Tuesday, January 15, 2013

It's the Spending, Stupid ... Not the Tax Rates ... California Continues to do the Wrong Thing ... Its Balanced Budget Is All Smoke and Mirrors


Most States are required by their own laws and constitutions to balance their budgets annually. But in reality they don't even try. It's all cheap talk, short term accounting tricks and no legitimate action.

The proper political spirit and necessary intention to balance state budgets is often missing in action. Gamesmanship prevails instead. So when a state does manage to "balance" its annual budget, it's done with smoke and mirrors.

The balanced budget games played by the politicians and bureaucrats throughout our otherwise great country are performed with the intention to not admit the ugly reality to the voters -- er -- constituents and taxpayers -- that they purportedly represent.

But perhaps even worse than the failure to admit reality by our "public servants" is the fact that We the People sit by and allow it to happen. Ever wonder why? I do.

So now that I have your attention and we're all ready to tell it like it is, let's go deeper into this charade of public sector governance. It could be so simple to balance the budget if the genuine intention to do so existed, and here's how. By the way, this KISS approach would work in Washington, too.

How Simple The Job Of Balancing A State's Budget Could Be

Simply stated, in any serious realistic effort to balance a state's budget, the beginning point would be to formally restrict the upcoming year's government spending to the state's estimated tax receipts. Then we work backward from that number and decide what to spend on what. We establish priorities, in other words, since we have $X available to spend and no more than that.

And as part of the certain to be heavily debated process of what to spend, things like appropriate annual pension accruals and paying the state's bills on time would be officially incorporated in the state's estimated annual spending.

And money which was 'temporarily' provided by entities outside the state, such as federal government "subsidies," would be clearly asterisked since the federal government has no money of its own and the subsidy could be withdrawn in the future. And proper accruals for cash to repay existing debt, both interest and principal, would be included in the estimated spending levels as well. The game of smoke and mirrors would end, the truth would be told and a sincere effort to live within the state's means would become the norm.

At the end of each year, the actual experience versus the initially projected attempt to achieve a balanced budget would be publicized and form the basis for next year's estimated spending levels.

See how easy this could be if anybody actually wanted to follow the "spirit" of the law instead of just taking a wink and nod  approach to living within the state's means.


The first step toward problem resolution is problem recognition. If a state isn't willing to or in some other way doesn't manage to balance its budget, it's either spending too much, taxing too little, or engaging in a combination thereof.

Putting the emphasis on taxing instead of spending --- the wrong place --- is often the politically popular 'solution,' but in reality it's no solution at all. To the contrary, it is usually where the problem lies.

Then the spending to revenue problem gets bigger and bigger until finally the state's finances are completely out of control.

The lesson is straightforward. When a state raises taxes instead of controlling spending in the farce of pursuing fiscal balance, it's the certain route to spending more than it collects. Because when government and uncontrolled OPM spending is involved, that's what happens.

And in addition, since most people are opposed to paying more taxes themselves, the politicians elect to tax as few as possible of the 'other' voters -- er -- citizens. The so-called 2% of rich and greedy fat cats among We the People then become the target and source of the 'extra' funds. But it's never enough to offset the 'extra' spending. So the problem grows.

Eventually the spend and don't tax enough game ceases and the bills come due. But only after the state has run up billions in public pension obligations, unpaid bills that are pushed into the following accounting year, borrowed for infrastructure and not formally recognized that both the interest and principal on borrowings must be repaid, and so forth. And then there's the final farce when it comes to plugging the hole to balance a state's budgets, the federal government's subsidies to the state for such things as Medicaid, student loans, grants to higher education, unemployment compensation grants, welfare programs and so on.

At the bar, people without money to pay for their drinks often ask the bartender to put it on the tab, and with credit cards, people without money tell the sales clerk to  charge it. For government bureaucrats, it's called balancing the budget. And it's all one big lie!

California Is A Great Example Of What Not To Do To Achieve A Balanced Budget

So let's see what the pols are up to in California these days. And if you happen to live in Illinois, Michigan, Ohio, New York, Pennsylvania and numerous other states as well, there's lots of lying going on around you as well. The fact is that almost no state government is making a serious effort to live within its means. And we all know the government knows best gang in Washington isn't serious either.

