services programs, adding $7.1 billion in costs, the Finance Department said. California can expect to spend $6 billion on other new expenditures, most related to the coronavirus response.
For the record, my estimate for California’s share of the first wave of state aid in the HEROES bill was about $21 billion.
That obviously wouldn’t fill the hole.
The $54.3 billion estimate is far higher than the roughly $35 billion figure that Legislative Analyst Gabriel Petek presented to lawmakers in April. Still, the new projection nominally falls below the roughly $60 billion gap the state dealt with in 2009 in two separate budget actions. And as a percentage of the state general fund, the new deficit is still smaller than the one the state faced that year.
Hmmm, how well did California [and how did California] get through that period?
The last recession prompted state worker furloughs, teacher layoffs, increased class sizes and the loss of some health and social service benefits for low-income residents. Lingering budget woes also led voters to approve tax hikes on top-income earners and sales. The electorate in 2016 overwhelmingly agreed to extend the income tax portion through 2030.
Hmmm. Okay. There were layoffs and furloughs.
Democrats now wield significantly more control, with a supermajority in both houses. And in 2009, Republican Arnold Schwarzenegger was in the governor’s office, not Newsom, a Democrat.
The Legislature can pass a budget with a majority vote rather than two-thirds support. In 2009, that threshold meant enticing a handful of Republican holdouts with appointments or district benefits.
Thursday’s fiscal report includes a staggering estimate for the state’s unemployment rate: 18 percent, far higher than the 12 percent the state saw during the Great Recession.
In my opinion, it doesn’t mean much that Democrats can craft whatever bills they want without any Republican input.
When the money isn’t there…. their options are limited. No wonder Newsom is not “following the science” in opening up.
California state workers may take a 10% pay cut
It wasn’t only that Newsom announced easing of restrictions that caused me to write about California first.
It was also the following.
California Cuts State Salaries 10 Percent to Offset COVID-19
Gov. Gavin Newsom proposed cutting state worker pay by 10 percent Thursday, dramatically changing the economic outlook for a workforce that just a few months ago was looking forward to raises from a humming economy.
The pay cuts, scheduled to begin with the July pay period, would save $2.8 billion in the coming fiscal year, according to Newsom’s $203 billion budget proposal. His administration estimates the state faces a deficit of $54 billion over two fiscal years due to economic impacts of the coronavirus.
When looking at these numbers… 10% does not sound like a big cut.
But you know that Newsom did not want to have to be forced to cut pay at all. They’re obviously trying to avoid any layoffs.
The pay cut comes as the state’s unemployment rate continues to notch upward. At least 4.6 million people in California have filed unemployment claims since March 12, Newsom said. His administration estimates the unemployment rate could reach 24 percent or higher.
The administration will bargain with all of the state’s unions over the pay cuts, but if agreements can’t be reached, the administration will pursue the reductions through the budget process, according to a budget proposal.
I am definitely looking forward to the media coverage of these union negotiations. Or non-negotiations, as the case may be.
That likely would mean furloughs. A 10 percent pay cut translates roughly to two furlough days per month. The Legislature ultimately has authority over state workers’ pay.
That is good to hear.
Assembly Speaker Anthony Rendon, D-Lakewood, said that while “everything needs to be on the table,” he’s concerned a 10 percent hit to state workers’ pay will exacerbate the suffering already caused by COVID-19.
“I want to make sure that we are not only respecting state workers, but collective bargaining,” Rendon said. “I am concerned about the 10 percent cut. You are looking at workers who are already suffering, so I am going to make sure we go through those details.”
Dude, look at a 25% unemployment rate, all among private sector employees. While some of them have gotten very generous unemployment coverage, to July at least, some of them may be looking at long-term pain. They’re not going to cry over a 10% pay cut to state employees.
Yvonne Walker, the president of SEIU Local 1000, the state’s largest union, said in a Wednesday night video that she would work to avoid furloughs.
“We can figure out the equivalent of what that 10 percent represents and try to negotiate something that, yeah there might be a little pain involved, but it won’t be those two furlough days and how we think about it,” Walker said in the video.
Walker declined to elaborate Thursday, saying she didn’t want to divulge the union’s bargaining strategy.
Abraham Pinedo, 40, a materials and store supervisor at Deuel Vocational Institution in Tracy, said the pay cut could affect his 10th-grade daughter’s college plans and the family’s plan to buy a home in Lodi.
Yeah, I’m stopping right here, because while I am sure a 10% cut would have effects on Pinedo and other public workers, their tale of woe is not necessarily going to be convincing to all the private sector folks who are being asked to pay to try to keep these folks whole. There is a reason tax revenue is down, and it’s not because the private sector is not sharing the wealth.
The budget proposal says workers who make less than $15 per hour will still get a planned raise to bring their pay to that amount.
Dude, this is not the time.
