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Jon Coupal- Columnist

Jon Coupal is an attorney and president of the Howard Jarvis Taxpayers Association -- California's largest taxpayer organization with offices in Los Angeles and Sacramento. [go to website]

Q&A: What Taxpayers Need to Know About the State Budget

[Jon Coupal] 8/16/03

Q. What period of time does this budget cover?

A. Currently, California has an annual budget which runs from July 1st to June 30th of the following year. This is why they call it the "fiscal year" instead of a normal calendar year. The $99.1 billion budget which was just approved was for the 2003-2004 fiscal year. Because of the close relationship between the state and local governments, the latter generally operate on the same calendar.

The budget was approved several weeks late this year, but given the chasm between the two parties, it could have been much worse. Additional pressure was placed on lawmakers to resolve the budget impasse when, as a result of a suit filed by the Howard Jarvis Taxpayers Association, the California Supreme Court ruled the state lacks legal authority to spend money -- with a few minor exceptions --after June 30th without a budget.

Q. How come there is no consistency is describing the size of the deficit?

A. Various figures have been used to describe the size of the deficit, ranging from $26 billion to over $38 billion. The problem is that the size of the deficit depends on state revenue projections and other assumptions about future events. There are two major problems with California's financial situation. First, on a day-to-day basis, government is spending more money than it is taking in. Second, we have a massive amount of accumulated debt.

Think of it this way: Suppose your weekly take home pay is $1,000 a week but you are spending (with a little help from Visa or MasterCard) $1,200 a week. That means every week you fall further into debt. Then suppose that, unlike politicians, you begin to act responsibly and reduce your spending to the $1,000 per week that you are taking in. That's a great start as you are now operating on a balanced budget. However, there is one remaining problem: You must now repay your debt.

California is the same way. Whatever the politicians tell you, we are still spending more money than we are taking in and our children will be saddled with billions of dollars in debt.

Q. But I thought the California Constitution required a balanced budget?

A. In theory, yes. In practice, no. The California Constitution does not have a provision which states "there shall be a balanced budget." It does say, however, that the state cannot go into debt more that $300,000 (chump change) without voter approval. This is the provision that is supposed to result in a balanced budget. The courts have ruled, however, that as long as there is a "reasonable anticipation of revenue" in the following fiscal year, the state will not be forced to adhere to a strict balanced budget. This makes some sense given the ebb and flow of revenues and expenditures during any given year.

Q. But isn't this year different? How much debt are we talking about?

A. Mountains. We start with a massive $10.7 billion "deficit financing" scheme to push today's problem into subsequent years. This is on top of the nearly $2 billion plan to issue bonds to repay the state's annual obligation to the public employee retirement system. Finally, there is another "mere" $1 billion in other borrowing as well as other accounting tricks which, if performed by a corporate accountant, would have stockholders screaming for jail time.

Notwithstanding the courts' giving a wink and a nod to some minor debt financing without voter approval in prior years, there is a real chance that the courts will rule the major elements of the current budget illegal. The Howard Jarvis Taxpayers Association is already challenging the Pension Obligation Bonds ($1.9 billion) and others have announced plans to challenge the deficit financing bonds.

Q. How deep were the cuts in this year's budget?

A. What cuts? This budget has pay increases for bureaucrats, higher welfare benefits and expands Medi-Cal eligibility. While the politicians claim that spending is going down $7 billion from last year, that simply reflects accounting gimmicks such as delaying for a few weeks some spending at the end of the fiscal year. By proposing in this budget to pay a bill in July of 2004 instead of June, it looks like we save billions. But only a fool would be unable to figure out that this is not really a change.

The biggest joke of all, of course, is the argument that the $4 billion car tax increase that just hit us is a spending cut. How can this be, you wonder. By increasing the car tax, the state argues that it is relieved of the obligation to provide the "backfill" funding to local governments. Again, the tax-and-spend politicians have taken sophistry to new heights.

Q. How can we tell if politicians are really serious about fixing the budget mess?

A. First, when they stop spending more money than is coming in, and second, when they stop getting us deeper in debt. Given that this year's budget envisions over $1 billion MORE in actual government spending than last year, it is safe to say that our politicians are not even close to being serious.


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