Local government took a real hit in 2012. Declining tax revenues, the demise of redevelopment agencies, unsustainable retiree pension and health care costs, and lavish total compensation packages for some top executives have left many local officials scrambling for ways to balance their budgets. Cities are cutting services, downsizing staff, outsourcing, privatizing services and enacting sweeping reforms to public pensions. Stockton and San Bernardino declared bankruptcy. Moody’s Investments say that more will follow.
These trends will worsen in 2013 as local government faces further cutbacks from the Sacramento.
Sacramento is betting that voters will approve Proposition 30, an 8 billion dollar tax hike needed to close the state’s budget deficit. Prop 30–the Schools and Local Public Safety Protection Act–will increase the marginal rate paid by those who make over $250,000 by 1-3% for 7 years, and the sales tax by .25 percent for the next four years.
There are good reasons to believe Proposition 30 is going to fail. First, voters simply do not trust Sacramento to spend their money wisely. According to a July 2012 Public Policy Institute of California Poll (PPIC), 69% of “likely voters” disapprove of the job the legislature is doing, less than half approve of the job the governor is doing, and 66% of likely voters think the state is going in the wrong direction. So, while the majority of votes approve giving more money to education, they don’t trust Sacramento to get those revenues to the classroom.
The decline in trust has been exacerbated by the governor’s enthusiastic support for high speed rail and his failure to deliver sufficient reform of the state’s public employee pension system.
Brown pushed through a 4.5 billion in bonds for a high-speed rail project that most voters said they did want. A July Field Poll reported that “a fifth of likely voters who support Brown’s proposal to raise taxes say they would be less likely to support it if the Legislature appropriates money for high-speed rail.” Only 52-55 percent of likely voters support Proposition 30. If just a small percentage of its supporters defect, the Proposition will fail. Four and a half billion dollars is more than half the money the governor expects to raise from Proposition 30.
The governor and the legislature did pass significant and substantive pension reform. Reports of pension spiking, pensions for felons, double dipping, and eye-popping unfunded pension obligations have raised voters’ ire, which resulted in pension reform initiatives being passed in San Diego and San Jose. As the legislative session drew to a close, legislators hurriedly considered pension reform, because they feared Proposition 30 will be dead on arrival if they failed to act. However, the consensus is that hat their efforts didn’t to far enough and the state still faces tremendous unfunded pension liabilities that will eat into the operating budget with each passing year.
Proposition 30 also faces stiff competition from Proposition 38, a more generous school funding initiative which is being bankrolled by millionaire activist Molly Munger, and is supported by some PTAs. The Proposition 38 campaign is targeting Proposition 30 supporters with the message “money for schools, not for Sacramento.” As a result, it is likely to do as much or even more harm to Prop 30 than the anti-tax crowd, led by the Howard Jarvis Foundation. Having two propositions on the ballot that deal with the same topic will confuse many voters causing many to vote down both.
If Prop 30 fails, Brown says that this will “trigger” a 6-8 billion dollar cut in education funding, but that is a baseless threat. Schools have been cut to the bone and a 6 billion dollar cut is politically untenable. That leaves Brown with two choices. (1). Get 4 Republicans (two in the Assembly and two in the Senate) to join all the Dems to reach the 2/3 necessary to pass the tax increases. However, in doing so, Brown will violate his pledge not to pass any tax increases that were not approved by voters. That would hurt the youthful and energetic governor’s chances for winning a second term in 2014. (2). The second choice is for fiscal pain to be dispersed. Schools will be hurt, but so, too, will local government. Raiding local government is a tried and true tactic for resolving the state’s fiscal problems. Impossible you say? Just recall that that local government only has as much power as the state is willing to give it and only as much money as the state is willing to let it have. In flush times, the state has had a “hands off” policy regarding the delivery of local services. “Home Rule” was the guiding philosophy. However, in a face- off between the state and local government, the state wins. This was vividly demonstrated when the California Supreme Court sided with the governor when he decided to abolish 425 redevelopment agencies.
If you thought 2012 was bad for local government, you are not going to like 2013.