Too close to the edge
The players in Sacramento seem to believe they are in a familiar, so somewhat comfortable, predicament: A deadline looms, but budget brinkmanship is keeping them from reaching a deal. The deadline will pass, there will be some pain localized around the Capitol, negotiations will resume, and they’ll get the job done.
Sure, some of the details are new this time. For example, there is actually a budget in place for the fiscal year that starts Wednesday. The problem is that it’s so wildly out of balance that the state has no ready cash to pay its bills, and no one on Wall Street or anywhere else has enough faith in the government to extend it a loan on manageable terms. So state Controller John Chiang is ready to issue IOUs in lieu of cash to satisfy short-term obligations.
But even that seems familiar. California has issued IOUs before, back in the early 1990s. Then it got its budget, the economy improved, and everyone wanted to lend the state money. We survived that, so what’s the big deal?
The familiarity is an illusion. The state has had enough cash to pay its bills since July 2007 only because it borrowed from various supposedly off-limits special funds. Now that money too is almost gone. IOUs, coupled with anticipated monthly tax revenues, might preserve the state through September, but only with permanently decimated access to the credit market. After that, default.
Finally, the day of reckoning and right-sizing? No. The day of chaos, government by lawsuit, possibly federal usurpation of state sovereignty and a domino-like collapse of confidence in state governments, followed by economic panic. This season’s Sacramento brinkmanship is more reckless than at any time in recent memory. Democrats are right to protect human services, Gov. Arnold Schwarzenegger is right to press for a prudent reserve on top of the $19.5 billion needed to fill the budget hole. But they’re playing a dangerous game.
They, and Senate Republicans, are a long way apart if they insist on turning this budget into a long-term reform plan or a long-term reallocation of power among interest groups in Sacramento. Reform is needed, but this budget won’t accomplish it. Power may be reallocated, but labor unions, for example, won’t lose their hold on Democrats merely because state employees are compelled to take a pay cut.
If the state’s leaders focus on completing a budget that matches cash with the coming fiscal year’s payments, and still set aside a reserve, they’ll be close. Too close to risk a meltdown with profound and lasting consequences.