Contents

Contents......

Part 1: Domestic Issues......

  • California Budget Crisis......
  • Cloud Computing
  • Democrat Presidential Outlook 2012
  • Gerrymandering......
  • Google’s Antitrust
  • GOP Presidential Outlook 2012......
  • Immigration Reform
  • Medicare/Medicaid: Background and future
  • Presidential Primaries
  • Supreme Court Preview......
  • TARP
  • Unemployment
  • US Debt Reduction Plans

Part 2: International......

  • Afghanistan: The US role and the future of the country......
  • Al-Qaeda
  • BRICS
  • China's Economic Future......
  • Egypt: Where, To, from Here?
  • European Union: France and Germany......
  • Libya......
  • Mexico: Update and Outlook......
  • NATO: Its Future
  • One World Currency
  • OPEC......
  • Palestine......
  • Sudan: Update and Outlook......

Index......

Part 1:
Domestic Issues

Speaking Truth in Today’s Current Events 1

California Budget Crisis

Dani Kapke

"When you think about the genesis of Silicon Valley, it really started from its superior educational base. You don't want to kill the goose that's laying the golden eggs." - John Sedgwick, speaking on education cuts

"As unappealing and painful as the governor's proposed budget is, the only thing worse is to allow this fiscal crisis to linger." - Tem Darrell Steinberg, California Senate President

“For 10 years, we’ve had budget gimmicks and tricks that pushed us deep into debt. We must now return California to fiscal responsibility and get our state on the road to economic recovery and job growth.” - Governor Jerry Brown

“[The budget] is all of our problem and it is a challenge for all of us. We are all in this together.” - Governor Jerry Brown

From the 19th century gold rush to the prodigies found in the Silicon Valley, California has a great deal to be proud of. One thing, however, that the Golden State takes no pride in is the massive amount of debt it has accumulated over the last few decades. Although many US states are suffering from an imbalanced budget, none have felt the fiscal shortfall quite like California has. In fact, the total budget gap for California exceeds $25 billion for fiscal year 2011-2012, meaning the state has $25 billion less than it needs to cover its normal expenditures.[i] Without an easy route out of its financial crisis, California looked to the federal government for a help, but was denied. President Obama made it clear that, with debt of its own, Washington would not provide any money to aid state governments. Thus, California was left to handle the situation on its own.

Lawmakers in California considered various budget alterations, proposing bill after bill during the first half of 2011, ultimately deciding on a plan that, while not perfect, managed to balance the state’s budget. The impact of the new budget will be felt for years to come, not only in California, but potentially in every US state. The details and impacts of the budget will be discussed in more depth later on, but, in order to fully grasp the California budget crisis, it’s imperative to first understand why the crisis began in the first place.

For the most part, the public is under the misconceived impression that California’s fiscal problems are the sole result of flippant administrative excess; in other words, the government carelessly spending more money than it has. While there is a measure of wasted spending involved, the budget problem is primarily the end result of decades of mini financial crises the state government was forced to bailout.

There are two costly situations in California’s history which analysts point to as “the starting point” of the budget crisis we see today: first, the victory of Proposition 13 in 1978, and second, the growth of corporate monopolies. The details of both can become rather tedious, so bear with me.

First, the victory of Proposition 13. As California experienced a drastic escalation in home values, property tax assessments skyrocketed. Thus Proposition 13 was proposed. Under Proposition 13, the annual real estate tax on a piece of property would be restricted to “1% of its assessed value and this assessed value would only increase by a maximum of 2% per year, until a change in ownership.” Following the victory of Proposition 13, property tax rates dropped an average of 57%. [ii]

These property taxes were the main revenue source for school districts, cities, counties, and with such severe losses, there were predictions of drastic cuts to education and social services. Such cuts were prevented, however, by the state’s decision to bail out local governments and the schools. Unfortunately, the state rescue also resulted in a loss of local control. Furthermore, as a consequence of Proposition 13, school districts and city governments were forced to compete for their share of the state budget.

California is now seeing the long-term ramifications of Proposition 13. David Menefee-Libey, a political scientist at Pomona College, explained the impacts, saying, "In the first years after Proposition 13 passed, the state was able to get by because it had a [budget] surplus. But because the state is now responsible for funding local government and school districts the demands on state resources became too great.” [iii] Although the victory of Proposition 13 meant lower property taxes for homeowners, it also meant unprecedented expenditures for the state government which continue to drain its budget.

