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Budget magicians use sleight of hand to help close California's giant deficit
By Mike Zapler
Mercury News Sacramento Bureau
Posted: 06/21/2009 07:23:30 PM PDT
Updated: 06/21/2009 07:23:54 PM PDT
SACRAMENTO The menu of options to close California's massive deficit is short and seemingly clear: Cut spending, raise taxes or borrow. But faced with a money crunch the likes of which the Golden State has never seen, Gov. Arnold Schwarzenegger and legislators have pulled a less obvious tool out of the box. Call it budget magic.
Need an extra $2.3 billion? Easy just make people pay more of next year's taxes this year, by increasing paycheck withholdings and estimated tax payments.
How about selling a chunk of a state insurance fund? That's good for a cool $1 billion on paper, even if experts say it's highly uncertain the sale would fetch that much, if it can be executed at all.
Expenses still too high? Here's a really creative one: Push back state employees' monthly paychecks in June 2010 by a single day from June 30 to July 1 and thus onto the next fiscal year's books. Just like that, $1.2 billion "saved!"
Those are just some of the maneuvers or, to use a less charitable term, gimmicks that the governor and lawmakers have suggested to help fill a $24 billion shortfall through June 2010. The proposals add up to about $10 billion, depending on what one defines as a gimmick.
One-time fixes
The one-time moves have been pitched as a way to sidestep some of the most draconian cuts on the table such as eliminating welfare and removing 1 million children from the health insurance rolls or to stave off more tax hikes, which Schwarzenegger and Republicans staunchly oppose. Democrats say the accounting mechanisms will also help avoid having to borrow billions of dollars from local governments already drowning in red ink, as the governor had proposed.
But Edward Chiang, a certified public accountant in San Jose, said it would be hard for him to get away with the kind of financial accounting coming out of Sacramento.
"It's borderline kiting," said Chiang, referring to an accounting term that Webster's defines as "to get money or credit by using bad checks."
"Basically you use one receipt to pay for another and keep shifting it down the line, kind of like what Bernie Madoff did," he explained. "You can keep borrowing from Peter to pay Paul, as long as you don't run out of Peters." (Chiang added that he wasn't accusing anyone, particularly our muscle-bound governor, of doing anything illegal.)
Ultimately, Sacramento's number-crunchers believe an economic recovery will rescue the state from a Madoff-like fiasco. When the economy picks up, the thinking goes, tax revenue will shoot up and allow California to square its expenses with actual revenue.
"The odds are, there is a point during the next budget year that (revenue) will bottom out," said former Assemblyman John Laird, D-Santa Cruz, who headed the budget committee from 2004 to 2008. "In the meantime, if you can save children's health care and parks and other programs until next year, you've done the right thing. If it doesn't bottom out and you get to next year, then you have the same hole that you've got to fill."
Bigger problem?
But is it the same hole? If the rebound scenario doesn't play out, the Capitol could find itself in an even bigger mess next year, still staring at a steep deficit after already having exhausted the one-time tricks. Moreover, federal stimulus money the state is relying on to offset cuts to schools and universities will mostly dry up by the middle of next year, and a series of recent tax hikes will expire, leaving the state with billions of dollars less in revenue.
Of course, this isn't the first time budget writers have used creative accounting to muddle through a bad patch. Just last year, the governor and lawmakers agreed to loosen rules that had required estimated tax payments to be counted in the same fiscal year in which they're collected. That allowed them to "net" an "extra" $1.4 billion to help fill last year's hole.
But with Republicans now dead-set against tax or fee hikes, the latest budget talks envision a dramatic expansion of such maneuvers.
In addition to his proposals to grab future tax revenue this year, the governor suggested pushing $1.8 billion in school and community college payments for the 2009 fiscal year into 2010 on top of the more than $4 billion due to education that had already been deferred.
Democrats then unveiled their own set of one-time maneuvers. They include a new 3 percent tax withholding for payments to independent contractors, good for $2 billion. They also include $2.5 billion in "fund shifts" moving money from accounts dedicated for specific purposes, such as transportation improvements, into the general fund. That's about $500 million more in shifts than the governor put forward.
Democrats plan to force a floor vote on their budget plan sometime this week, even though Republicans have already declared the proposal dead on arrival because it includes new taxes on tobacco, oil production and vehicle registrations.
When Schwarzenegger recently criticized the Democrats for including one-time "gimmicks" in that plan, a reporter pointed out that he had done the same thing.
"Very good point," the governor responded.
