California 2009 budget crisis, proposed reforms

Note: This article was last updated in 2009. Click here for more recent information on state budgets and finances.

The California 2009 budget crisis was the $41.6 billion gap in the California state budget and finances. The governor and the state legislature worked out a deal to try and ameliorate the problem. Before this deal, there were several other proposals as to how to make up the gap.

Higher taxes

California teachers

The California Teachers Association was preparing a ballot initiative aimed at a November 2009 special election to raise the state's sales tax by one penny, which would generate about $6 billion a year in new taxes. In CTA's draft initiative, all the additional revenue from the new tax would go to public schools.

Democrats

Legislative Democrats introduced a tax increase package including a sales tax, income tax, and oil severance tax. In addition, they also advocated increasing the state excise tax and sales tax on gasoline, and replacing it with a new 39 cent gas fee, which would effectually add 13 cents to the price of fuel.

Specific tax increase ideas that were advanced, in the Democrat proposal and elsewhere, included:

• Increase the gas tax by 19 cents a gallon.
• Increase the state's sales tax by three-quarters of a percent. Total in new taxes: $4.9 billion through the 2009-10 fiscal year.
• Require all state residents to pay an additional 2.5 percent on their income tax bills. If you owed the state $1,000, you would owe $25 more under the proposal. Total in new taxes: $1.75 billion through the 2009-10 fiscal year.
• Impose an oil severance tax of 9.9% on all oil extracted from the ground in the state. Total in new taxes: $845 million through the 2009-10 fiscal year.
• Eliminate the current gas sales and excise taxes and replace with a higher gas "fee" of 13.5 cents per gallon more than users at the pump pay.
• Consider eliminating the tax break provided by the state's enterprise zone program which, some researchers believe, has been ineffective at the program's goal of improving employment rates.

Republicans

Assemblyman Michael Duvall, R-Yorba Linda, appeared to be one of the Republican legislators softening on his no-taxes pledge, saying, "I think we all know it's crisis time" and there "has to be some kind of revenue to balance this whole situation" and "There will be things that are fee-generated and probably some kind of tax (increase)." However, he was not one of the six Republicans to vote for the budget deal including increased taxes.

Schwarzenegger had proposed extending the state's sales tax to several sectors of the service industry that were not previously covered; specifically: auto repair shops, furniture and appliance repair services, amusement parks, sporting events and golf courses and veterinary services.

Newspapers

Some newspapers in California advocated higher taxes. The Contra Costa Times editorial board proposes these:

• Permanently reinstate the car tax in order to raise $6 billion a year.
• Levy a temporary income surtax for two to three years.

Cut spending

Assembly and Senate Republicans proposed $22 billion in cuts and revenue transfers. This would solve the FY 2009 operating deficit of $16 billion, and go a long way toward ending the ongoing structural budget deficit. Taxpayers can access a detailed version of the Republican savings plan. Both Democrats and Republicans appeared willing to cut approximately $6 billion in state spending.

Role of taxpayer groups

The Howard Jarvis Taxpayers Association (HJTA), which is California's largest grassroots anti-tax organization (over 200,000 members), was a vocal player in the year's budget battle. The group fights for decreased spending with no new taxes. HJTA and other limited-government advocates filed a lawsuit when Democrats in the state legislature attempted to enact a package of tax and fee increases through a simple majority vote, in violation of the Constitution. California, as HJTA pointed out in a radio ads, has the highest income, sales, and gas taxes in the United States. Its Tax Freedom day was fourth highest in the country, according to the Tax Foundation. Any further taxes would only lead to a more dramatic decline in revenue, according to the group.

Education spending

If Schwarzenegger's most recent plan had been approved, California's schools would get less money than in the prior year, but the size of the gap was a matter of dispute with varying estimates ranging from $1.7 billion up to $14 billion.

Public schools, as of January 2009:

• Account for about 41% of the state's operating budget.
• State spending on public education on increased 1% a year for each of the last ten years, adjusting for inflation and enrollment growth.
• Schools received $56.5 billion in state general fund and local property tax revenues in the 2007-08 fiscal year.
• Schools were likely to face a real reduction in state revenues over the next 18 months.

Union concessions

Schwarzenegger negotiated unsuccessfully with California's public employee unions to take two paid holidays away from the 14 paid holiday days that the state's 230,000 public workers received.

