Next month, the state Department of Finance will announce its latest economic and revenue forecast. If the numbers are bad, state lawmakers will have to whack away at spending — again.
Partisan bickering makes the job tougher, but the complexity of California’s economy, and the tax structure that funds the state government, guarantees a budget nightmare almost every year.
For one thing, California’s economy dwarfs the economy of any other state.
“We compare ourselves to other countries as far as the size goes," economist Dennis Meyers with the Department of Finance says. "It’s also similar to other countries in its complexity.”
Meyers builds the state’s economic forecast. That forecast determines how revenues get projected and how much money the state can spend.
Meyers tracks the industries that drive California’s economy. He says there are lots of them — and a lot more than other state economists have to contend with.
“We’re not a mono-industry economy,” Meyers explains. “A smaller state like Nevada is predominantly driven by the gaming industry. So as long as you got a handle on what’s going on with gaming, you got a pretty good handle of what’s going on with the economy and revenues and things like that. But here we don’t have that luxury.”
Manufacturing, oil drilling, software development, agriculture — all major U.S. industries factor into Meyer’s calculations. So does anything that affects imports or exports. That’s because California is the country’s Pacific Rim gateway. If consumer spending in the U.S. slows, or a quake rattles China or a tsunami washes over Japan, California’s economy gets hit because trucks and trains aren’t moving.
Translating economic activity into projected state revenue is tough. Jerry Nickelsburg, who tracks California's economy for UCLA’s Anderson forecast, says what makes the job even tougher is that the state government relies on the most volatile kind of revenue: taxes on personal income and capital gains. In good years, the state collects a lot; in bad years, it collects a lot less.
“The way in which we collect revenues for the state general fund is one which ensures that we’re going to have times of feast and times of famine — and it’s very difficult for the Legislature to smooth that out,” Nickelsburg says.
Voters get frustrated by the way the lawmakers turn “feast or famine” revenue into a budget. Nickelsburg says we want to make sure more money goes to public schools or mental health care or some other worthy purpose, “so we pass initiatives directing the legislature to spend on one project or another, but we don’t consider in passing those initiatives what would have to be given up in order to do that.”
That task falls to lawmakers. By Jan. 10 each year, the governor proposes a balanced budget. The legislature has to enact a balanced budget by June 15.
In the months between, lawmakers analyze and debate the spending plan, negotiate alternatives and finally vote. The public and plenty of interest groups weigh in.
So does the legislative analyst, Mac Taylor. “It’s messy,” Taylor says, “and I don’t think people should be surprised by that.”
Taylor heads a non-partisan fleet of economists and policy wonks that advises the Legislature on fiscal questions. The team reviews the governor’s proposed budget each year and recommends to the Legislature which parts to adopt, modify, or reject. The Legislative Analyst’s Office also presents alternate forecasts and budget solutions.
Taylor says adopting a budget for a state as complex and diverse as California is a challenge in good economic times. Doing it when deficits are in double digits makes the choices even tougher.
“How big do you want your government to be?" Taylor says. "What things do you want them to do? How should we distribute taxes? Who should pay them?” Taylor says those are all important issues that deserve thorough debate.
“While I know it's frustrating for people because we don’t always solve our problems," Taylor says, "and they tend to persist over time, I think it’s really healthy that we have these kind of debates and that people are engaging.”
State lawmakers will dive into a new budget debate in January. But the budget process is well under way now.
Taylor has forecast a $13 billion deficit. The state’s Department of Finance will issue its revenue forecast by mid-December.