Business Update with Mark Lacter

California's $16 billion problem

KPCC's business analyst Mark Lacter sounds like a broken record when it comes to California's finances.

Steve Julian: Mark, what's the takeaway from Governor Brown's budget revision?

Mark Lacter: Well, the most obvious takeaway, Steve, is the size of the revision - going from $9 billion to $16 billion in the space of less than six months. That's an increase of more than 70 percent, and frankly, it tells you just how unrealistic the original estimate turned out to be. Imagine that you're looking to buy a house for, say, $600,000, and you've made all the arrangements with the lender and you're set to do the deal, when all of a sudden the buyer says, "There's been a slight change, and instead of $600,000 the new price is $1 million."

Julian: As I buyer, I could - and would - walk away.

Lacter: Yes, but the state of California doesn't have that option. Thing is, the earlier budget numbers were based really on a wishful thinking scenario - that the economy would be in such good shape by now, that tax receipts would be especially strong (and they aren't), that the federal government would be willing to give California a waiver on certain spending requirements (and they're not), and that the courts would throw out lawsuits from various groups challenging the budget cuts (and they haven't, so far).

Julian: So, virtually everything that the governor was hoping would happen didn't happen.

Lacter: That’s right – and now he has to hope that voters will pass a ballot measure in November that would temporarily increase sales taxes, along with personal income taxes for the very wealthy. Otherwise, the cuts will be even larger. But what's remarkable about this budget situation is the reaction among Californians. Unless you're directly impacted by these cuts, whether it's through higher tuition, or health care cuts, or a payroll cut if you're a state employee - in other words, unless you have some skin in the game - there's a good chance you're not paying much attention. Just look at the poll numbers - voters don't like the idea of higher taxes, but they also don't want to see cuts in education.

Julian: So there's still a disconnect between wanting it all without paying any more.

Lacter: Yes, and the feeling is if there is a deficit problem, well, it's only because the state spends too much money. What people sometimes forget is that these cuts eventually impact everyone - they diminish the quality of life, and that certainly affects the California economy.

Julian: And it's not only the state, Mark, but the city of LA has a mess on its hands.

Lacter: To the tune of $220 million, more or less, which they're hoping to close by eliminating more than 600 city positions and raising taxes and privatizing. As with the state, it's a case of taking in too little and shelling out too much.

Julian: Have you nothing original to say??

Lacter: I know – broken record. Look, we all want police and fire and trash pickup and decent roads, but once you cover that, and then have to pay for pensions and health care coverage, there's very little money left over for the other services. You know, I've been watching the City Council's Budget Committee hearings (not exactly riveting television), but they do point out one big problem: Everybody has their own idea about what should be cut and what shouldn't be cut. Their own pet programs are critical, and other programs not so much.

Julian: And what about revenue?

Lacter: Well, you the business community that's pushing for tax breaks as a way of growing the economy. But if you don't require businesses to pay taxes, you're missing out on tax revenue that the city would otherwise have received - potentially up to $400 million a year, according to one study. That means the deficit is even higher. It's just a zero sum game. So the full council will be getting their hands on the budget in the next week or so, and who knows – maybe they'll find some common ground.

Julian: Or... not.

Lacter: You’re such a pessimist.

Mark Lacter is a contributing writer for Los Angeles Magazine and writes the business blog at LA Observed.com.


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