California Requests Federal Aid to Fund its Deficit

California has a long-term problem with its budget, which the current recession has merely exacerbated.

California Treasurer Bill Lockyer asked U.S. Treasury Secretary Timothy Geithner on Wednesday to authorize assistance for his state from the federal Troubled Asset Relief Program, warning that depressed tax revenues may cut into basic services and halt the building of infrastructure.

In a letter, Lockyer asked Geithner for TARP assistance for California and "other financially strapped states and local governments which face a severe cash flow crunch."

"If we cannot obtain our usual short-term cash-flow borrowings, there could be devastating impacts on the ability of the State or other governments to provide essential services to their citizens," Lockyer wrote.

California's Proposition 13 limits increases on residential and commercial property taxes, for existing owners, to 2 % a year - below the rate of inflation. This creates a dependence on cyclical types of revenue streams, such as income and capital gains taxes. The fluctuation of the later has been especially damaging to the budget during the multiple stock market collapses of the last decade.

This was noted in a UC-Berkeley Haas School of Business study, from 2003:

Proposition 13 caused the state to rely more on sales, income, and corporation taxes as sources of state and local funding, leaving those more cyclical taxes to shoulder 70% of the tax burden.

This proportion is the highest among the large states, making California's tax revenue base among the most cyclical, making California's revenue base more vulnerable to economic downturns. At the same time, large parts of the expenditure stream are locked in by voter mandate or statute.

They recommended a 'rainy day fund':

(The authors) suggest a $5 billion baseline for capital gains revenue, with excesses above that amount being considered temporary revenues and siphoned off into a "rainy day fund" to allow for a stable expenditure stream when capital gains revenues fall below that baseline.

There is a constitutional requirement in California that requires the budget, and any tax increase, to be passed with a two-thirds vote in the state legislature. This allows a minority, or even a substantial minority, to wield a good deal of control. Apparently, Democrats are thinking of proposing a referendum to amend the two-thirds rule, maybe in 2010. Though this has apparently polled above 50 % recently, its prospects are dubious during a recession when a good portion of the states' homeowners are underwater.

There is good reason to believe Californians are tired of the referendum process in general, as it has resulted in a large number of mandates to the state budget (noted in the Haas excerpt), and created quite a bit of inflexibility. It looks like nearly all of the proposals slated to be voted on in a few days will down to defeat, including a 'rainy day fund'. Although, one is polling well:

The only proposition passing in the 10News poll is Prop. 1F, which would prohibit pay raises for legislature, governor and other elected officials if the state is expected to have a deficit. It is leading by 10 points, according to the poll.