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While the media buzz rages about the so called national fiscal cliff (a gross mis-characterization, meant largely to force the GOP to crumble on tax increases), California is heading down to a more real one of its own. With Governor Jerry Brown at the helm, the unions continue to have a free hand on milking wealth producing Californians to the brink, until the state’s beauty, resources and social ties (Hollywood, Silicon Valley, Napa Wine, Salinas and San Joaquin agriculture, the Pacific ports and beaches, etc etc) are not enough to hold them within the sate  and they flee to more welcoming regions.

Jerry Brown ran for Governor promising to fix California’s fiscal problems and balance the budget. During the 2010 election, I commented the election did not present a very appealing choice, but noted that “…Brown is more likely to push CA passed the brink in collusion with the unions, and actually bankrupt CA.”

Also endorsed was Andy Favor for Comptroller rather than the incumbent John Chiang. Not surprisingly, California voters did not agree, and they now find themselves reaping some of the economic consequences of their chosen team.

Brown, an ideological leftist with deep ties to the state unions was never prepared to make the tough cuts in the budget required in order to balance it and restore California to fiscal health. Unlike the Federal government, state governments cannot simply “print” money (thankfully) and are far more limited in ability to run deficits. What they do not bring in as taxes, they must borrow, and lenders are near the end of their risk appetite for California spending sprees.

Not willing to make real cuts, Brown simply “created” wealth in his projections in order to forecast a balanced budget. As noted in an article about part of Brown’s social agenda I predicted that wanted to:

…instead continued the California tradition of budget gimmicks and “kicking the can down the road” for later administrations and generations to deal with. The budget he has signed, assumes the voters will approve more than $8 billion in new taxes this November, and seizes over $3.1 billion from local redevelopment agencies, a violation of the voter’s will and likely unconstitutional (and bound to end up bogged down in court). It further assumes, that even if the voters passed the new taxes, they would not have a detrimental effect on the economy and drive even more people and businesses away from California, which they will.

And so they have.

Comptroller John Chiang has had the unhappy position of announcing California’s revenue shortfalls each month since the new fiscal calendar started in July. The differences between Brown’s projections and reality are stark.  Tax revenues in July 2012 missed the projections by $475 million according to the Comptroller (and $583.8 million or 10.3% according to Bloomberg’s). Chiang and Gov. Brown tried to lessen fears by stating that this was quite expected and mostly a technicality since many revenues meant for July would actually come in the following month.

Perhaps there was some truth to that, as August’s revenues exceeded their own projections by a small margin of $134.9 million, but  far short of covering July’s shortfall. The headlines told a completely different story. It was widely reported in state and national media, that August’s revenues exceed projections by over $434 million. Comptroller Chiang had himself gloated that:

While August revenues did not fully offset last month’s shortfall, we are fortunate that the recent market upheaval, sluggish job growth and continued weakness in key segments of our economy did not lead to a third straight month of slipping revenues… We now look to September and its $7.6 billion of projected revenue – making it the largest cash month between now and December 15, when a decision must be made on whether to pull the trigger to cut more program funding.

The Democrats were padding themselves on the back, announcing that they had been right about the July panic, as August had nearly covered the shortfall. Only later did they quietly admit to an accounting “error”. Chiang was forced to admit that it was discovered that the Board of Equalization mistakenly allocated $343 million of local government dollars to the State. Hard to tell if this was an intentional effort to mislead the public and avoid lender panic (again, with deficits, California must maintain the confidence of lenders in order to pay its bills), or simple incompetence.

While July’s revenues included a worrying 33% decline in sales tax, August’s numbers hid an even more fearsome statistic beneath the small surplus. It went largely unnoticed in the wake of the deceitful “near $400 million surplus” headlines; Corporate taxes dropped by a whopping 71.5%.

After August, September continued the pattern of increasing deficits with its own $147 million shortfall. Even when thinking the deficit was $343 million due to the “clerical error”, Chiang had emphasized the importance of a September bonanza (as quoted above). Instead it did not even meet its own projections.

October gave a minor respite with Chiang reporting a $207.9 million margin over projections for the month. It was over all too quickly when the November bombshell numbers were released – $806.8 million (10.8%) below projections, nearly a billion dollars just in November.

December’s numbers have not been released, but heavy emphasis on a very rosy holiday season forecast by the Governor’s team is liable to fall very far short. The continuous deficits have not gone unnoticed by investors and rating agencies, as they have by the press. Moody’s downgraded California’s rating to an “A1” – the second worse bond rating in the entire nation, above only Illinois’ “A2” (another finely managed state by the Democratic party and Obama’s political birthplace).