Liquidate some assets held by state

William Shughart, a senior fellow at the Independent Institute, proposed that the best way to raise funds to cover the budget gap was by selling some of the assets that California owned.

Rainy day fund

Tom Campbell proposed moving to what is known as a "rainy day" system. Under this system, the state would store up one year's revenue and spend no more in any one year than the taxes actually received the previous year. Under this system, he argued, the state would not erroneously spend too much money in a particular year's budget based on faulty assumptions about how much tax revenue would be raised in that year.

Gov. Arnold Schwarzenegger proposed such a system to the state legislature in 2005, but the proposal did not get out of committee in either the senate or the house.

Constitutional convention

Jim Wunderman, president of the Bay Area Council, which represents businesses, wanted the state to call for a constitutional convention. Wunderman proposed the idea in an opinion column in the San Francisco Chronicle in August 2008 and said he was shocked by how strong the positive response had been. He chalked this up to widespread agreement that "California is broken...That part is no longer debatable. The question now is 'How do we fix it?'"

In order for a constitutional convention to be called, two-thirds of the Legislature must agree to put a statewide ballot proposition on the ballot that asks voters whether they wish the state to hold such a convention. If the voters agree to this idea, by a majority vote, the legislature then has to provide for a convention. Any constitutional amendments that are developed by the delegates to the constitutional convention must then go to a statewide vote.

Joint Venture, an organization with a 49-member board that focuses on the economic health of the Silicon Valley area, voted unanimously in mid-February to support the call for a constitutional convention.

California has held two such conventions, in 1849 and 1878.

Transportation projects

Other things proposed to be cut out of the budget were transportation projects, like the expansion of Interstate 680 in the South Bay area. About 90 similar project in South Bay were facing being cut as a result of the budget crisis. As a result unemployment for construction workers in the area reached 21 percent.

Long-term reforms

Devin Nunes proposed a four-point structural plan to end the problem of budget deficits. The four points were:

• Two-year budgeting. He said, "This would allow a part-time legislature the time it needs to hold hearings, conduct negotiations, and provide oversight to determine the state's spending priorities in the first year, while in the second, write and pass the budget."

• End budget stalemates. Nunes said this means "Automatically adopt the governor's proposed budget, provided it is free of tax hikes, if the legislature fails to pass a budget by its constitutional deadline. This reform would give the legislature a compelling reason to move the budget along briskly, and it would end the continual government shutdowns resulting from partisan bickering and gridlock."

• New spending controls. Nunes wrote, "To prevent overspending, we need mandatory limits on the growth of government. State spending should not grow faster than inflation, and a 3% budget reserve must be established to prevent unanticipated expenditures, such as natural disasters, from creating a deficit."

• Refund budget surpluses. "When the state government is flush with funds, taxpayers should get some of their money back. We need a mandate for the state to send tax-rebate checks to all taxpayers when surpluses exceed the rate of inflation."

Structural reforms proposed by others include:

• Make it easier to pass a budget. California is one of three states that require a two-thirds supermajority vote in each house of the Legislature to pass a budget. Some advocate making it easier to pass a budget (and raise taxes) by passing a constitutional amendment so that in the future higher taxes and a budget can be enacted by simple majority vote of both houses. The Public Policy Institute of California (PPIC) conducted a poll in mid-January, showing that for the first time a slight majority (55%) of California voters would consider reducing the requirement for the state legislature to impose new taxes from 2/3rds to 55%.

• Two-year budget. Instead of adopting a new budget every year, go to a system with a two-year budget. One year of the legislative session would be dedicated to the budget and one year would be reserved for other legislation.

• Reform public employee pensions. Put a constitutional amendment on the ballot to reform all state employee pensions. Michael Haley suggests, "...limit safety pensions to a 70 percent cap, non-safety to 50 percent. Reduce the amount of money that current pensioners receive. This will also reduce local county and city costs dramatically, as they are bound by state rules and the 70-50 percent cap will apply to them as well. This will not only save the state literally billions of dollars annually, it will save local governments millions. While you are at it, change the recently lowered age of retirement back up to 55 for safety, 65 for non safety. That alone will cut pension costs in half, health care costs by a third. That will save billions of dollars, and public employees will still have a far better deal than most private employees."

See also

• California state budget and finances
• State budget issues, 2009-2010