Budget magicians use sleight of hand to help close California's giant deficit
By Mike Zapler
Mercury News Sacramento Bureau
Posted: 06/21/2009 07:23:30 PM PDT
Updated: 06/21/2009 07:23:54 PM PDT
SACRAMENTO The menu of options to close California's massive deficit is short and seemingly clear: Cut spending, raise taxes or borrow. But faced with a money crunch the likes of which the Golden State has never seen, Gov. Arnold Schwarzenegger and legislators have pulled a less obvious tool out of the box. Call it budget magic.
Need an extra $2.3 billion? Easy just make people pay more of next year's taxes this year, by increasing paycheck withholdings and estimated tax payments.
How about selling a chunk of a state insurance fund? That's good for a cool $1 billion on paper, even if experts say it's highly uncertain the sale would fetch that much, if it can be executed at all.
Expenses still too high? Here's a really creative one: Push back state employees' monthly paychecks in June 2010 by a single day from June 30 to July 1 and thus onto the next fiscal year's books. Just like that, $1.2 billion "saved!"
Those are just some of the maneuvers or, to use a less charitable term, gimmicks that the governor and lawmakers have suggested to help fill a $24 billion shortfall through June 2010. The proposals add up to about $10 billion, depending on what one defines as a gimmick.
One-time fixes
The one-time moves have been pitched as a way to sidestep some of the most draconian cuts on the table such as eliminating welfare and removing 1 million children from the health insurance rolls or to stave off more tax hikes, which Schwarzenegger and Republicans staunchly oppose. Democrats say the accounting mechanisms will also help avoid having to borrow billions of dollars from local governments already drowning in red ink, as the governor had proposed.
But Edward Chiang, a certified public accountant in San Jose, said it would be hard for him to get away with the kind of financial accounting coming out of Sacramento.
"It's borderline kiting," said Chiang, referring to an accounting term that Webster's defines as "to get money or credit by using bad checks."
"Basically you use one receipt to pay for another and keep shifting it down the line, kind of like what Bernie Madoff did," he explained. "You can keep borrowing from Peter to pay Paul, as long as you don't run out of Peters." (Chiang added that he wasn't accusing anyone, particularly our muscle-bound governor, of doing anything illegal.)
Ultimately, Sacramento's number-crunchers believe an economic recovery will rescue the state from a Madoff-like fiasco. When the economy picks up, the thinking goes, tax revenue will shoot up and allow California to square its expenses with actual revenue.
"The odds are, there is a point during the next budget year that (revenue) will bottom out," said former Assemblyman John Laird, D-Santa Cruz, who headed the budget committee from 2004 to 2008. "In the meantime, if you can save children's health care and parks and other programs until next year, you've done the right thing. If it doesn't bottom out and you get to next year, then you have the same hole that you've got to fill."
Bigger problem?
But is it the same hole? If the rebound scenario doesn't play out, the Capitol could find itself in an even bigger mess next year, still staring at a steep deficit after already having exhausted the one-time tricks. Moreover, federal stimulus money the state is relying on to offset cuts to schools and universities will mostly dry up by the middle of next year, and a series of recent tax hikes will expire, leaving the state with billions of dollars less in revenue.
Of course, this isn't the first time budget writers have used creative accounting to muddle through a bad patch. Just last year, the governor and lawmakers agreed to loosen rules that had required estimated tax payments to be counted in the same fiscal year in which they're collected. That allowed them to "net" an "extra" $1.4 billion to help fill last year's hole.
But with Republicans now dead-set against tax or fee hikes, the latest budget talks envision a dramatic expansion of such maneuvers.
In addition to his proposals to grab future tax revenue this year, the governor suggested pushing $1.8 billion in school and community college payments for the 2009 fiscal year into 2010 on top of the more than $4 billion due to education that had already been deferred.
Democrats then unveiled their own set of one-time maneuvers. They include a new 3 percent tax withholding for payments to independent contractors, good for $2 billion. They also include $2.5 billion in "fund shifts" moving money from accounts dedicated for specific purposes, such as transportation improvements, into the general fund. That's about $500 million more in shifts than the governor put forward.
Democrats plan to force a floor vote on their budget plan sometime this week, even though Republicans have already declared the proposal dead on arrival because it includes new taxes on tobacco, oil production and vehicle registrations.
When Schwarzenegger recently criticized the Democrats for including one-time "gimmicks" in that plan, a reporter pointed out that he had done the same thing.
"Very good point," the governor responded.
