Patterico's Pontifications

4/8/2020

The Coming Budget Reckoning for the Golden State (and Others)

Filed under: General — JVW @ 3:59 pm



[guest post by JVW]

Sorry I have been quiet for the past weeks. Everything is fine, but as I explained to Dana I just haven’t been super motivated to post recently. In terms of the COVID-19 updates I think that our host and Dana are doing a bang-up job staying on top of the news and I don’t have much to add to the discussion.

But I do have an interest in what the economic fallout of the pandemic will be, especially how it impacts the fifty-seven states who don’t have the luxury of manipulating interest rates, printing currency, or running huge deficits. We here in California have been taking victory laps in the past few years of economic growth, convincing ourselves that our model of a massive regulation, high taxes, and a huge bureaucratic apparatus is scalable across the entire country, not just those states blessed with a giant coastline, rich agricultural land, fantastic weather, elite research universities, and a huge chunk of the entertainment industry. But as usual much of the expansion of government in the Golden State has been predicated upon the idea that economic good times would never end, which has allowed us to conveniently ignore our failures and assume that expansion would continue to march on.

Now, of course, we know better. The mixture of a massive market drop coupled with heavy job losses is going to force California to revisit some assumptions that the ruling party has made about the purpose of government in the modern economy. Here are a few things with which our elected leaders must contend:

The Budget
During the economic boom the California budget rose from $152 billion for the 2014-15 fiscal year to $209 billion in 2019-20, and this year. The trend started under Jerry Brown, who prioritized cementing a progressive legacy in his fourth and final term as governor rather than holding the line on fiscal discipline and building up a larger budget reserve for just this sort of crisis. As it stands, the state’s budget director is already warning state agencies that they “should have no expectation of full funding for either new or existing proposals” as tax revenue plummet. During the fat times the state built up a $20 billion reserve, but that sum is unlikely to plug the holes in this year’s budget, let alone help us through a potentially long-lasting economic slowdown.

AB 5 – The Gig Workers Act
We have touched upon the negative effects that this legislation has had on a variety of workers in the Golden State, not just the Uber and Lyft workers this bill targeted, but freelancers of all stripes. With unemployment claims lately reaching two million, legislative Democrats are going to be forced to determine if blind fealty to union interests is more important than allowing Californians the opportunity to pick up regular work without forcing a company to treat them as full-time employees. Now would be the ideal time to loosen regulations that stifle hiring, but it would appear that not only is the state legislature digging in, but Congressional Democrats are interested in taking this bad California law nationwide.

Health Care
Here’s another area where Governor Newsom and legislative Democrats had hoped to establish themselves as the progressive vanguard to differentiate themselves from the Trump Administration’s approach. The new governor who campaigned on the idea of making single-payer health care available statewide has since scaled back his plans somewhat, though the state has reinstated the financial penalty for residents who don’t have health insurance while at the same time expanding eligibility to immigrants living here illegally. Will the state actually fine residents who can’t afford to purchase health insurance in the economic downturn, or will the state strain the budget by subsidizing premiums for those residents who find themselves out of work? When government insists upon playing an outsized role in health care delivery it can find itself painted into a corner in times of crisis.

Taxes
The major initiative on the ballot this fall has long been assumed to be the split-roll property tax change which would require commercial and industrial properties to be reassessed at current values. Advocates tout an alleged $12 billion in new revenue which they naturally claim will go toward schools and the environment and whatever other causes set progressive hearts aflutter, though the reality is that all of that money — and then some — would ultimately be used to plug state pensions which are going to spiral further out of whack in a prolonged recession. Golden State voters have as of late shown an admirable skepticism regarding the state’s alleged lack of adequate revenue, but in times of economic hardship they might fall for the mindless rhetoric of forcing “greedy” businesses to pay more, not understanding that these increased taxes will ultimately be passed along to the consumer. Within the context of what promises to be a bitterly fought Presidential election, it will be interesting to see how this all shakes out.

Speaking of pensions, I’ll try to explore this issue further in a follow-up post, but as you can well imagine the day we have long expected would eventually come is now that much closer.

