Federal Budget Discussions (2010)

The link below has a summary of a recent electronic town hall meeting:

http://usabudgetdiscussion.org/national-town-meeting-results/

I attended the meeting. I was surprised to see that cutting 15% from the defense department and other agencies and raising SS taxes were not enough to balance the budget. A combination of spending cuts and tax raises were required to balance the federal budget. Many people at my table and nationwide supported a carbon tax, even after I argued that such a tax should not be passed until it was accompanied by a corporate tax credit to upgrade utility/energy facilities. (Without a credit, it is very likely that utilities will impose the costs of making their facilities environmentally-friendly on consumers.)

I learned that I wanted to limit the mortgage tax deduction/credit. As is, the mortgage tax deduction benefits rich people or people who spend more for houses. In short, it is a tax cut for the rich and upper-middle class that leads to inflated housing prices. Overall, I had a good time at the meeting.

California Legislators Got Drunk on Stock Market Gains

I've been studying California's budget. From 1998 to 2009, California added over 80,000 full time government employees. That means future taxpayers must pay for an additional 80,000+ pensions, lifetime medical benefits, and annual salaries. However, adding 80,000 more government employees is not the major problem, as long as we reform their generous long-term benefits.

The biggest problem is that starting in 1999, California's legislators assumed revenue/tax numbers based on stock market gains/sales and spent accordingly. From 1998 to 2000, spending jumped dramatically, but from 1999 to 2008, expenditures declined only once--right after the tech bubble popped, in 2003/2004. (Note: the tech bubble's peak was in 2000; hit a low in September 2002; and continued in a tight range until 2007.) Basically, it seems our legislators banked on an ever-increasing stock market to finance spending. Oops.

Public sector unions aren't helping. Even though the stock market money isn't there anymore, public sector unions are still acting like it's 2004. Behind closed doors, various unions have negotiated generous benefit packages, such as lifetime medical benefits and pensions. Unfortunately, it is difficult to project the cost of such benefits because no one knows how long a state employee will survive after retiring. As a result, if taxpayers desire consistently balanced budgets, it makes more sense to pay public sector employees higher salaries while reforming their generous benefits. (CalPERS, the state's public pension/health care fund, already has over $200 billion in assets.) Fiscal reform is possible without threatening state workers' job security, because government workers will continue to be unionized--reform would affect only the hard-to-project costs inherent in pensions and lifetime medical benefits.

As far as education is concerned, I am concerned we are spending too much money on it without seeing results. The state's website indicates that approximately 50% of the General Fund is reserved for K-14 education. In addition, California's Constitution requires that school coffers receive first crack at the largess:

"From all state revenues there shall first be set apart the moneys to be applied by the State for support of the public school system and public institutions of higher education."

Education spending is probably a sacred cow that needs to be slimmed down before we see any real change in California's fiscal health.

See here for a detailed webpage outlining the major issues, with plenty of stat-porn for the political wonks.

Bonus: Meg Whitman promises to cut 40,000 government jobs--back to 2004 levels--if we elect her Governor; however, I am unclear how she will accomplish that goal without incurring massive litigation and settlement costs. Perhaps the 40,000 positions she wants to cut are non-union or part-time? If so, then it doesn't appear that cutting these positions will reform the problem of generous public sector benefits, which are typically reserved for full-time government workers.

Meg Whitman is probably the most successful female CEO in Silicon's Valley's history, but I wish she'd be more specific about how she plans on accomplishing her goals. If she does well in the Governor's race, expect to see her as the GOP's Vice Presidential candidate in 2012.

Out of the Fire and Into the Frying Pan?

The WSJ's Greg Hitt reports that the stimulus plan isn't really going to taxpayers--much of it is going right into the hands of government workers. See January 13, 2009 article, "Stimulus Proposal Aims to Aid State, Local Governments."

In a nutshell, President-elect Obama has asked Congress to give him more taxpayer money--more than the $700 billion already printed. Purportedly, this new money would be used to stimulate an economic recovery. The problem is, much of it will go to a new "education stabilization fund," or into the pockets of government workers. Under the proposed plan, $80 billion would go towards programs benefiting teachers' unions.

Is this change, or just maintaining the status quo?

Federal Budget Outlays

The Epoch Times had a good chart showing what the federal government projected it would do with our taxes in 2007:

http://en.epochtimes.com/news/7-4-15/54114.html

Social Security is the largest outlay, with 21% of our taxes going there. Next up is Defense, with 19%. Obama may reduce defense spending to shift more taxes towards infrastructure spending. Doing it this way would allow him not to raise taxes.

