Experimental feature

Listen to this article

Experimental feature

Dr Schwarzenegger recommended a strict regimen for the patient but, this being California, cosmetic surgery in the end was more expedient. A little liposuction here, a nip and tuck there and, from the proper angle, the budget looks marvellous again. Zoom in, though, and it is clear the state’s cash flow problems could resurface following Monday’s tentative budget deal, to be voted on this week. Even worse, a golden opportunity to solve structural problems was wasted.

Some real cuts are being made by reduced welfare spending, continued furloughs of state employees and prisoner releases. But cuts to education, the biggest budget item, must largely be repaid in future years, forming a $10bn liability. The $2bn it is borrowing from cash-strapped local governments must also be repaid. These counties, cities and agencies may issue bonds backed by promised state repayments. Perhaps the most egregious fudge moves the last payday of the fiscal year into the next for state employees, creating “savings” of $1.2bn that will have to be cut from the 2010-11 budget.

Meanwhile, borrowing needs are unclear and IOU issuance may continue for weeks. One positive is the lack of new taxes. Californians are already among the most heavily taxed Americans and depend too much on wealthy residents with volatile fortunes. The richest 1 per cent of Californians paid nearly half of state income taxes in 2007.

Even if a robust economic recovery bolsters state revenues the way the housing boom did after the technology bust, the ingredients for future problems remain. Voters could have been mobilised to reverse binding referendums that limit property taxes, set aside minimum funding for education and require a legislative supermajority to pass a budget, but the moment has now passed. Until the next crisis, that is.

E-mail the Lex team confidentially
Post public comments

The Lex column is on Twitter


Lex is the FT’s agenda-setting column, giving an authoritative view on corporate and financial matters. It is also one of the few parts of FT.com available only to Premium subscribers. This article is provided for free as an example. A Premium subscription gives you unlimited access to all FT content, including all Lex articles and the FT mobile Newsreader.

Subscribe to FT.com

If you have questions or comments, please e-mail help@ft.com or call:

US and Canada: +1 800 628 8088
Asia: +852 2905 5555
UK, Europe and rest of the world: +44 (0)20 7775 6248

Get alerts on Lex when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.

Comments have not been enabled for this article.

Follow the topics in this article