– JVW

36 Responses to “The Coming Budget Reckoning for the Golden State (and Others)”

  1. By law school districts have to give teachers advance notice of layoffs, so at the beginning of next month a whole bunch of pink slips for teachers are probably going to be handed out. The districts will then hire back a certain number of those teachers once the budget situation becomes more clear, but this is going to be a very stressful few months for public school teachers.

    JVW (54fd0b)

  2. Unfunded liabilities didn’t magically disappear when the state Dems were touting the “budget surplus”.

    Colonel Haiku (2601c0)

  3. Newsom has been doing a fantastic job of handling the public health emergency, but the coming budget emergency is going to be a doozy, and I don’t know how well I expect him to do then.

    States are super limited in their ability to handle crises like these because of balanced budget requirements, and I don’t think there are any states that are really ready for it.

    >During the fat times the state built up a $20 billion reserve, but that sum is unlikely to plug the holes in this year’s budget, let alone help us through a potentially long-lasting economic slowdown.

    That money is gone, and on some level rightly so: this *is* the rainy day, and using the rainy day fund right now is reasonable. But the fall is going to be horrifying.

    aphrael (7962af)

  4. Apparently, the only conclusion to draw for us Caliunicornians?

    We are FUKKT.

    Colonel Haiku (2601c0)

  5. Bankruptcy is fun. All the states will do it and if it’s a leftist administration the media will praise it as fun-kruptcy.

    NJRob (a8e16f)

  6. 2. Nor do they disappear during “national emergencies.”

    Gryph (08c844)

  7. When the economic catastrophe hits the state governments, it’s going to cause a massive contractionary pressure on the economy, and i’ll be amazed if more than half a dozen state governments come out unscathed.

    Honestly I think in the end that no matter who is President the response is going to be a federal bailout of the states — sort of like Hamilton’s bailout of the state revolutionary war debts.

    It may take us some time and an incredible amount of pain to get there.

    aphrael (7962af)

  8. For those that think that money pledged to schools will go to schools … they’re right it will. But the OTHER money that the schools used to get will now go elsewhere. It’s a shell game and they think that voters are that stupid (and they are often right).

    Kevin M (ab1c11)

  9. Gryph, at 6: maybe not, but certainly during both the civil war and WW1 there were huge constrictions of civil liberties, and the kind of responses we’ve seen nationwide in the last month were common on local levels during previous epidemics.

    aphrael (7962af)

  10. 6… true. So if one is both a Caliunicornian AND an American…

    One is fukkt coming and going…

    Colonel Haiku (2601c0)

  11. Make the Chicoms pay.

    mg (8cbc69)

  12. But the Golden State still has an enviable climate, JVW. We must hold onto that, and our last pair of holes-in-the-sole shoes because that’s all we’ll have…

    One think I’m curious to see is whether new-to-homeschooling parents find themselves actually enjoying teaching their kiddos and spending time with them (and seeing it have a positive effect on the kid), and are considering keeping on with it when the public schools re-open.

    Dana (0feb77)

  13. Prop 13 is an issue now, as you have people in a neighborhood paying wildly different amounts. The house I sold for $1.5 million was assessed at $500,000. The new buyer will be paying three times what I did. This will lead to a steady outflow of residents who cannot afford to move within California, and a constant increase in property taxes.

    Rather than the 1% 1.25% of purchase price with a slight annual bump, they ought to go back to the old annual re-assessment with a much lower rate — 1/2% or 5/8% — and reinstate the over-65 deferrals. It’s insane when a neighborhood is priced at $3 million and some folks have houses assessed at $600K. The current initiative is intended to soak “those other people” but it will come back to be paid by consumers, starting with renters.

    Kevin M (ab1c11)

  14. Newsom has been doing a fantastic job of handling the public health emergency, but the coming budget emergency is going to be a doozy, and I don’t know how well I expect him to do then.

    Exactly this. It will be particularly difficult for Newsom too, because we have a Democratic Progressive super-majority and their answer to every crisis seems to be to raise taxes. There certainly won’t be any thought given to making any hard cuts in spending, no matter the debt. The $20 billion reserve is all but certainly gone.

