Business analyst Mark Lacter joins KPCC once a week for an in-depth look at economic issues in Southern California.
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California budget; business interests

KPCC's business analyst Mark Lacter talks about California's ongoing budget troubles and how the state is shaping up to end in the red this year.

Susanne Whatley: On Tuesdays we talk about the latest business stories with Mark Lacter. So, Mark, there's more trouble for California's budget.

Mark Lacter: Looks that way, Susanne. The state is shaping up to be in the red this year, again, not because the economy has taken a nosedive - actually, things are looking reasonably decent (almost 200,000 jobs being added to the rolls so far this year, consumer spending showing some life). No, the reason for the shortfall really goes back to last June when lawmakers in Sacramento were desperate to figure out a way of balancing the budget. They'd been cutting like crazy but were still a few billion dollars short, so they made up the difference by simply assuming that the state would be receiving way more in tax revenues than most anyone was really expecting. It's like making $50,000 a year and deciding to buy a car on the hope that you're going to get a $10,000 raise later in the year.

Whatley: I guess there’s no raise in the cards…

Lacter: That’s right, certainly not that size. The proviso in the budget deal was that if the state numbers weren't adding up by December, there would be a bunch of additional cuts, and that seems to be what's happening. It was sleight of hand - but only because Gov. Brown couldn't drum up the two-thirds majority needed to raise taxes through the legislature. Next year the deficit could be much higher, so what we're starting to see are efforts to work around the legislature.

Whatley: What are we going to see?

Lacter: One of the more interesting plans is being put together by a group that includes the philanthropist Eli Broad, Eric Schmidt of Google, former Gov. Grey Davis, and many other business and government leaders. It’s a bipartisan group called the Think Long Committee for California, and they've come up with several major recommendations for restructuring the government. The ones getting the most attention involve changing the initiative process, simplifying the tax codes, and phasing in a 5 percent sales tax on services (stuff like accounting and legal work – even getting your clothes dry-cleaned). Not taxing services is a big reason state revenues have struggled to keep up with expenditures.

Whatley: I see that education is one of the group’s big themes.

Lacter: That’s right. You know the conventional wisdom is that businesspeople hate having their operations located in California (that's certainly the impression you get in the various surveys of the best and worst places to do business - California is always ranked near the bottom). But it’s more of a love-hate relationship. Businesspeople love the fact that California's economy is so large, that it has a huge base of consumers, that the state's location makes it a lot easier to ship and receive goods. But they do hate the regulations that can be so inconsistent and sometimes nonsensical, and perhaps most important, they worry about being able to hire people with the educational skills to do the job. That's a huge deal - and that's why there's been such concern among business groups about the cutbacks in state education funding.

Whatley: What's the answer?

Lacter: Well, this Think Long Committee would use the tax changes to help provide an extra $5 billion a year for the schools. The group also wants to make secondary-school students more prepared for college study. Now, it's a pretty good bet that these proposals will elicit some opposition. (On “Airtalk” yesterday, you heard some major pushback from representatives of the California Federation of Teachers and the Howard Jarvis Taxpayers Association. The problem with proposing such a major overhaul with so many moving parts is that you're bound to rub interest groups the wrong way. And even if the ballot initiative passes, it's bound to be challenged in the courts.

Whatley: This is why compromise tends to be so difficult.

Lacter: Yes. But then there's a poll by USC and the Los Angeles Times that finds that when it comes to the public schools, two-thirds of California voters say they're are willing to pay higher taxes. So perhaps we're reaching a turning point when it comes to funding education. I'm sure the business community will be watching this closely.

Whatley: Mark Lacter is a contributing writer for Los Angeles Magazine and writes the business blog at LA