The November report shows over $1 billion dollar shortfall in corporate and income taxes. The passage of proposition 30 (endorsed a “NO” vote here) elated the spending-happy state unions and departments; the race was quickly on to spend money that not only did not yet exist, but was intended to cover existing budget deficits and not new spending.

The California Teacher’s Association reveled in the electoral victory:

California students and working families won a clear victory today as voters clearly demonstrated their willingness to invest in our public schools and colleges and also rejected a deceptive ballot measure aimed at silencing educators, other workers and their unions.

The Departments of Health Services and Developmental Services for example, immediately increased spending by $1 billion in November alone. The state bureaucrats’ increased spending and the lower tax collection has increased the state’s budget deficit for the year’s first 5 months at $2.7 billion.

This example serves well as the opposite side of the coin to Reagan’s affluent 80’s. In that great decade, President Ronald Reagan reduced American’s tax burden only to be surprised by growing tax revenues as the economy soared. Brown is teaching us how you can increase taxes in order to reduce revenues.

California’s near $1 billion shortfall in November immediately following and despite the massive tax increase passed by voters in the Nov election cannot be overstated. In a state where the wealthiest 1% pay nearly half of all Income Taxes, many of them may have had enough. California now has the highest tax bracket in the country, and the most progressive tax rate. In recent years (before this year’s Brown tax hikes), the breakdown of Income tax revenues were approximately as follows:

 

Income Group % of all state Income Taxes Paid
Top 1% 50%
Top 15% 80%
Top 35% 97%

The bottom 85% of Californian earners pay only 20% of its income tax, and the bottom 65% pay virtually none. Most incredibly, is that the state relies on 1% of its earners to produce half its income tax. To make matters worse, while sales tax was always the state’s largest revenue source (as it is in almost all states), the high California Income tax has now surpassed it.

California has become little more than a democracy in which the vast majority of its 40 million people vote to squeeze ever increasing amounts of money from its wealthiest 1 million to support a much more rapidly increasing state spending machine. Its producing class must produce ever more revenue at ever increasing efficiency in order to survive and support its ever larger non producing class. California’s producers, thanks to Jerry Brown, may be close to having had enough. If so, the state faces complete fiscal collapse and insolvency.

Much like Greece, the beneficiaries of this parasitic system could care less about all that. Borrowing,  federal bailouts, bond defaults, tax increases; it doesn’t matter as long as they get paid. The state worker apparatus and affiliated unions, which ironically funnel millions in state funds to support Democratic candidates that control the state, will not budge – the state and everything in it can go to hell but the unions (which are always referred to as “teachers” by the media, and whose goals are always of course the “children”) will get their raises, pensions, benefits and retirement plans.

Brown however, may have fooled himself and/or his own union supporters with his new budget passed (by Democrats alone) last summer. Confident in his projections  and the majority of California’s voters willingness to raise taxes (mostly on their richer neighbors), he included automatic spending cuts to be triggered by deficits.

In fact, he used these triggers as a threat and leverage to get his tax hikes passed. The California voter was scared into believing the tax increases were necessary if schools and other services were not to be sharply reduced. Now it may look like he must take his own medicine. Or maybe not….

The triggers call for up to $2 billion dollars in cuts if the deficit is over $2 billion by December (which it is). The cuts can include ending bus subsidies and shortening the school year by 7 days. However, though it is pretty clear already that the triggers should have been activated, the Governor and the Department of Finance have significant leeway in interpreting the deficit, the activation of the triggers, and the type and size of cuts to be made. So far, he has simply pushed the can down the road. Why make cuts, when they can just add to the debt….as long as there are some Californian’s willing to work, invest, risk, innovate, and produce wealth, it can be taken from them, and as long as there are others outside the state who are willing to risk their wealth and lend it to California, it can be borrowed.

The how and if, they will be paid back…  well that’s the can we kick the down the road; to another governor, another generation. Sounds great, but if the good will and love of their state does finally runs out, if the producers move to produce where they are welcome and not vilified, and if the lenders lend no more, will the masses of Californians who have been taught that they are entitled to everyone else’s wealth by virtue of existing, accept it with a quiet tantrum or like in Greece, take to the streets violently demanding what is “theirs”?

In another world, they could just maybe learn their own dignity, perhaps to produce themselves, surely to honor liberty and personal property, and begging their forgiveness invite their more affluent exiled brothers back into the Golden State.

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