Gov. Brown’s budget deficit: mandate or tax?

The entire country has been focused on the recent Supreme Court redefinition of the Obamacare individual “mandate” to buy health insurance as a “tax.” Obamacare has been redefined to ObamaTAX.

The power to define or redefine is the power to reform. Here in California, political consultant Joe Rodota has recently reported on the efforts of the political “reform industry” in the state to bring about several radical changes, including redefining what the state budget deficit is.

Rodata states that, in the past, there was an effort to redefine the deficit as either:

  1. “inherited debt” — referring to budget gimmicks and short-term borrowing; and,
  2. “operating deficit” — referring to the current year problem of receipts being insufficient to cover expenses.

What happened to the simple term “spending deficit?”

Notice how such so-called political reformers conveniently have no term for a “spending deficit” created by either the governor or the legislature wanting to expand the budget level beyond existing revenues.

An example would be Gov. Jerry Brown’s proposal to increase the 2013 state budget from $87 billion to $92 billion, a 5 percent increase, by a new income tax hike on the wealthy and raising the sales tax rate.  Billionaire Molly Munger has a competing tax initiative on the November 2012 ballot that proposes a 10 percent increase in the state budget to $97 billion.  Both tax proposals would exceed the 2 percent combined rate of anticipated increase in the state population and monetary inflation for 2013.

Demographer Dowell Myers of the University of Southern California has forecast only a 1 percent statewide population increase for 2013. This assumes there will be no flight of businesses and residents out of the state due to the roll out of higher green power rates and Cap and Trade pollution taxes on all large industries and utilities starting in 2013.

And the U.S. Federal Reserve Board has forecast that monetary inflation will run from 1.2 to 2.0 percent in 2013.

This means that voters will be asked to approve new income and sales taxes that are 3 percent to 8 percent higher than population and inflation increases combined.  Aside from the sales tas hike, Gov. Brown’s tax hike would shift this added tax burden all on wealthy households making $250,000 or more.  Munger’s tax proposal would tax everyone but the poor making $14,300 or less per year.

If neither of these tax proposals is passed by the voters, there would be no budget deficit because spending would have to be brought into line with revenues; and Munger’s spending increase would not occur.

“Inherited Deficit” a Doublethink Term

The proposed term “inherited debt” sounds like a term right out of British novelist George Orwell’s “doublethink.”   “Inherited Debt” is an invented term for politicians to blame their predecessor for any budget deficit. But how can you blame your predecessor, when by law a budget must be balanced prior to approval?  So how can a governor inherit a deficit?  The use of budget gimmicks and wishful thinking about tax receipts from capital gains taxes on stocks often result in a phony balanced budget. And the word “inherit” sounds like something beneficial, like an inheritance.

“Inherited deficit” must be the term President Obama refers to when he says that there still is no economic recovery because of the debts inherited from former President Bush.  But this definition is getting stale, as the national recession was officially declared over in 2009.  It is never clear when an “inherited” deficit becomes the responsibility of the presiding president or governor.

“Operating Deficit” Is Like the Term “Drought” in California

The suggested term “operating deficit” is used like the term “drought” in California.  The term “drought” is overused to explain dry spells, court-ordered droughts during wet years, and too much snowpack water running off to the ocean.  Just as the term “drought” explains all droughts, including non-natural droughts, the term “budget deficit” explains every kind of funding shortfall or overspending, including non-deficits. If everything is considered a drought, nothing is. The same with the term “deficit.”

When a Deficit is Not a Deficit or a Smaller Deficit

The term “Operating Deficit” ignores that there is such a thing as fund transfers between “general funds” and “special funds.”  Government apparatchiks will tell you with great certainty that “special funds” can’t be used for “general purposes” to fund operating costs. But when Gov. Jerry Brown shifted $5 billion in special redevelopment funds to public schools, the two types of funds merged as “general funds.”

Just as state and federal water systems can merge their water systems through the Mendota Canal in central California, special funds, bond funds, and federal funds are often merged into California’s general fund in its budget.  The “general” fund often appears to run a deficit but when “special” and “bond” funds are combined, the deficit often washes out.

Consider the following table from the California Department of Finance, which shows a 10.1 percent deficit in the General Fund washes out to be a 0.5 percent deficit when all funds are considered. Put in terms of real dollars, a $10 billion deficit become less than $1 billion — $738 million — when you add in “special” and “bond” funds.

Historical Budget Expenditures (in billions of dollars)

Fiscal Year (1)General Fund (2)Special Funds (3)Totals (4)Bond Funds  (5)Budget Totalsw/out Federal Funds (6)Federal Funds (7)ExpenditureTotals Including Federal Funds (8)Special Fund For Economic Uncertain-ties
2007-08 102.985 26.673 129.659 8.405 138.065 56.211 194.276 1.296
2008-09 90.940 23.843 114.784 7.601 122.386 73.089 195.475 -7.391
2009-10 87.236 23.514 110.750 6.250 117.000 89.088 206.089 -6.112
2010-11 91.549 33.432 124.981 6.000 130.981 84.764 215.745 -3.797
2011-12 86.512 35.587 122.100 13.141 135.241 78.703 213.945 -1.704
2012-13 92.553 39.824 132.377 4.950 137.327 72.784 210.112 1.131
Change in Dollars -$10.4 +$13.15 +$32.38 -$3,455 $738 +16.573 +$15.84 0.17
Percent Change Minus10.1% Plus51.6% Plus2.1% Minus41% Minus0.5% Plus 29.5% Plus8.1% Minus12.7%
Source: California Department of Finance

It is not the General Fund that counts as much as the total of all operating funds.  California depends on its General Fund for about 64 percent of its operating expenditures, on its Special Fund for 28 percent of its expenditures, and on Bond Funds for 8 percent of operating funding.

Figure SUM O4 – 2012-1013 Total Expenditures by Agency

Fund General Funds Special Funds Bond Funds Total Funds
Amount in billions of dollars $91.338 $39.409 $11.674 $142.421
Percent 64% 28% 8% 100%

A budget deficit is like a pea shell game: which funding shell is the deficit under? Bonds? Special Funds? Federal Funds? Total Funds?

Gov. Brown claims he has a $16 billion deficit.  But it’s a contrived “spending deficit” anyway because, without spending $16 billion more than last year’s budget, the budget would be balanced.

Yes, there may be a deficit or fiscal drought in the state General Fund.  But the term is meaningless when you can balance the state budget “teeter totter” high, or balance it low.  Either way will work.

California has been running budget deficits for the last decade.  Government has not collapsed or fallen into the ocean. Public order has been maintained. Public schools may have annually ordered teacher layoffs, but no massive layoffs of core teachers have ever occurred.  So why do the newspapers keep calling it a “structural deficit”?  It might as well be called a “wish budget deficit” or “the Moonbeam Budget.”

A Budget Deficit “Mandate” or a “Tax?”

When Obama declared “Obamacare was not a tax” in 2009, that was not a one-line joke on “Saturday Night Live” entertainment show.  But it ended up like a joke anyway after the U.S. Supreme Court redefined it as a tax.

California’s budget deficit isn’t a “mandate” that requires raising taxes to fix. Constantly defining wishful over-spending as a budget deficit is part of the problem. But in California, there is no court of law to declare a “deficit” as another ruse for a “tax” increase. Nor do the Main Stream Media report on it.

(Wayne Lusvardi is a contributor for CalWatchdog.)