TCS Daily

Schwarzenegger Seeks The Right Bailout

By Josh Barro - December 29, 2009 12:00 AM

Next month, California's governor plans to ask Washington for another bailout to help close his state's $21 billion budget gap for the next fiscal year. This request comes with an appealing twist, though: it wouldn't cost federal taxpayers a dime.

Instead of asking for more money, Arnold Schwarzenegger is expected to ask Washington to release California from rules that inhibit budget cuts. Schwarzenegger would use this leeway to cut spending by as much as $8 billion. Details are expected next month, but the bulk of the cuts will likely be in school aid and Medicaid.

Last year's American Reinvestment and Recovery Act (popularly known as the stimulus package) extended hundreds of billions of dollars in aid to the states, but with strings attached-they had to maintain existing service levels in programs getting stimulus support, or in some cases increase them. This placed high-service states like California at a disadvantage, as they must maintain already-high baselines that do not apply to other states.

On education, the stimulus bill forbids states that take stimulus money from cutting state education spending below fiscal year 2006 levels, near the peak of the economic boom. However, despite a substantial temporary increase in income, sales and motor vehicle tax rates, California's independent Legislative Analyst's Office anticipates that fiscal 2011 general fund tax receipts will be 6% below 2006 levels.

California's revenue situation is so dire that the stimulus restriction puts a higher floor on education spending than the state's usually-stringent Proposition 98 education funding formula. To maintain stimulus eligibility, California must devote an ever larger share of its revenues to education or further increase taxes, even as public school enrollment declines.

Similarly, stimulus rules box California into its relatively generous Medicaid eligibility rules. Californians with dependent children are eligible for Medicaid if they earn up to 106% of the federal poverty line, the 14th highest level among the fifty states. California also covers many optional add-on services within Medicaid, including acupuncture, chiropractic treatment, and non-religious components of faith healing.

As a result, California has 18% of America's Medicaid participants with just 12% of the population, and per-capita Medicaid spending of more than twice Nevada's. But if California were to reduce eligibility to match Nevada levels, it would forfeit stimulus dollars.

On both education and Medicaid, California is punished for its past generous spending. The stimulus package enshrines a status-quo bias, where high-spending states must maintain their programs but low-spending states do not have to grow theirs. If Medicaid at 106% of the poverty line is a federal priority in California, why not in Nevada or the 34 other states that do not provide it?

In both education and health spending, the President has significant leeway to waive stimulus penalties. Obama should agree to Schwarzenegger's request to do so, giving California a freer hand to dig itself out of its fiscal hole. This would be in line with the purpose of federal aid to states during recessions.

In a recession, when tax revenues drop, it is desirable to run a budget deficit to reduce the need for economically damaging tax hikes and spending cuts. But states are generally prohibited by their own constitutions from borrowing to pay for current operations. By borrowing money and giving it to states, the federal government provides backdoor deficit financing.

But aid to states is less useful when the federal government simultaneously mandates certain spending. By prohibiting cuts in certain areas, the federal government reduces a state's options to close budget gaps not covered with stimulus dollars.

This may lead states to undertake anti-stimulative actions. In California's case, that could include further increases in the state's already uncompetitive income tax (fourth-highest top rate) and sales tax (second-highest average rate). Instead of dictating from Washington, the federal government should let states determine what budgetary courses of action are most appropriate for their circumstances.

The Obama Administration has previously blocked Schwarzenegger efforts to rationalize the state's budget, including a threat to withhold stimulus money over a proposed cut in pay for home health care workers. But Schwarzenegger has been a key White House ally on issues including cap and trade, putting him in a better position than most Republicans to ask for help.

Spokesman Bill Burton says the White House is taking a look at aiding California. With projected federal budget deficits exceeding $9 trillion over the next 10 years, the White House should find Schwarzenegger's proposal appealing, because it is free.

This article first appeared on

Josh Barro is a Senior Fellow at the Manhattan Institute.



The right bailout, the right restrictions
Sure, the feds should let CA cut some spending... but if they really want to help, the old restrictions should be replaced with a single new one: go ahead, Arnie, you can cut anything you want, but only if the cuts are made permanent.

I hate to rain on your parade (welcome to TCS!) but...
...this concept of cutting spending on services is only the 'hostage' in the real negotiations. The goal of which is: The rest of the nation openly bailing out California for at least the next year w/o California cutting a single dime in spending.