Second, the growth of corporate monopolies. By the mid-1990’s, California was faced with a serious dilemma as corporate monopolies took over. A good example of this is Enron, an energy trading company which utilized the loopholes in California’s recently deregulated energy markets to “cheat” Californians out of billions of dollars. Although Enron is attributed the feat of financially undermining California, other energy companies were also taking advantage of the energy markets. Shortly after Enron’s invasion, the price of energy skyrocketed in California, leaving the utility companies to pay the bill (California law prevented the companies from passing on the cost to consumers). [iv]

As it turns out, major banks had loaned heavily to California energy utilities such as Pacific Gas and Electric, San Diego Gas and Electric, and Southern California Edison. Unfortunately, when the price of energy shot up in 2000-2001, the utility companies were unable to pay back their loans. In an attempt to protect the interests of the financial upper class, and to avoid financial meltdown, California’s government stepped in to bail out the utilities.[v] In the end, the energy crisis cost the state roughly $40 billion to $45 billion, most of which has never been recovered.

It was in this way that the California budget crisis began. For the next decade or so, California’s governors desperately attempted to balance the budget by raising taxes, cutting programs, then cutting taxes, and creating programs. Unfortunately for the state, the governors’ efforts were largely unsuccessful. This brings us to the current governor, Democrat Jerry Brown, and his attempts to balance California’s broken budget.

Governor Brown’s first task in dealing with the budget was to target where exactly California’s needed revenue would come from. Although many assumed that a large portion of the budget reform would come from increased taxes, this wasn’t the direction Governor Brown took his endeavors. If he had learned anything from the previous two governors’ attempts, it was that California’s Republicans would vehemently oppose tax hikes – and he was right.[vi]

Instead of fight the Republicans over tax hikes, Governor Brown focused on both increasing various fees, such as those for vehicle license registration, and on cutting funding for education[vii] and welfare programs. Fellow Democrats were opposed to the education and welfare proposals, claiming that such actions would hurt only the lower and middle class of California, while leaving the upper class untainted by the financial burden. Consequently, Governor Brown lost backing from much of his party.

In terms of how to get the budget back on track, Governor Brown allowed for some very creative and hopefully innovative steps. Two different approaches in particular are worth noting: halting legislators’ pay and utilizing a simple majority.

California’s State Controller, John Chiang, made the decision to bring into effect Proposition 25, which prevented the state legislators from being paid if they failed to pass a balanced budget by the constitutional deadline, June 15, 2011.[viii] Chiang took such action in response to a very poorly balanced bill the Democratic legislators had passed on June 14th. The bill left a budget gap of over $1.5 billion, and was vetoed by Governor Brown days later. [ix] The implementation of Proposition 25 was meant to motivate the legislators who were avoiding tough decisions in order to survive politically, Chiang said.[x] Furthermore, Chiang’s effort appears to have worked.

Although Democrats hold the majority in both houses of California government, Governor Brown took advantage of Proposition 25, which allowed the legislature to pass a no-tax-hike budget with a simple majority. The initiative prevented minority Republicans from rejecting budget proposals unless the proposal included tax hikes. This allowed the Democrats a bit more freedom, at the same time causing Republicans to be even more adamant about retaining taxes at their current level.

On June 30th, just two weeks after he had vetoed the Democrats’ imbalanced budget, Governor Brown signed into place the 2011-2012 budget. One of the governor’s biggest challenges was to get the budget finalized before the deadline, and the action hadn’t come a day too soon, as July 1st marked the beginning of FY2011. Although the budget is finalized and in place, there is still some question as to its viability and effectiveness.

Before going any further, two important aspects of the new budget must be realized:

First, while increased taxes play a small role in the new budget, the primary revenue surge comes from cutting government spending. In total, the budget reduces expenditures by $15.0 billion (primarily education and welfare). Targeted revenue increases of $0.9 billion (sales tax and vehicle license fees) and other solutions of $2.9 billion were also adopted. The remaining $8.3 billion in changes come from the improvement in the state’s revenue outlook.[xi] The total of $27.2 billion in changes balances the budget and leaves the state with a reserve of $543 million. [xii]In theory, the new budget should entirely mitigate California’s pressing financial burden, but there are still a few barriers that will be addressed later on.

Second, Governor Brown made it a point during the budget negotiations to keep in mind what the voters want, and, with a few exceptions, he’s achieved it. Jack Pitney, professor of government at Claremont McKenna College, predicted that Californians would be in favor of the new budget, and went on to say about the budget, “It doesn't involve the kind of deep cuts people were talking about a few months ago, lets tax increases lapse and allows people to hit the beach without having to worry about the budget," [xiii]By avoiding tax hikes, governor Brown was able to create a budget that seems to achieve its purpose while at the same time following the will of the people.

