TOPICS > Economy

Amid State Struggles, Calif. Faces Deep Budget Shortfall

February 17, 2009 at 6:10 PM EDT
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As the stimulus goes into motion, states around the nation are facing budget shortfalls. California is facing a particularly dire situation, with thousands of jobs on the line.
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GWEN IFILL: As the federal government struggles to turn the national economy around, state governments are dealing with the consequences of the slide up close. Forty-three states reported budget gaps totaling $47.4 billion in January.

And nowhere has the rubber hit the road with more force than in California, where lawmakers are struggling to make up a two-year $41 billion projected deficit in the Golden State alone. Without a budget agreement, the state is poised to lay off 20,000 government employees and suspend public works projects.

For a closer look at the challenges facing California, we’re joined by Speaker of the California Assembly Democrat Karen Bass and John Myers, Sacramento bureau chief for KQED Public Radio.

John Myers, I want to start with you so you can give us some of the nuts and the bolts. Where do things stand tonight?

JOHN MYERS, Sacramento bureau chief, KQED Public Radio: Gwen, as we speak now, the California State Senate is considering a tax increase, a $14.4 billion tax increase, to try to solve part of the problem.

It’s still unclear whether or not there are enough votes. California is one of those states where it takes a two-thirds supermajority to both pass a budget and to increase taxes. That means a few Republicans have to vote for it. And at this point, they are at least one Republican vote short.

That’s the real sticking point at this point. And we’ve been going on marathon sessions here at the State Capitol in Sacramento for the last three days.

GWEN IFILL: John, we’ve seen the pictures of all the legislators asleep at their desks or sleeping on the floor. What is driving the dispute that seems so irresolvable so far?

JOHN MYERS: Well, I think it’s a combination of things. It’s a philosophy. It’s a notion of, what is the best thing to do or what’s the least bad thing to do, probably. You know, you have a very healthy debate. Democrats think that the worst thing you can do is completely dramatic cuts in state spending, especially to the state’s social safety net.

Republicans, however, think that a tax increase is the absolute worst thing, especially in these recessionary times.

Gov. Arnold Schwarzenegger and the Democratic leaders of the legislature have proposed kind of a “half of each” kind of plan, where they’ve got taxes, cuts, and some borrowing, actually, to get out of that $41 billion hole. But until you can get Republicans to kind of cross that line — and, you know, the interesting part of this, Arnold Schwarzenegger is a Republican — but until he can find enough fellow Republicans to buy into his way of thinking and the Democrats’ way of thinking, we’re stuck.

Strict budget rules cripple economy

Karen Bass
Speaker of the California State Assembly
The problem in the State Senate is that they are missing one Republican vote. In the State Assembly, we have all of the votes we need to raise the taxes. And we are just waiting on our Senate colleagues -- just one of them -- to step up.

GWEN IFILL: Madam Speaker, let me ask you about what it is that makes California so different or so unique in this kind of national budget crisis that it's bleeding this much red ink?

KAREN BASS, D, speaker, California Assembly: Well, certainly what John described, California is only one of three states in the country where a two-thirds vote is required. The other two states are Arkansas and Rhode Island.

And the fact of the matter is, over the last few years, California has cut $19 billion out of essential programs and services. And so John is certainly correct when he says that it's very difficult for Democrats to make the decision to do deep cuts.

But in fact, over the last three years, we have done just that. And in this budget alone, we have proposed and agreed to $15 billion of additional deep cuts, in particular to education.

The problem in the State Senate is that they are missing one Republican vote. In the State Assembly, we have all of the votes we need to raise the taxes. And we are just waiting on our Senate colleagues -- just one of them -- to step up.

And I actually believe that that will occur within the next 24 hours. We do have two Republican senators that are in play. And we're waiting to see if we can come to a conclusion with them and actually put the budget up for a vote in both houses. In the Assembly, we have already voted on 25 related budget bills. We're just waiting for one more to conclude the process.

GWEN IFILL: What is the chicken and what is the egg here when you talk about the difficulty that the California budget is in? When you look at the national economy -- which is clearly not doing well -- is that what's driving California's problems? Or are they problems unique to California, like it's incredibly high foreclosure rate and...

KAREN BASS: Exactly. California was or is the epicenter of the foreclosure crisis. Forty percent of the foreclosures in the country take place in the state of California.

But there's other things at play here, as well. We have a very out-of-date tax system. We also have a budget that is restricted by either constitutional or statutory laws, which means that 90 percent of the budget is actually not even in our control.

So, for example, several years ago, voters passed an initiative, Prop 98, that requires that 40 percent of the state budget, regardless of the revenue, has to be dedicated to education. And so there are several things at play that make it very difficult for us to close a $41 billion hole.

One more Republican vote needed

Karen Bass
Speaker of the California State Assembly
So above and beyond philosophy, it's a concern about a political future. And in my opinion, with the state of California poised to go over a cliff, that's just absolutely unacceptable...We have to do what is right for the state of California.

GWEN IFILL: And how much is what makes it difficult a matter of philosophy about whether the solution here is increasing taxes and fees, which you are doing as part of this proposed agreement, and increasing tax breaks for corporations, which is also part of this agreement?

KAREN BASS: Well, let me just tell you: I believe it's much more practical than philosophy. The fact of the matter is, in California, we have very strict term limits. We can only serve in the legislature for six years. And so most people in the legislature are thinking about their next elected office.