So in reality the states aren't any better at fiscal management than are the feds. They just pretend they are by "requiring" themselves to balance the budget each year by any means possible, including fiction. As Alice In Wonderland put it so well, the words "balancing the budget" mean exactly what state politicians say they mean; nothing more nor less than that.

Brown's Breakthrough Budget is subtitled 'California's Democratic supermajority gets to work. Let the spending begin:'

"California Gov. Jerry Brown is touting his new "breakthrough" budget that provides $2.7 billion in additional funding for schools, $500 million for universities and a $1 billion reserve fund. For only the second time in the past decade, California has a balanced budget. But can the state's new Democratic supermajority keep it?

Mr. Brown is promising to be a good steward of the cash cow voters gave him on election day, when they approved a ballot initiative (Prop. 30) increasing the state sales tax and rates on top earners. They also okayed a measure (Prop. 39) requiring corporations to pay taxes based on their sales in the state, which will raise $2 billion in new revenues from out-of-state businesses that were using an alternative, more favorable formula. Thanks to these tax hikes, there will be an additional $8 billion to $11 billion flowing into Sacramento each year.

That is, if the projections are correct and lawmakers don't spend themselves into a hole.
California Gov. Jerry Brown

The state has borrowed nearly $25 billion over the past decade from special funds, schools, and local governments; $10 billion from the feds for unemployment benefits; and $73 billion from capital markets for infrastructure improvements. Meanwhile, local governments want Mr. Brown to pay billions in reparations to redevelopment agencies, which the governor looted to balance his budget a couple of years ago.

The California State Teachers' Retirement System has requested a $3.5 billion annual infusion to keep the teachers' pension fund solvent. State universities and colleges are clamoring for an additional $600 million. Labor unions aim to renegotiate their relatively austere contracts, and Democrats plan to stuff their budget with sundry provisions such as middle-class college scholarships and dental benefits for low-income individuals.

Meanwhile, Medicaid providers have sued the state for slashing their payments by 20% in the last four years and will want to be re-compensated now that the state has cash to spare (at least in theory) and a Democratic supermajority. The budget proposes $670 million in taxes and fees on hospitals and Medicaid managed-care plans to help fund the ObamaCare Medicaid expansion, which will cost an estimated $350 million this year and grow over time. Note, though, that $350 million is merely a "placeholder for the costs" until a more "refined estimate can be developed" once Washington provides more guidance on rules."

Summing Up

The pigs in California are lining up at the trough for their fair share of the new "free" money.

And when the trough is full of 'new' money, it will be quickly emptied.

And it's highly likely that the trough won't even be filled to the rim since the money raised by increased taxes won't be nearly as much as it's projected to be. That's because the politicians' revenue projections are phony and also due to the fact that people will find ways to pay less in taxes now that the tax rates have been raised. They always do.

In any event, after the new money has been spent, then more money will be needed to refill the trough again and create more free food for all the hungry pigs.

Thereafter the cycle will continue and there will be an ongoing and periodic need to raise taxes again and again to keep the trough full and feed even more pigs in addition to feeding the same pigs more.

Then the politicians will work hard to balance the budget Alice in Wonderland style by not paying bills on time, borrowing more money, ignoring future pension obligations, getting more free money subsidies from the feds and so on.

But, of course, the feds don't have more money to "subsidize" the states any longer. They've run out of borrowing capacity, too.

So maybe it's just possible that we have a spending problem and not a taxing problem.

Maybe that's the reality. And maybe once that reality is recognized widely enough, maybe the states and We the People will finally be forced to deal with it.

That's my bet, because more and more of us are beginning to acknowledge that we have a spending problem. Then we can tax enough to make the imbalance in the budget disappear.

But not before we come to grips with the out-of-control spending throughout the states, including the state of California and many others as well. And Washington too, of course. But you already knew that.

When all that happens, but not before, balancing the budgets at the state level won't be an Alice in Wonderland fictitious exercise any longer.

Thanks. Bob.

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