California impasse ends as Schwarzenegger reaches agreement
This came in overnight via the FT. Most of the shortfall in revenue is made up through spending cuts. Below are the relevant paragraphs:
The agreement involves cutting nearly $6bn from schools and community colleges and close to $3bn from the state’s university system, although Mr Schwarzenegger said education cuts would be fully “refunded”.
An additional $1.3bn will be cut from Medi-Cal, the health programme for low earners and the poor.
CalWorks, the state’s welfare-to-work programme – and the target of much criticism from Mr Schwarzenegger – will have its funding cut by $528m, while Healthy Families, a programme that provides health insurance for 930,000 low-income children, will be cut by $124m.
The state’s in-home support services programme for the frail and disabled will also have its funding slashed. Mr Schwarzenegger has maintained that the system is a hot-bed of fraud abuses and won approval to begin fingerprinting care-givers and recipients of aid.
Another contentious part of the agreement will clear the way for oil drilling to resume off the coast of Santa Barbara. The prospect of drilling in the area has attracted a lot of criticism and is likely to be fiercely contested by local residents and environmental campaigners.
I should also mention some thoughts from Tim Fernholz via Brad DeLong on why the Federal Government has not given states more money. He claims it was moderate Senators in Congress who explicitly took out state aid from the February stimulus package. He writes:
Robert Samuelson, typically known for butchering economics in his column, takes a break today in order to butcher political science. He says the stimulus isn’t working because it is composed of the wrong programs, and he blames President Obama specifically for not including things like fiscal aid to states…. But if Samuelson were to remember what actually happened last February, or even do some superficial research, he’d realize that it was the moderate members of the Senate, led by Sens. Ben Nelson and Susan Collins, who stripped out much of the state funding…. [T]hese senators never did get around to telling anyone the economic logic of their proposal…. So Samuelson will never criticize moderate senators for passing bad policy, so long as they do so in the name of deficit hawkery, but by God the president who signs such a bill — a much-needed bill to ameliorate the effects of a major recession — will be held accountable!
This should make plain why Obama rejected California’s request for aid apart from the Administrations own ideological reasons. There was no chance the state would receive any aid given the mood in Congress, so why waste political capital in trying to do so? Like it or not, the result is cuts in spending. Expect the same elsewhere, particularly in New York and Nevada where budget gaps are even larger in percentage terms.