The Cost of Being Debt Free

Governor Brown’s budget is filled with errors and frivolous spending on ventures such as High Speed Rail. Source: Neon Tommy

The cost of being debt free may be greater than California can afford. With drastic cuts to important programs and no guarantee of California’s debt problems, let alone economic problems being resolved, the potential downside with California’s new budget is far greater than the potential upside.

Even though Governor Jerry Brown is optimistic that our debt problems are over, his drastic cuts have yielded a surplus of only $851 million for the 2013-14 fiscal year[1], compared to the billions of dollars in debt California has accumulated. Ending the deficit is a good start, but at the rate of our current budget, my grandkids will be having grandkids by the time California’s debt is back to manageable numbers. And while it is certainly a positive that Governor Brown is keeping in mind long term economic safety by establishing a rainy day fund of $1 billion[2], these days are still rainy.

For starters, the budget may appear to yield a millions in surplus, but too many crucial assumptions were made to ensure that the debt will be alleviated in the future. For example, the budget assumed that California would make $1.9 billion in tax revenue from Facebook’s IPO[3]. But the drastic drop in Facebook’s share price means that the transactions have generated far less tax revenue for the state than originally expected. In fact, it is estimated that the government will only make $1.3 billion[4] of revenue. In addition to lower revenues, it is also important to keep in mind that California is notorious for having poorly run government programs that go over budget due poor planning and oversight. A highly likely instance in which budget problems are likely to arise is California’s investment in high speed rail. High speed rail is notorious in many countries and states for having cost overruns due to the “optimism bias,”[5] evidenced by the fact that on average, urban passenger rail projects in the US have gone 40% over their projected costs.[6] With a multi billion dollar price tag on California’s high speed rail, the state cannot afford to go over budget by 40%. Lower revenues coupled with likelihood of cost overruns make California’s surplus dubious.

But even if all goes California’s way, the budget cuts are still problematic. For example, the state school system’s budget has been cut by 25%. Governor Brown had to completely eliminate the state redevelopment program for economic development. California’s pensions have experienced massive cuts, and there have been significant cuts for the elderly and unemployed. With so many cuts for programs essential to the citizens welfare as well as their economic well being, it appears that the cost of the balanced budget is coming right out of those who need it now. Eliminating the deficit has meant more taxes and less safety nets for the state’s poorest during these tough economic times. From this it is clear that the cost of Governor Brown’s plan is not ideal.

Rather than cutting welfare and education in order to balance the budget, California should be concentrating on cutting from other areas. For example, California’s budget currently has millions of dollars allotted to pay for active transportation, which is literally paying millions of dollars to ask people to ride bikes and walk instead of drive. The area that should be receiving the most cuts is transportation infrastructure, especially active transportation and high speed rail, two projects that are unlikely to have the same economic benefits of welfare, but are being funded superfluously nonetheless. Balancing the California budget has to come at a cost, but the way that Governor Brown is paying is a method that California can’t afford.


Sources

[1] Jim Christie, Huffington Post. “California Budget Surplus? Governor Introduces Plan That Eliminates Deficit” (2013).

[2] California Department of Finance, “California Budget Summary” (2013).

[3] Vauhini Vara, Wall Street Journal. “California Budget Hurt by Facebook’s Stock-Price Slump” (2013).

[4] Vauhini Vara,  Wall Street Journal. “California Budget Hurt by Facebook’s Stock-Price Slump” (2013).

[5] Randal O’Toole, Cato Institute. “High Speed Rail” (2010).

[6] Randal O’Toole, Cato Institute. “High Speed Rail” (2010).[/expand]

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