Note the time these budget cuts would take place? In 2010. What is 2010? An election year for Congress. California sends 55 reps and two senators to the Great Cesspool. One of the reps, ultra-liberal Barbara Boxer is up for re-election this time and her polling already stinks. All 55 congresscritters for the House are up. The vast majority are Dems.

And who are the main 'customers' of MediCal and school spending? ACORN low-income types, illegal immigrants (but I am being redundant) who illegally vote en masse and the teachers' unions. Thus, they are the 'hostage'.

This is a game of chicken. In the end California will get bailed out, I believe. But it will be at the expense of the rest of the non-Californian taxpayers as the Obamunists will blink and fork up the money rather than allow California to cut de-facto slush-fund spending to its cherished supporter groups in an election year.

And you can count on Pelosi (D-San Fran) and Boxer to raise hell about it too, thus upping the ante.

I'll give the Governator some cred. He's a total SchwarzenKennedy sell-out who makes RINO a really bad term than it already is. But he's smart to play it this way..and the Dems in the State legislature will quietly back him on this play, too...for the same reasons why Pelosi and Boxer will not-so-quietly back him.

To all you non-Californian federal income taxpayers reading this: Better stock up on the K-Y Jelly because the Obamunists will soon bring repeated bad prison experiences to a butt-hole attached to Y-O-U.

Some other facts: (a) Earlier this year I predicted something like this was going to go down, (b) what SchwarzenKennedy is doing supports my prediction very well and (c) I am a California resident who will laugh at the rest of you despite that I am opposed to all of this with regards to my ideological principles because if this goes down like I say it will then you ALL deserve what you get for voting in the Obamunists and their Messiah into total power.

SchwarzenKennedy basically pulled an Obama during that election... portraying himself as a real Republican. When he got into office, he did try some minor things but the unions declared war on him big time.

Ever since, he's been the California Dems' butt boy.

Hence why I stated that they are really supporting the Governator's game of chicken with Obama despite any public protestations to the contrary. Of course, Obama can say back, "Fine, we'll allow you to do your cuts" and then those chumps in Sacramento will be up the creak. They'll try to blame 'that EVIL Republican Ahnold!' for taking away the kiddies' school lunches, in that case. But Ahnold is a lame duck and not running for re-election. The Dems in the legislature & for Congress are. It will be interesting.

That recall election was very unique, btw. There were no party primaries and the Dem candidate (Cruz Bustemante) was in the bad position of running against Grey Davis, whom the Dems officially supported not being recalled (it was a twofer, the votes for the replacement governor only kicked in if Davis was recalled in a separate vote) but couldn't afford to not have a candidate in the replacement vote either. The registration requirements were low. Hundreds of people ran for governor. Gary Coleman ran. Arianna Huffington ran and was even in some of the debates. So did some porn star. It was a total circus.

CA blackmail
I heard one guy saying that the dysfunctional CA politicians are basically saying, give us a bailout, or we'll let thousands of prisoners out out jail.

Apparently they never considered that jail guards, some of whom make $100k - even 300k, was one baby step to cut costs.

Many people on other forums have told me those figures can't be right, so would some of you CA people out there tells us what the correct ones are?

those figures are correct...
..and the prison guard union is one of the most powerful in the state. They teamed up with the nurses and the teachers to go after SchwarzenKennedy when he first came into office. They routinely team up anyway to defeat propositions that attempt to cut them down to size in some way (like vouchers for the schools).

They make a s--load of money, those prison guards. I am sure you can Google entire articles about it.

So, when push comes to shove, they'll release the prisoners but keep the guards there to play pinnocle or whatever like the GM union dudes do at those 'job shops' and then blame the uproar on Congress and Obama for forcing the state to let the prisoners go.

The Dems in Sacramento will be more than willing to sacrifice the Obamunists in D.C. in order to pathetically attempt to save their own bacon in the election, is my very well-educated guess. If that means they get in bed with the goverRINOr and the Reps running for Congress who will have a field day with voters even in an ultra-blue state like Kalifornya as a result, so be it.

People outside of Kalifornya (and many clueless within it) don't realize how bad things are here or how desperate the Dems who ran this into the ground for twenty years are. A lot of people are pouring out of the state so that in the upcoming reapportionment after the 2010 census, for the first time in over a hundred years Kalifornya won't be getting more House seats in Congress like it has after every census.

What if California defaults?
This article projects that if California goes, most likely its municipalities will default to. Total amount being defaulted in that case: a HALF a trillion dollars.

California is too big to fail. Obama will have to bail it out or face revolution on Nov 2.

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