Explaining Southern California's economy

California budget: If you think this year looks bad, just wait until 2012

California Governor Jerry Brown Unveils State Pension Reform Program

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California Governor Jerry Brown announces his public employee pension reform plan October 27, 2011 at the State Capitol in Sacramento, California. Gov. Brown proposed 12 major reforms for state and local pension systems that he claims would end abuses and reduce taypayer costs by billions of dollars.

It's unclear what sort of unicorns-and-moneybags fairyland that officials in California were living in when they projected a $500-billion surplus in the 2011-12 budget. Against 12-percent unemployment and exposure to the housing crisis that ranks right alongside Nevada and Florida, any surplus at all was political and economic wishful thinking. So now come the trigger cuts — $2 billion of 'em.

Education will bear the brunt of this, if lawmakers can't figure out how to dodge the cuts. Not that education hasn't already been pummeled: according to Education Week, K-12 statewide has endured $18 billion is cuts over the past five years. The University of California and Cal State systems will also take it on the chin. Education Week says that some districts are in better shape than others, based on budget planning. But there are some time bombs out there, such as San Diego Unified.

Thinks that sounds bad? Well, then buckle up for 2012-13, when the Legislative Analyst's Office projects the deficit will be...$13 billion. The LAO does place these shortfalls in the context of a larger fiscal trend, which is sort of uplifiting, in a New Normal kind of way:

One year ago, the state faced ongoing budget imbalances of around $20 billion per year. Now, we forecast that the General Fund’s operating shortfalls will be between $8 billion and $9 billion per year in 2013-14 and 2014-15 and then decline gradually to about $5 billion in 2016-17. By making very difficult budgetary decisions—including the trigger cuts—the Legislature and the Governor have strengthened the state’s fiscal condition considerably.

We're going to have to face a choice in California, between continuing to fund and finance pension liabilities and supporting public education. All in a political environment where politicians seem dead-set against higher taxes, although a majority of the population (mostly Democrats and Independents, it should be pointed out) favor them.

Michael Lewis pondered the pension side of this in a Vanity Fair article earlier this year. He forecasts a future in which California cities face year after year of grinding budget cuts and layoffs, eventually leaving most places with one city employee, whose only job is to administer to pensions. Gov. Jerry Brown is beginning to take on this very heavy gorilla, but it's going to be an uphill battle, as the Sacramento Bee points out in an editorial today.

For their part, state Republicans did see this coming. This is from the Huffington Post, last month:

Republican lawmakers, who opposed tax increases, had warned that the revenue projections were overly optimistic.

"The Legislative Analyst's Office report indicates, as predicted, that the budget passed by Democrats with only a majority vote was overly optimistic and based on shaky assumptions," Assemblyman Jim Nielsen, R-Gerber, vice chairman of the Assembly Budget Committee, said in a statement.

He also noted that state spending is projected to increase by 12 percent in the fiscal year that will start July 1.

"It indicates that a lot more needs to be done to get California's budget under control, and that does not happen through tax increases," he said.

The real political problem here is that education cuts will penalize younger voters, while pension cuts affect older workers and retirees. The latter are a more powerful and well-organized political force. 

You can see from the LAO's projections that we're in for a rough decade. A slowly recovering economy should ease the pain, eventually. But state leaders should admit that continuing over-estimations of incoming revenues aren't going to do anything but create continuing battles.

Follow Matthew DeBord and the DeBord Report on Twitter.

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