Defense hawks may disagree with any decrease in defense spending, arguing that it would cause a decline in domestic security. I do believe terrorists will hit the United States again, but much of the current defense spending is on major projects, like stealth fighters. Meanwhile, port security is inadequate. Consider this simple, low-tech scenario: a terrorist pays two dock workers to put an unmarked package on a ship. The dock workers will be told they are transporting drugs and will be paid a few thousand dollars for their discretion. In reality, the box would contain a major bomb or chemical weapon. The bomb doesn't even have to be inside a box. The terrorists could place a bomb inside an imported car, major appliance, or some other product that has many electrical components, making the bomb harder to detect.

Rather than focus on large-scale projects, such as the next generation of aircraft, which always seem to run over cost, the U.S. should shift more money into intelligence work. More specifically, Obama should hire more workers to 1) supervise America's major ports (e.g., Los Angeles, Miami, etc.); and 2) more effectively monitor the contents of packages before ships on-load and offload them. I realize modern ports have automated systems, but having more hi-tech automation doesn't necessarily lead to higher security.

If you're interested in reading more about Obama and defense spending, here is an interesting article:

http://www.cfr.org/publication/17793/

California's Ailing Government

The AP's Judy Lin reports that California faces a $28 billion deficit:

SJ Mercury

And the hits just keep on coming...

California's State Budget

California will raise taxes to stem a massive budget crisis:

http://news.yahoo.com/s/ap/20081106/ap_on_bi_ge/california_budget

Two items in the article tickled my tragedy bone:

1. The additional 1.5% raising of sales taxes. It's being called a temporary tax, but as we know, the government rarely retracts a policy when doing so would mean a reduction in tax receipts. In addition, this tax will fall disproportionately on the poor and middle classes and will discourage holiday spending. I am not opposed to raising sales taxes in general, but now seems like a terrible time to do it.

2. The state's admitted over-reliance on capital gains tax receipts. Apparently, our controller was basing budget projections on an ever-increasing stock market. Are you kidding me? Someone ought to send Sacramento a self-destructing copy of Dow 36,000 pronto. The origins of California's financial and housing crisis come into clearer focus with each passing day--total blindness and overzealous optimism are never a good pair.

NY Predicts 47 Billion Dollar Deficit

NY forecasts a budget deficit of 47 billion dollars over the next four years:

LA Times Article

Over the next four years, New York must confront a budget gap of $47 billion...Projected state budget deficits nationwide are expected to total at least $100 billion by fiscal 2010.

Almost sounds small when compared to 700 billion...almost.

America's Account Deficit

An oldie but a goodie, from C. Fred Bergsten, Peterson Institute, February 1, 2007:

http://www.iie.com/publications/papers/paper.cfm?ResearchID=705

Our external deficit has risen by an average of $100 billion annually over the past four years. It has climbed by an annual average of $80 billion for the past nine years. The trajectory, as well as the level of the imbalances, is clearly unsustainable.

In the background, you can almost hear Jack Nicholson bellowing, "You can't handle the truth!"

Out of Fannie frying pan and into the fire

Think the government is spending our money wisely? Check out this CS Monitor article:

http://www.csmonitor.com/2008/0911/p01s05-usec.html

"[T]he Congressional Budget Office (CBO) projects that the nation will add more than $2.3 trillion to the national debt over the next 10 years."

Terminator v. the Controller: the Missing $15.2 Billion

The Governator (Republican) has sued Chiang, the Democratic State Controller, to force him to slash government pay until a budget is passed. See

http://www.sfgate.com/cgi-bin/article/article?f=/c/a/2008/08/11/BAVF1293CA.DTL

Here is a more detailed article about the budget issues:

http://www.sacbee.com/111/story/1145146.html

Republicans...say even more is needed: a spending cap to restrict annual expenditures through a formula tied to growth in population and inflation.

In California, a 2/3 vote of each legislative house is required to pass a budget. You would think our legislators would be able to figure out a budget cannot get passed without cooperation and civility, but this partisan samba seems to happen every single year. Still, few things make me more happy than government workers talking about cutting spending.

How can someone profit off of this? Perhaps by buying muni bonds or state bonds.

http://www.buycaliforniabonds.com/

Good luck to Sacramento. I'm going back to work. In my job, I don't get paid for being ineffective, or for missing the same deadline every year. I wonder where I can get a job that doesn't tie getting results to my pay? I'm still scratching my head...I'm sure the answer will come to me later.