    Dana (0feb77)

  15. One think I’m curious to see is whether new-to-homeschooling parents find themselves actually enjoying teaching their kiddos and spending time with them (and seeing it have a positive effect on the kid), and are considering keeping on with it when the public schools re-open.

    That’s fine for well-educated parents who can afford the time, but two-earner households or those with poorly educated parents won’t fare so well. My brother and his wife decided to home-school their kids, but neither of them finished high school (despite going to Newport Beach schools). The result was yet another generation of near-illiterates.

    Kevin M (ab1c11)

  16. I used to think that CA’s progressives would be turned out when the middle-class turned on them, but they have solved that — drive them out of the state so that it’s the rich and their servants and no one else.

    Kevin M (ab1c11)

  17. Make the Chicoms pay.

    It would be great, but the Mexicans will pay for the Wall first.

    Kevin M (ab1c11)

  18. Another concern I have, after coronavirus is said and done, is if there will be a significant increase in homelessness? California is already at a crisi level with regard to those living on the streets, in spite of Newsom allocating $1 billion last year to keep people sheltered. Depending on how long this crisis continues, more people are at risk of being unable to pay rent, or losing their homes, or even their jobs. There is a real possibiliy that the number without shelter/jobs will dramatically increase.

    Dana (0feb77)

  19. Homeschooling Day #9: they all graduated. #Done.

    Colonel Haiku (2601c0)

  20. “ Advocates tout an alleged $12 billion in new revenue which they naturally claim will go toward schools and the environment and whatever other causes set progressive hearts aflutter, though the reality is that all of that money — and then some — would ultimately be used to plug state pensions which are going to spiral further out of whack in a prolonged recession. ”

    In CA Gov-Speak, “for the schools” = “for the pensions or some other form of public employee compensation”.

    The reckoning is just coming sooner rather than later.

    harkin (b64479)

  21. Btw – Great Post!!

    harkin (b64479)

  22. The chronic homeless are mostly mentally ill and/or addicted to drugs, aren’t they?

    There’s no reason people willing and able to work should remain homeless, and I don’t think many do.

    If there’s 25% unemployment for a long period of time (which I don’t expect), it would be a much different story, of course.

    Dave (1bb933)

  23. I don’t believe that a significant number of homeless are there because they can’t pay rent. In places where rents are far lower, there are many homeless. Responsible people who can’t find affordable housing in a place move someplace else. They could come here, for example, where apartment rent is between $500-1000 lots of places. That thousand gets you a 1200 sf two-bedroom apt with granite counters and a pool and gym on the property.

    They’d have to find a new job, or course, but they aren’t doing too well where they are, assuming they have/want a job.

    Kevin M (ab1c11)

  24. Shoot, you can buy a new home here for just over $200K if you aren’t too demanding. There are older condos on the market for under $100K.

    Los Angeles is increasingly for multi-millionaires and their heavily subsidized servants. It’s not a place you can make it for $80K a year.

    Kevin M (ab1c11)

  25. In CA Gov-Speak, “for the schools” = “for the pensions or some other form of public employee compensation”.

    Not even that honest. The money that used to go to the schools (or whatever they promise) will be diverted elsewhere. They already did this with the lottery money.

    Kevin M (ab1c11)

  26. harkin’s right… great post, JVW!

    Colonel Haiku (2601c0)

  27. Next, they’ll be coming for our bike lanes…

    https://twitter.com/FinallyMcFly/status/1247985019785826305

    Colonel Haiku (2601c0)

  28. I’m so glad that I moved to Reno, and no longer have to deal with the perennial terror of California’s election propositions.

    norcal (a5428a)

  29. Hm, Newsom’s pandemic management decisions as of today:

    Gov. Gavin Newsom’s decision to lend 500 state-owned ventilators to New York and other coronavirus hot spots outside the state caught some local California officials off guard, particularly in Riverside County where health officials have been scrambling to acquire the critically needed medical equipment.
    Riverside County officials said the state recently denied their request for an additional 500 ventilators, even though the county expects demand for the breathing machines at county hospitals and medical centers to exceed the supply in less than three weeks.

