Welcome to the October Money issue of NorthBay biz magazine. In addition to all the stories this month, there’s a special report on law and business. We hope you enjoy all the stories, features and columns in the area’s only locally owned, formerly glossy business publication. You can rely on NorthBay biz as your local source for business news and information, because, “Helping grow your business isn’t just something we do…It’s all we do!”
California’s unending quest for more revenue is a thirst that can never be quenched, as just a quick look at the state’s budget process confirms. A little background information: The state’s financial audit reports that tax revenues grew from $185 billion in 2012 to $250 billion in 2015, a $65 billion—or 35 percent—increase! Yet, on the ballot this fall are a record number of propositions calling for tax increases and bond issuances. On the heels of record tax revenues collected, the state is asking for a record number of new tax increases. Why?
To a large extent, the state’s budgeting process operates as if it’s on automatic pilot. A major factor in play is Prop 98, which mandates 55 percent of any new revenue be spent on education regardless of any other budget priority or need. And (here’s the good part) these ever-increasing spending levels are locked in. That means even if tax revenues fall next year, the state still has to fund Prop 98 education spending at the now established higher level, and inability to do so creates a deficit that must be paid back.
Budgeted spending on education for the school years of 2011-12 through 2016-17 grew from $47 billion to $72 billion. Despite this significant increase, ruling politicians are telling us there’s still a desperate need for another tax increase, namely Prop 55. The ultimate result of a system like this is a continual ratcheting up of state spending; spending can never go down regardless of available revenues or need.
The cost of big government run amok is staggering. Of course, significant portions of the increased tax revenue bounty went to other fiscal sinkholes that will never be adequately funded by their very nature. Medi-Cal and public employees’ health and retirement benefits lead this list.
In a time of a tax revenue bonanza, how much has been spent on much needed and long- overdue infrastructure investment? How are our roads? Oh, right, there’s no money to fix them at the pace needed. Maybe we can issue more transportation bonds. Following that thought to its conclusion, it’s interesting to note that, despite record revenues, the state’s debt has increased to more than $400 billion.
Cost of government is at an all-time high. If the state were any other business, investors would certainly be questioning the “value proposition,” since the value of services provided by the state government are at all time lows. Remember, these are really good times when it comes to collecting revenues for the state; there’s more money to spend than ever before, yet the fall ballot is crammed with requests for more.
The main fault of this “ballot box budgeting” approach is that these propositions are almost always funded by special interest groups that supports some “worthy cause” that “just needs more funding right now.” The hidden reality is, these private interests benefit financially when the proposition passes.
Here’s an example: Prop 51 calls for $9 billion in bonds for K-12 public school construction. While not specifically addressing Prop 51, State Treasurer John Chiang has criticized the municipal bond process as a “pay-to-play scheme that often doesn’t deliver value it should to the taxpayers who end up paying for it.” When “special interests” are putting up millions of dollars to support a proposition, you can be fairly confident there’s a lucrative contract waiting for them when the initiative passes.
To close, the state’s current budget surplus is due to a temporary tax (it’ll become permanent and extended until 2030, proving there’s no such thing as a temporary tax) and a booming assets market. The top 1 percent of earners in California delivers half the state’s income tax revenue, making this a volatile and quickly ephemeral source of revenue to depend upon. Throughout this financial recovery, the state has done little to change the fragile systemic nature of it budget. Perhaps that’s why Moody’s Investors Service ranked California second from the bottom in its ability to withstand the next recession.
When the state economy takes a turn for the worse, as it always does, what to you think the reaction will be from Sacramento when the windfall has been spent and the bills come due?
That's it for now. Enjoy this month's magazine.
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