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Thursday, Sep 21, 2023

Creativity Needed in State Budget Battle

Recently there have been articles appearing in various newspapers indicating that legislators of both parties are positioning themselves for an anticipated major battle over the next fiscal year’s budget. The projected structural deficit for the next fiscal year is still between $6 billion and $10 billion. Prior years’ solutions have been mere band-aids resulting in deferring the problem to future years and generations. The exorbitant costs of doing business in California are still driving businesses out of the state and out of business thereby reducing the potential revenue pool and the stock market has not recovered adequately to substantially increase tax revenues from the realization of significant capital gains. We are once again facing the tough decisions as to how to fix this tremendous problem. Can we continue to hope that economic growth stimulated by lower taxes will reduce the structural deficit, or do we need to raise taxes? Will an increase in tax rates result in less tax revenue due to increased flight and business closures? Are there still significant inefficiencies that can be reduced thereby resulting in substantial cost savings? And, most important, do our legislators have the necessary skills and the desire and ability to work together to solve the problems for the common good? Unfortunately, the majority of our legislators represent the extreme views of their respective parties. This results in very little cooperation between parties to enable workable solutions to the problems. Traditionally, the extremist Republicans are opposed to raising taxes and the extremist Democrats are opposed to reducing expenditures. If neither side is willing to bend, no solution can be reached and the problem will continue to be deferred. We need more legislators that are willing to move from the extreme positions and compromise. So far, only the moderates are willing to do this and there are too few moderates to accomplish the task. The question now becomes, what can the people do to change this situation for the future? One possible solution would have been the adoption of the “open primary” but the voters rejected this solution by the recent passage of Proposition 60 and the failure of Proposition 62. Perhaps, the better solution is to provide for independent re-districting to eliminate the “safe seat” districts and to increase term limits. One might ask: “How would independent re-districting and an increase in term limits result in a more cooperative legislature”? The answer lies in the current structure that now virtually assures the election of extremists. When the current method of redistricting was implemented, it resulted in “safe seats.” These seats are virtually guaranteed to continue with the same party. The successful primary candidate in a “safe seat” district will be the one who receives his party’s support. Additionally, with the current term limits, candidates need their party’s support more frequently as they run for new offices to keep themselves employed. To get party support, a Democratic candidate must not be outflanked on the left and a Republican candidate must not be outflanked on the right by their respective challengers. By eliminating the “safe seat” districts, a successful candidate would need to appeal to the greatest number of voters, not just their party. To do so, would provide a much greater opportunity for the election of a moderate candidate. By increasing term limits, an incumbent would not need as frequent party support and would be able to make decisions based more on what is best for all than on what is most popular with their party. Developing solutions Despite the current situation, certain San Fernando Valley legislators are attempting to develop creative solutions to fix the budget instead of merely posturing for a never-ending battle. Assemblymember Lloyd Levine is currently exploring two ideas. The first is to increase commerce by moving traffic quicker. The increased commerce would provide additional revenues to California. The idea would result in re-designing freeway interchanges to reduce bottlenecks. Funding would come from user fees, thus there would be no additional cost to the state. Anyone who takes the interchange from the 405 (South) to the 101 (N/W) is familiar with the ultimate in bottlenecks. A reduction in the severity of the turn and a smoother transition could keep traffic flowing at a more even speed and significantly reduce the problem. Another of Assemlymember Levine’s ideas is to create more revenues by increasing the amount of saleable products produced by prison labor and to make prisoners of means responsible for paying for some of their living expenses. Assemblymember Keith Richman is proposing a constitutional amendment to force the state and all local governments by mid-2007 to abandon their traditional defined benefit retirement plans in favor of a 401(k)-type system. By law, current employees are locked into their pension plans. Those workers will receive a guaranteed pension based on their final salary, years of service and age at retirement. Assemblymember Richman wants to switch to a defined contribution plan, which would apply to new employees. Workers and employers would contribute to a tax-deferred investment account that would be available to workers upon request. Employer contributions would be capped. The plan will be less expensive and more transparent then the current pension plans and will eliminate future pension shortfalls. Current pension shortfalls are a prime contributor to the structural deficit. What we need now is to convince more of our legislators to put on their thinking caps and develop creative solutions to our budget woes. Now, more than ever, is the time to avoid politics-as-usual, eliminate the battles and roadblocks, fix the problems of today and provide for a solid future. Gregory N. Lippe, CPA, is managing partner of the Woodland Hills-based CPA firm of Lever, Lippe, Hellie & Russell LLP (LLHR) and a director of the Valley Industry and Commerce Association (VICA).

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