The proposal to reduce pay marks a dramatic shift from just a few months ago, when more than 108,000 state workers were looking forward to raises this summer and other unions were starting to negotiate for new raises against the backdrop of a budget surplus.
Yes, a whole bunch of people had plans for this year that got disrupted. This isn’t happening in a vacuum.
[If you don’t get the joke, read this.]
And let me cap it off with the end:
Kari Everett, 57, an information technology specialist at CalPERS, worked through the furloughs of the Great Recession. She had to take three unpaid days off per month at the height of the cost-cutting.
“It was hard,” Everett said. “I didn’t have to get a second job. I just had to cut my expenses and watch everything.”
She said she and her husband, who is also a state worker, had to stop eating out, going to movies and traveling. She said she knew other state workers who had to start going to food banks.
“I am thankful I have a job, and thankful I do get retirement,” she said.
Yessssss, about that retirement.
Oh, but I should do that one another time.
Contributors to the deficit: very high salaries
(and benefits)
Despite California’s $54 billion budget deficit and $1 trillion unfunded pension liability, there are 340,390 government employees bringing home six-figure salary and pension checks.
Recently, though, Gov. Gavin Newsom asked U.S. taxpayers for a bailout.
The governor wrote a letter to Congress requesting a $1 trillion in coronavirus 50-state aid. Then, House Speaker Nancy Pelosi obliged by adding $500 billion for the states into the HEROES Act – the bill passed and now awaits action in the Senate.
Here, in part, is why California is asking for taxpayers help.
Our auditors at OpentheBooks.com found truck drivers in San Francisco making $159,000 per year; lifeguards in LA County costing taxpayers $365,000; nurses at UCSF making up to $501,000; the UCLA athletic director earning $1.8 million; and 1,420 city employees out-earning all 50 state governors ($202,000).
They have a nifty mapping tool where you can see high salaries and pensions.
In 2017, we found that 44 lifeguards in Los Angeles County cost taxpayers between $200,000 and $365,000. Today, it’s worse with salaries comprising only about half the total cost when including overtime, extra pay and benefits.
Well, that would be easy if they just keep the beaches and pools closed. Nothing to pay for!
Before the COVID-19 crisis, state and local governments in California were plausibly operating. Now, with tax revenues dropping, underlying financial weaknesses are being exposed.
In a move praised by fiscal reformers, Gov. Newsom proposed a 10-percent across-the-board reduction in state employee salaries along with state agency budget cuts of five percent.
However, the governor admitted that if the federal government sends states more aid, then the salary reductions will be restored.
California, in other words, like many states with excessive pay and pension costs, is relying on the U.S. taxpayer to see them through crisis.
Probably a lot more can get cut, eh? Maybe instead of an across-the-board 10% cut, you could do higher cuts for those above certain salary levels.
After all, slicing off from the rich is a California pastime, right?
A modest proposal: seize the wealth of the top Californians
I am just going to excerpt this piece with a simple solution to California’s deficit, mainly because I find it grimly amusing.
The California Department of Finance recently projected that the state is facing a $54 billion deficit. There is hope for a bailout from the federal government.
Given the current political make-up of the national government, does anyone want to count on what should be viewed as the goodwill of reactionaries such as Senate Majority Leader Mitch McConnell and the great commander Trump? If any money is made available by them, wouldn’t it likely have many strings– actually–ropes used to strangle people, attached to it?
I think that gives you an idea for the tone.
A 50% tax on the wealth of just Larry Ellison, Mark Zuckerberg and Elon Musk would solve the deficit with tens of billions remaining. A quick google search puts their wealth at:1
Zuckerberg $68.2 billion
Ellison $67.4 billion
Musk $36.8 billion
An emergency wealth tax of 50% on these three individuals alone would come to $86.2 billion.2 That would leave over $30 billion more than the estimate of California’s government deficit. That extra money could be used to house the homeless, guarantee everyone food and access to medical care, finally provide a proper level of funding for the state’s public colleges and schools, lift many, if not all, of the state’s residents out of poverty, and have funds to help out in case the state experiences another round of destructive fires and/or a major earthquake.
Of course, almost all these three men’s net worth is due to their stock holdings in the companies they run.
The stock value would likely take a hit if they had to liquidate their holdings.
But, no worries, this guy has the solution:
Some of the wealthy will, understandably, contend that at least some of their assets are not liquid, easily sold for cash. In that case, they should be allowed to pay the tax by turning over assets. The state could slowly liquidate the assets and also use them as collateral for borrowing money.
The state would have the same problem as if these guys had to go to market to liquidate.
“But it would be over time!”
1. Not enough time
2. It would mean them losing their controlling stakes
And finally:
3. Where were you planning to get the money to fund 2021? Because those guys won’t be around for you to grab those assets.
I’m sure we’ll be hearing more pleas for a federal bailout… but the states have to deal with things pretty soon, unlike the federal government.