Washington to the (CA Budget) Rescue?
This much we already know about California’s $19.1 billion budget shortfall.
Spending cuts alone won’t be the final answer — never have a California governor and state lawmakers agreed to cuts of that dimension, and certainly not in one budget cycle.
Nor will tax cuts alone settle matters. Again, the state has never pulled off a tax increase, on that level, in one fell swoop. To do so in this political environment wouldn’t encourage a mere tea party — but it might inspire an outright storming of the Sacramento Bastille, aka the State Capitol.
So what’s the answer?
Most budget-watchers will harken back nearly 20 years ago, to the salad days of Pete Wilson and Willie Brown and their budget fix (btw, with one of three dollars missing, a bigger hole percentage-wise than this year’s exercise) — a fix that was equal parts spending cuts and higher taxes.
Allow me to float a scenario, to solve the $19 billion dilemma, and it goes something like this:
1) $6.3 billion in spending cuts;
2) $6.3 billion in temporary tax and fee increases;
3) a $6.3 billion bridge loan from Washington.
There’s actually precedent for item # 3. It’s called the New York City Seasonal Financing Act, which 35 years ago extended a $2.3 billion line of credit to the Big Apple (that’s about $13 billion in today’s dollars). Washington didn’t just give away the money — the loan had to repaid within a year it was made, at a 1% higher rate than Treasury’s borrowing rate, which returned $40 million to the federal coffers.
New York City, then, was a lot like California today. During the decade leading up to Washington’s intervention, the city’s expense budget—$11.8 billion during the 1974-75 fiscal year—had grown at an annual rate of 12%. However, tax revenues had increased only 4%-5%.
And, like the current situation in Sacramento, New York’s political ruling class was running out of options. Higher taxes already had driven businesses to the suburbs. Nearly half of the city’s budget (44%) was propped up by state and federal aid. The city got by on short-term borrowing that, in very little time, had blown a large hole in its budget (NYC’s short-term debt exploded from $747 million in 1969 to $6 billion by early 1975).
At first, the Ford Administration shot down the idea of helping NYC void bankruptcy, prompting the New York Daily News’ infamous “Drop Dead” headline.
Actually, Gerald Ford was neither anti-city nor anti-Gotham (remember, Ford wasn’t all that conservative of a Republican, and he’d appointed Nelson Rockefeller, formerly a New York governor, as his replacement vice president).
But, by drawing an early hard-line and ramping up the pressure on city leaders to get their act together, Ford succeeded in getting a far more balanced deal — albeit, one with a lot of moving parts.
New York’s municipal workers’ unions were talked into contributing to the fix from their pension funds. The city’s banks did their part, by agreeing to refinance city notes and municipal bonds. Meanwhile, city government cracked down on spending and wayward programs.
And the city got tough on spending and wayward programs. For example, new eligibility forms were mailed to the city’s 338,000 welfare-check recipients, with the choice of verifying their eligibility within 10 days or facing benefit elimination.
Obviously, much has changed in the past 35 years — especially, the last two years. After bailouts to big banks and auto giants, not to mention at least one European nation, would politicians have the nerve to make a similar move in California’s direction and take the subsequent heat?
Then again, I can think of one politician in particular who could benefit from such a power play: Barbara Boxer.
In the political fight of her life, and trying for a fourth term in Washington, Boxer sorely needs to show she’s relevant to California’s well-being — in other words, that she can deliver for her constituents. And she has to show she’s a senator of substance in Washington — a trait that seems lacking as she takes a back seat to fellow Sens. John Kerry and Joe Lieberman on the cap-and-trade debate, even though the bill is germane to her environmental committee.
Here’s how Boxer could pitch the California bailout: (1) it’s not bailout but a temporary loan, with the federal government making money off the interest; (2) the interest will be invested in something that benefits all 50 states — say, infrastructure improvements, green technology or school grants; (3) at $6.3 billion, it’s still half-a-billion less than America’s share of the Greek bailout; (4) if my conservative opponents disagree with me, are they saying that California, the world’s 8th economy, matters less than Greece, which doesn’t even make the top-30 of world GDPs?
Will any of this see the light of day? I doubt it. California bailout was briefly floated last year, and it didn’t take long for the White House to shoot down the trial balloon.
Still, it’s fun to speculate.
As with New York in 1975, the Obama Administration would have to wait until October, right around the World Series and trick-or-treating, when Sacramento’s urgency is giving way to panic. And it would require moving mountains in Congress, where a lot of reluctant members either: (a) care little for California, or (b) care even more about the current anti-incumbency streak brought on, in part, by bailouts and exorbitant federal spending.
Oh, and other minor detail. For all he did in bringing New York City back from the brink, Gerald Ford lost the state, the following year’s presidential election, to Jimmy Carter.
So Barack Obama might have little interest in California’s fiscal plight, especially if it brings him only a New York minute’s worth of good will.