Thursday, February 11, 2010

California Controller Ignores Overspending, Sales Tax Rate Increase While Accentuating the Positive

In a press release titled Controller Releases January 2010 Cash Update, Democratic Controller John Chiang refers the reader to the more detailed "summary analysis" linked to at the bottom of the release. This is a nicely produced, informative document which contains the following:

The State’s General Fund revenues improved again in
January 2010. Compared to estimates found in the 2010-11
Governor’s Budget, total General Fund revenues were $1.28
billion higher (18.6%) than expected. Personal income tax
revenues were $930 million better (17.2%) than anticipated.
Corporate tax revenues came in above projections by $189
million (73.4%), and sales taxes were also up by $157
million (17.5%).

Compared to January 2009, General Fund revenue in
January 2010 was up $452 million (5.9%). The total for the
three largest taxes was above 2009 levels by $255 million
(3.4%). Corporate taxes were up by $134 million (42.8%).
Sales taxes were $469 million higher (79.8%), and personal
income taxes came in $348 million below (-5.2%) last

Sounds hopeful, correct? The above positive tone continues throughout the document in what may unfortunately just be more a puff piece than anything else, as I will get to shortly. For example, on page 2, large right-hand box, of this document puts forth the Obama administration's (and MSM's) hopeful prognosis for the economy (no quote, and no argument here for or against a positive outlook for the economy).

Only on page 4 does the bad news get a brief mention. This involves a deterioration in projected cash balances despite the above good news. Why is this so, if revenues were above plan? Well, so were costs:

Local assistance payments were $525 million
higher (1.2%) than the 2010-11 Governor’s Budget
projected, and State operations payments were
also up by $156 million above (1.2%).

Why were State operations a large 1.2% above projections? I would not know, but this smells like mismanagement to me.

The net effect is that on page 4, Mr. Chiang finally comes clean: the state had a worse cash balance at the end of January than projected -- a massive negative $24.1 billion negative cash balance -- $126 million below projections.

Basically, per Table 1, while General Fund revenue was $1.465 B over projections, something called "non-revenue" was $1.00 B below projections. This line item was explained as comprising transfers into the General Fund from other State funds. Why this was so far below projections was unexplained; one wonders if perhaps the other State funds have been sucked dry already?

Amongst the smaller details, one line item stands out. Mr. Chiang says:

Year-to-date collections for the
three major taxes were $1.66
billion below (-3.7%) last year at
this time. However, retail sales
taxes were up $1.21 billion
(9.4%) from last year’s total at
the end of January.

Sounds OK, but . . .

He neglects to point out that the State base sales tax rose on April 1, 2009 from 7.25% to 8.25%. This is about a 14% increase in rate. An increase in sales tax receipts of only 9.4% sounds like a significant shrinkage in real sales volume, both in nominal dollars and assuming mild inflation, an even larger shrinkage in actual transactions.

Full disclosure: I linked to the above through a Calculated Risk post, in which CR called the Chiang reports "good budget news". CR is an immensely valuable blogger, with generally very insightful points of view. In this specific case, I would humbly tend to differ. A medical analogy to the Chiang summary: an overweight patient has been put on a calorie restriction and exercise regimen. She (let us say) points out that she exercised above plan last month, thus burning off more calories than expected. Yet her weight rose. Why? She ate even further above plan than she exercised. This is what Mr. Chiang reluctantly tells us, but well "below the fold".

Until California gets spending under control, it will not have good budget news, in my opinion. Note that the rise in State operations above projections of $156 million exceeds the worsening in the cash balance. If California had actually come in below expectations on spending, then it would have something to crow about.

Why was there no discussion of the overspending?

In California, the controller's office is a partisan elected office.

Per Wikipedia, John Chiang is a lawyer with an undergraduate finance degree. He has worked for Gray Davis (who was controller before he became governor) and for Barbara Boxer. His summary of California's finance as described above appears to be the work of a politician more interested in spin/damage control than in truly holding the rest of the state government's feet to the fire till good fiscal health is restored.

Perhaps California should consider changing the position of controller to be a non-elective, non-partisan job, with a requirement that the controller possess an advanced degree in business or finance. In that situation, one would hope that the public would not get official publications that accentuate the positive but instead would receive the truth/whole truth/nothing but the truth in a way that serves the general good rather than the interests of politicians.

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