However, before we toss the budget’s credibility out the window or hail it as the perfect solution, it’s important to recognize that Governor Brown has made some very good, some very bad, and some very ugly reforms.

First, when looking at the good aspects of Governor Brown’s budget, two factors standout: credit ratings have improved and revenue returns seem viable.

California has long had very poor credit ratings, and was in fact downgraded in January of 2010 because of its massive debt. [xiv] As a result of California’s new budget, however, Standard & Poor'srevised California's ratings outlook from "negative"to "stable" , saying the state's method to balancing its budget is "largely realistic.”[xv] Standard and Poor’s credit rating is important to California’s recovery since it deals with the “general creditworthiness of an obligor, or the creditworthiness of an obligor with respect to a particular debt security or other financial obligation.” [xvi] Over the years, credit ratings have attained wide investor acceptance as convenient tools for discerning credit quality. Thus, as a result of Governor Brown’s budget reforms, California has improved its overall credit ratings.

Governor Brown took a gamble when he included revenue increases in the budget, while at the same time retaining current tax levels. Fortunately, Dan Genter, chief investment officer of RNC Genter Capital Management in Los Angeles, supports the governor’s decision, saying, "The worst is really behind them and they're seeing a significant return of revenue." [xvii] Furthermore, the May tax receipts reflect the state’s continuing recovery from the economic downturn with $6.6 billion in higher receipts compared to January. Since then, tax receipts have continued to come in higher than expected by an estimated $1.2 billion in May and June. With the improved revenue receipts, lawmakers project an additional $4 billion in 2011‑12 revenues. Governor Brown expects a portion of the state’s budget balance to come from increased tax revenue, which the experts agree is quite likely.

Second, in contrast it is important to recognize that not all of Governor Brown’s budget reforms have proven beneficial, thus we come to the bad of the reforms: ignoring long-term structural barriers.

Unfortunately, according to Reuters, the budget plan, “does not address long-standing roots of pain in California’s budget imbalances” [xviii] - the type of structural changes both the Republicans and Democrats have called for. Although the new budget appears to remedy California’s current crisis, there is no framework for future budgets that would have a long-term bearing on California’s financial health. Without such reforms, California will likely face a similar situation in the future. In the end, the absence of a long-term budget framework leaves the possibility of a reoccurring budget crisis.

Third, and finally, the new budget’s impact – both short and long-term – is very important, and potentially very ugly. This is seen most prominently in the case of education and the future of California’s high-skill workforce.

Governor Brown made a very controversial move when he opted to significantly cut higher education funding. The state’s colleges will lose $1.4 billion in funding: $500 million from the University of California system, $500 million from the California State University system, and $400 million from community colleges. As expected, the University of California regents approved an additional 9.6% tuition hike to offset the state budget cuts. The increase comes on top of an 8% hike for the 2011-2012 school year. Many students have protested the recent increase in tuition – about $1,000 – as it comes only a few weeks before the fall semester begins. Keep in mind, these cuts to education come one year after tuition hikes drew protests from tens of thousands of students throughout the state.Thus, the short term impacts on both the colleges and the students are certainly negative, and will continue to play out over the next few years.[xix]

Although the short-term impacts of the new budget undermine higher education, the long-term impacts will be potentially detrimental to California’s workforce and ultimately its economy. The significant cuts in education spending could thin the state's human capital, potentially forcing California companies to look elsewhere for skilled workers. “It's the equivalent of "eating the seed corn,"” said Levy, chief economist at the Center for the Continuing Study of the California Economy in Palo Alto. [xx] Looking at the Silicon Valley, for instance, its success stemmed from its superior educational base at Stanford and UC Berkeley. By undermining higher education over the next few years, Governor Brown’s new budget puts the future of California’s high-skilled industries and ultimately the economy at risk.

The question, then, is what can be expected over the next couple of years aside from education? It’s important to note that whether or not the budget will remain balanced through the end of fiscal 2012 relies on the continued increase of state tax revenues. Fortunately, economists and financial analysts are fairly confident in California’s development over the next two years. Because the state has improved the structural alignment between its recurring revenues and expenses, the state's rating outlook is expected to “remain stable through the two-year outlook horizon.” [xxi] Ultimately, over the next two years we can expect to see better financial stability in California.

California’s 2011-2012 budget is a mixed bag, so to speak, of good, bad, and ugly policy reforms. The fact that the state’s government was able to pass a budget with such extremities is remarkable; however, only time will tell what overall impact it will have – not only on California’s development, but on America’s. [xxii] Undoubtedly, the budget crisis will go down in California history, the question is whether or not Governor Brown’s budget reforms will be something Californians can be proud of.