And because of the rigidity within the Republican Party, they believe or they actually enforce that, if a Republican legislator ever votes for taxes, that person will never win again. And there are many lobbyists around Sacramento today who will tell you that they were former legislators, but they were thrown out of office by their own party when they voted for taxes.

So above and beyond philosophy, it's a concern about a political future. And in my opinion, with the state of California poised to go over a cliff, that's just absolutely unacceptable. We cannot think about our political careers; we cannot think about our philosophy. We have to do what is right for the state of California.

For an example, I ran for office so I could come up and protect and expand the programs that I'm actually voting on slashing. We have to step up and do -- and it's shared pain, as President Obama said when he was being sworn in as our next president.

GWEN IFILL: But if I may ask, what difference would it make -- if you came up with an agreement tonight, you've already started furloughing state employees. You sent out layoff notices today to 20,000 state employees. DMV, Department of Motor Vehicles, offices have been closed. Projects have been stopped and can't be started so easily. Hasn't the damage already been done?

KAREN BASS: No -- well, absolutely, the damage has been done, but we can certainly prevent any further damage. So, for example, you mentioned the layoff notices. If we get a vote on the budget tonight, those notices won't go out.

Tomorrow, we are posed to stop over 200 more construction projects. If we get a vote on the budget tonight, those projects will continue to move forward. So it's absolutely correct to say damage has been done, but we can absolutely stop the state from going off a cliff today, if one Republican senator steps up and agrees to vote for the budget. And I'm actually confident that that will occur within the next 24 to 48 hours.

A 'systemic problem' in California

John Myers
KQED Public Radio
The tremendous revenue decreases because of the economy right now, really took a whack at California's tax revenues, but California has had a systemic imbalance for years between what it brings in, in revenues, and what it spends in state government.

GWEN IFILL: We saw today where President Obama signed that $787 billion stimulus bill. Some of the money is going to the states. Does that have any effect on your plight?

KAREN BASS: Well, I will tell you, we are really looking forward to that money. But, no, we were concerned about closing this $41 billion gap now.

Now, the impact of the federal money? We anticipate that revenues will continue to decline, so when the tax receipts come in, in the month of April and May, we expect for there to be a new gap that opens up in our budget.

And so what we are very hopeful about is that the economic stimulus that comes to the state of California will prevent us two months down the line from making even deeper cuts. As I mentioned, the budget that we're voting on today really has about $15 billion in additional cuts. We don't want to cut anymore.

GWEN IFILL: John Myers, you've been following this very closely. How much of what the speaker says is likely to happen, say, within the next 24 hours? And how much of this is really about one vote and how much of this is about more?

JOHN MYERS: Well, it will be interesting to see. Certainly, I defer to the speaker. She controls much more than I do as an observer of the process.

But I would merely say that I do think it comes down to a one-vote kind of philosophy at this point. We've seen in the last three or four days, to get these final votes on this budget, a whole lot of political horse trading.

You've got several lawmakers who had to have additional things in this budget package to get their votes, maybe more money for education in their district, some other kinds of factors. This final outstanding vote could demand some kind of government reform package that Republican lawmakers are talking about. So we really are kind of in a traditional political process with that.

But I would just say, you know, California's problems really seem to kind of be on two fronts. The tremendous revenue decreases, because of the economy right now, really took a whack at California's tax revenues, but California has had a systemic imbalance for years between what it brings in, in revenues, and what it spends in state government.

That systemic imbalance got a little bit smaller a few years ago. But, you know, even when other states were having good times in the last few years and the economy seemed to be doing pretty well and they were socking the money away for a rainy day, California really wasn't doing that. We were borrowing and we were doing all kinds of little accounting gimmicks.

And so this is a twofold problem. This is a real economic problem, and this is a systemic problem in California government.

Governor must bridge party lines

John Myers
KQED Public Radio
Governor Schwarzenegger has his work cut out for him... Actually, over the last several years since he's been in office, he is somewhat much more of a pragmatic Republican than I think some of the Republicans in the state legislature.

GWEN IFILL: How much of this is a test, political and otherwise, for Governor Schwarzenegger?

JOHN MYERS: I think the Governor Schwarzenegger has his work cut out for him. It's fascinating to watch him through this process. And, actually, over the last several years since he's been in office, you know, he is somewhat much more of a pragmatic Republican than I think some of the Republicans in the state legislature. They tend to be to be more conservative than he does.

And, you know, it was Arnold Schwarzenegger, when he was re-elected in 2006, who kind of coined this term "post-partisan" that is very popular, of course, in Washington right now.

But there are perils with being a post-partisan kind of independent voice trying to, you know, bridge that gap between Democrats and Republicans. And he has really had a tough time in a very polarized state legislature here in Sacramento trying to get both sides to work together.

And I think, you know, at the end of his term in a couple of years, his legacy may well be the financial problems of California. That's what he promised to fix when he ran a few years ago.

GWEN IFILL: Madam Speaker, another all-nighter tonight in Sacramento?

KAREN BASS: It could very well be. And I think John is absolutely right when he talks about how our tax system is really out of whack. So you have a state with 35 million people, but you have 144,000 taxpayers that bring in over 50 percent of the revenue in the state. That's why we have a tax commission that is actually looking at modernizing our tax system.

Where the largest rate of spending has been over the last few years has been in corrections. We need to certainly change our sentencing structure. We're very much out of date there, as well.

GWEN IFILL: Assembly Speaker Karen Bass and John Myers of KQED Radio, thank you both very much.

KAREN BASS: Thank you.

JOHN MYERS: Thank you.