California's budget crisis: What happens when the pixie dust runs out?

California has balanced its budget by including lots of hoped-for revenues and delayed payments and other tricks that only postpone the inevitable.

It’s never really fun to say “I told you so.” Well, it’s a little fun. The Germans even invented a word for this – Schadenfreude – which loosely translates as “sour grapes.”

Maybe it’s sour grapes that has the rest of the country repeatedly turning to California’s budget mess. Or maybe California is just always in a budget mess. Indeed, the state has faced operating shortfalls – or gaps between inflows and outflows – in every year since 2002.

But this year, it would seem that state lawmakers and outgoing Governor Arnold Schwarzenegger have really outdone themselves. They busted through last year’s tardiness record by enacting a budget 100 days into the new fiscal year. Like last year, they balanced the books – but with a combination of spit and polish and pixie dust.

In particular, they assumed that the feds would pony up $5.3 billion, although only $1.3 billion has been promised so far (as an internal presentation said: “Still more work to do in Washington”). They hoped for a speedier economic recovery ($1.4 billion). They borrowed from internal funds ($2.7 billion) and deferred payments to schools and community colleges ($1.7 billion). They also suspended a Net Operating Loss tax deduction ($1.2 billion) and planned to sell and lease back 11 state properties ($0.9 billion) – actions which simply put off today’s problems until tomorrow.

To be sure, states often substitute happy thoughts for hard choices. And all states – not just California – are still reeling from the recession, when they suffered their worst revenue declines on record as caseloads mounted for Medicaid and other public assistance programs. Although the latest data show a slight uptick, state and local revenues remain essentially flat. Meanwhile, state and local governments are slashing payrolls to make ends meet.

California’s budget also makes some real cuts – including $1.6 billion from pay and benefits. And it increases employee contributions toward retirement for all new hires and ends the practice of “spiking,” or boosting final salaries to raise pensions. These reforms may pave the way for other states, which together confront unfunded promises of more than $1 trillion.

Finally, in his last California budget deal, the Governor insisted on a constitutional amendment increasing the maximum size of the rainy day fund and requiring deposits of above average revenues. Of course, this measure would have to go on the ballot – and voters rejected a similar proposal just last year. Some would call this sunny, California optimism while others would say it’s Peter Pan naivete.

Unfortunately, it’s no fun to be right when it comes to calling bad news, but sometimes you’ve got to at least start fixing the roof when it’s still raining. Wishing for the sun to come out is just not enough.

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