Subprime mortgages rejected by Calfornia voters.

The day after their defeat in a California special election, it’s clear that most voters viewed Props 1A-E like a subprime mortgages. I’ve used this analogy in a previous post about Bush’s unsustainable tax cuts, and it fits equally well here. In trying to solve an unprecedented financial challenge, these propositions offered voters a quick fix based on completely unrealistic revenue projections.

If Props 1A-E passed, voters were smart enough to realize that in a few short years they would be just like homeowners with subprime mortgages: unable to pay the bills and wondering how they got bamboozled into creating debts they couldn’t repay.

Subprime “victims” were told they could refinance their homes when their debt payments ballooned or bought into a fantasy that the ballooning economy would trickle down higher salaries to them that would cover their debt. Voters in yesterday's election were told that when the state’s income needs would further balloon in a couple of years – in large part because of the elaborate borrowing against future revenues orchestrated by these propositions – that either a huge economic recovery or the “rainy day fund” created by Prop 1-A would cover the gap. (Never mind that it might take decades, if ever, for the fund to grow large enough to keep voters from getting soaked.)

Another sad truth has been reinforced by the election: if the private sector figures out a way to fleece unsophisticated consumers, after politicians denounce the hucksters for their immoral greed those same politicians sometimes have the gall to try to fleece voters in a similar way. The focus on today at the expense of planning for tomorrow that has famously plagued American industry since the 1980's also has deeply infected politics and public policy. In California, with term limits forcing every newly elected public official to immediately set his or her sights on the race for the next office, it’s a miracle the ship of state didn’t sink years before yesterday.

I’ve mentioned in previous posts some long standing issues that must be fixed as part of raising the wreck, such the requirement that any bill with fiscal impact pass by a two-thirds vote. Hopefully this will all play out like a disaster movie formula, and we’ll be rescued in time. My additional hope is that the Governator will make good on his promise to leave politics forever, and that future entertainers who assume that public office is just another venue that would draw on their existing skill set will study the careers of Arnold and Jesse and try stand up comedy instead.

No brains in California May Propositions

“No brainer” is the tag line for the campaign urging voters to approve the latest smoke and mirrors referendums put forward by California’s dysfunctional state legislature and Governator. “No brain” is a better description of the opinion the “leaders” behind these referendums have of voters. There has been very little public discussion of these six propositions, which will be on the ballot on May 19. I believe that the supporters do not want voters to know much about the details and are hoping to fly them through under the radar.

These propositions are a train wreck resulting from the inability of the legislature to agree on a budget year after year. The Democrats won’t reduce spending the Republicans won’t raise taxes. In good economic times, they stumble all over themselves to reduce taxes to make voters happy, knowing full well that the in bad times they won’t have the courage to raise taxes in order to keep the state out of the red. The requirement for a two-thirds vote to pass a budget gets us a worsening series of accounting tricks, of which these propositions are the latest.

We’re told that this is the best deal we’re going to get, and that failure to pass these six propositions will plunge the state back into uncertainty. We should not buy into to these scare tactics. The plan is already fatally flawed because it is based on unrealistic revenue projections. Even if these propositions pass, the latest estimate is that the state will still be facing an additional eight billion dollar deficit this year that they do not address.

1A continues the tax increases recently approved for four years instead of two. Rather than hiking the gas tax and encouraging people to get fuel efficient vehicles or drive less, one Republican legislator whose vote was needed to pass the budget insisted on a sales tax increase instead, which is the most regressive form of taxation (hurts the poor the most). To take the heat off the legislature and get voters to swallow this bitter medicine themselves, 1A sets up an automatic rainy day fund. The problem with this is that revenue only flows into the fund when the State actually spends the amount of money on education mandated by Prop 98, which never happens (see 1B below). Given how many prior propositions are being eviscerated by the May 19th “gang of six” (see below), it’s hard to believe much about how all of this will work in the future.

1B would give schools and colleges 9.3 billion dollars starting in 2010-2012 they think they should have been paid under Prop 98 and that they think the Governator screwed them out of. Is the only way to solve this dispute is via another proposition? What are the odds various government entities will be fighting about this new one in 2010 and beyond? Where is the 9.3 billion dollars going to come from?

1C is an end run around Props 58 and 98 and is one the worst accounting tricks. It borrows money from future lottery revenue that is supposed to go to education to help close today’s budget deficit. This whole Madoff-like Ponzi scheme depends on the economy roaring back in 2010 so there will be money for the payments mandated by 1B. Oh, and it removes competitive bidding requirements from some lottery operations.

1D is an end run around Prop 10 that allows the state to take tobacco litigation money that is supposed to go to "First Five" early childhood development programs and instead spent it on other human services programs. Many First Five programs will end. Just to be consistent with the name of the programs it will kill, 1D will steal that money for five years.

1E allows the state to take money that voters said in Prop 63 should go to mental health programs for children and instead use it to pay for federally mandated Medicaid programs. Cutting and reducing funding for mental health programs will hurt people who need the help the most and cost taxpayers more in the long run, as failing to treat mental health problems always does. Its annual savings are less than half of one percent of the deficit.

1F is a Trojan Horse built to fool voters into thinking that elected officials are sacrificing something in this package. All it does it prevent salary increases for public officials during deficit years. It does nothing to prevent foregone increases from being made up later when times are good. This sort of faux pain for politicians is often used to bait voters into supporting propositions containing bad public policy.

Where is the proposition to lower the votes in the legislature to pass a budget or raise taxes from two-thirds to something more sensible like sixty percent, or God forbid, the simple majority used in Congress and most state legislatures? Vote no on the May 19th gang of six.