    Santa Clara County, another area hard hit by the COVID-19 pandemic, is offering a $1,000 bounty for each device it receives and has ordered companies with the devices to report their inventory to the county.

    “I understand and respect what the governor is doing. But are we going to be able to get the assistance that we’re going to need in a week or two weeks out?” Riverside County Supervisor Kevin Jeffries said Wednesday. “I think we were all a little surprised. We’re all trying to prepare so we’re not like New York.”

    Newsom on Monday said the state was able to lend the 500 ventilators to other states because California currently had an excess supply of the devices and those areas were in desperate need.

    Hospitals throughout California have procured thousands of ventilators in the last few weeks, increasing their total inventory from 7,587 to 11,036. Another 1,000 refurbished ventilators are expected to become available in coming days and weeks, the governor said.

    Newsom said the state’s ventilators will be returned if and when California needs them. The governor said California expects to see a surge of coronavirus patients in May.

    Newsom spokesperson Brian Ferguson, said that counties throughout the state have been requesting the state provide respirators and PPE gear. But the doling out is being prioritized:

    “The goal is to ultimately fill everyone’s needs. Those with the more immediate need will be prioritized,” Ferguson said.

    Ferguson said the state wants to avoid sending ventilators to areas where they may sit unused for weeks when other cities and counties may need them right away.

    The venitilators will only be returned if they are not currently in use in the states that have them.

    Dana (0feb77)

  30. Update from our DIL in Sacramento area…

    “Things have been steady, with 8 – 13 rule out/COVID patients… those that prove negative are transferred to med-tele, I’m hoping that the testing is 100% accurate and the nurse has swabbed them correctly… those that test positive are either stable enough to self-quarantine at home or deteriorate and have to be transferred to ICU… it’s touch and go… I feel that the media hype is real. Obviously not nearly as bad as NYC, but I’ve seen first hand how a patient goes downhill from COVID… it happens so fast it is truly frightening… they can’t have visitors, so they die alone and are cremated within 24 hrs.

    We use donated iPads that allow them to communicate with loved ones.”

    Colonel Haiku (2601c0)

  31. The budget: The major component of the budget that sank CA in 2008 was the housing market crisis more than the unemployment. ATM, the housing market hasn’t significantly crashed, so there is some reduction in concern for that area at least at the moment. IDK how much there might be a shortfall or might now, but the reason that 20 billion exists is for emergencies.

    School districts, how do they work: Every school district in the state now carries an emergency fund that they did not carry in 2008. The idea of that fund is to make up for some of a reduction in budget from the state in times of trouble. Because a lot of our funding comes from property taxes and the housing market hasn’t crashed at this point, any hit the schools take should be less than 2008 (which was… interesting times). The other factor is that teaching staffs in general tend to the older side (relatively few people seem to have come into teaching the late 80s/early 90s) so districts are still getting significant retirements (frex, my not huge district has more than 40 teachers and admin retiring this year) so non-rehired pink slips are unlikely.

    Healthcare: IDK that it’s more expensive to subsidize insurance for illegal aliens. They can already freely use the emergency room and that is very expensive. Is it more expensive for the state to pay for however many thousands/millions of ER visits (especially during an epidemic) or to subsidize insurance and have the insurance pay or for them to go to a regular doctor with insurance paying. I haven’t seen the numbers on that.

    Nic (896fdf)

  32. There’s a reason I refer to it as the Pyrite State. Feel free to use it; I release the copyright..

    The Dana in Kentucky (fd0d45)

  33. Always with the negative waves.

    California has 11.7% of the US population, 4% of the confirmed CV cases in the US, and 3% of the deaths.

    tldr; Scoreboard, baby.

    Dave (1bb933)

  34. 4% of the confirmed CV cases in the US

    Just yesterday I was reading about how testing in California was still inadequate. I wonder if that might affect confirmed cases.

    Kevin M (ab1c11)

  35. And I’m pretty sure that any bureaucrat would tell you why testing is bad.

    Kevin M (ab1c11)

  36. “Scoreboard, baby.”

    We lead in homeless, illegals, adult illiteracy and public pension shortfall ($190 billion before the virus hit) too!
    _

    harkin (b64479)


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