Impact of California's Proposed Budget Fix May Be Felt at All Levels

By Karl Vick
Washington Post Staff Writer
Wednesday, July 22, 2009

SALINAS, Calif., July 21 -- California, famous for leading, on Tuesday showed the way into the deepening darkness that awaits every state groping to reconcile budget deadlines with collapsing revenue streams.

The $26 billion deal Gov. Arnold Schwarzenegger (R) and Democratic legislative leaders are asking lawmakers to approve Thursday would plug the deficit in California, the nation's largest state. But the total shortfall facing all 50 states through fiscal 2011 is estimated at nearly 10 times that figure, or $230 billion, according to state budget officers.

And even advocates acknowledge the hard-won package of service cuts and borrowing, announced three weeks after the June 30 budget deadline, would tide over the Golden State for just a matter of months.

"Just fix it," said Christian J. Lopez, 21, chucking a baby seat onto the mound of belongings that held in place just long enough for him to slide shut the minivan door in a post office parking lot. "Shouldn't be that hard."

It always is, though. California fell into a recession as much as a year before the country at large, caught short by the burst of the real estate bubble, a bubble that had been driven by the implied promise that things would always be just a little bit better here.

Reality hit hard, and not only for citizens. The 11.6 percent unemployment rate, exceeded in only five states, was catastrophic for a state budget that relies inordinately on income taxes. A February effort by Schwarzenegger and lawmakers to bridge the gap in part by hiking fees was beaten back soundly by voters in May.

The latest plug was fashioned from the ledgers of local governments and the pages of the calendar. The governor and leading lawmakers found revenue by taking back money from cities and counties and by accelerating withholding on income tax into the immediate future, when by all accounts, money will be even harder to come by.

About a third of the money would be diverted from accounts that must be repaid. Under ballot provisions approved by the voters -- whose direct involvement in lawmaking is among the many factors complicating California's budget process -- lawmakers must maintain certain funding levels for K-12 education and pay back cities and counties within three years. Meanwhile, local jurisdictions are howling.

"There are lots of seminal moments these days. This is one of them," said Salinas Mayor Dennis Donohue. The central California city of 150,000, known as "Salad Bowl to the World," is proposing a 1-cent sales tax increase, to 9.75 cents on the dollar, in part because of what the mayor called "the uncertainties of Sacramento."

"It's very clear there are starting to be strong sentiments not only for reform, but to move resources and some power from Sacramento to local jurisdictions," he said. "We're part of a vanguard who are trying to be more independent."

Stephen Levy, director of the Center for Continuing Study of the California Economy, said the crisis facing states overshadows even more dramatic problems among cities and counties, where most services are delivered.

"We are definitely a harbinger of the dilemma more at the Salinas level," Levy said. "Cities are in deep trouble across the United States, because when the recovery comes, it will help income taxes first. But sales taxes and property taxes, which is what cities live on, will take a while."

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