Governor Schwarzenegger vetoed the Democrats’ end-run budget on Friday, and the veto stands no chance of being overridden (it would take a 2/3 vote, and it’s certain that no Republicans would vote for it). So what’s next?
First, Governor Schwarzenegger will call yet another special session of the Legislature. He hopes that the legislature will pass something. After all, he only vetoed the budget because it didn’t have a stimulus attached to it. There was nary a word about the obvious constitutional problems with the budget in the Governor’s veto message.
Meanwhile, Wall Street is telling California in no uncertain terms that the fiscal house will be in order before any more bonds are issued. And that’s going to be a problem. The basic conundrum still exists: Democrats have seen almost no programs worth cutting and Republicans have seen no taxes worth enacting. Meanwhile, somewhere around $16 billion or so has to be found and/or cut to balance the budget.
How will the budget be balanced? Eventually the Democrats will agree to cut spending everywhere. User fees that aren’t taxes are going up, and up a lot. Tuition to state colleges and universities will be going up at least 10% next year. And there will be a sales tax increase, probably of 1%.
While I’d prefer cutting taxes across the board that’s just not feasible in this environment. The sales tax increase is the one that’s most likely to pass muster politically. Thus, that’s the one I think will be enacted. But I don’t expect our legislature to enact this without a gun to their heads—late January or early February is when I see this happening.
But even this probable solution won’t be enough for the 2009-2010 budget. I know from talking to my clients what income tax collections are likely to be, and it’s not going to be a pretty scene in Sacramento in April through June. Major cuts in California government are coming because the revenues flowing into Sacramento are going to be far below what is being projected.
The budget over the past few years has been balanced by gimmicks. Eventually you can’t use gimmicks and you reach the day of reckoning. That’s happening now, and a lot of people have their heads in the sand.
What is the California economy going to look like over the next few years? At some point, something has to give — are they going to get some economic sense, or is Silicon Valley going to dissipate?