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By Michael Gardner of the San Diego Union Tribune
For California Budget Watch

SACRAMENTO – Five Senate Republicans have volunteered to be on the front lines of the initial budget battle this year, including weighing whether to put taxes before voters again.
In doing so, those Republicans have jeopardized their political lives.

Thus far, the senators have limited public posturing to brief statements on their goals. Moreover, none have committed to asking voters to continue higher taxes – the most controversial element of Gov. Jerry Brown’s spending plan — even if they secure significant concessions.

Key ingredients are no-loopholes laws to: rein in pensions, impose a spending cap, adopt more business friendly regulations and cut spending. Those actions must be taken first, before a tax extension vote, the senators insist. They also want the higher taxes to disappear much sooner than the five years the governor has proposed as part of his spending plans.

Talks at times have been promising. Other times they have been at impasse. Perhaps telling of the group’s philosophy is this statement issued earlier this month as they decided to return to the just-left table:

“Getting to a constructive agreement involves difficult compromise. Although various interest groups may not have an appetite for real change, we believe the public is demanding it.”

And on Tuesday, the day before the Legislature began taking up the budget on both floors, the members vowed to hold out until their demands are met.

“We remain united as a team in the fight to get these priorities implemented,” said a joint statement.

While Republicans and Democrats joined to approve billions in spending cuts this week, the bipartisanship ended there. There were still no Republican votes for the special election Gov. Brown wants to hold in June to seek approval for the tax extensions. Two Republican votes are needed in each house to make that happen.

And that’s where the serious dealing begins – and ends.

Conservatives have long-pressed the same goals the GOP 5, as they are called, are pushing. But at the same many of the same partisans are vilifying the five for something they have yet to do, which is support asking voters whether to continue the temporary sales, income and car taxes due to expire June 30.
Opponents point out that voters in May 2009 rejected each tax extension. Those critics hold that the state will never seriously cut spending and deflate a bloated bureaucracy as long as more tax revenues flow.

Those taxes would raise about $11 billion a year, helping bridge a $26.6 billion budget gap over the next 15 months. That shortfall between projected spending and revenues represents nearly a-third of the state’s $86.4 billion annual general fund.

Brown proposes a five-year extension used to cover a range of expenses – mostly for schools and to help counties fund new responsibilities for state programs.

The internal warfare has been escalating leading into this weekend’s California Republican Party convention. Conservative factions are planning to issue condemnations of any Republican who dares support asking voters for more taxes. Moreover, the most zealous have even threatened to launch recalls.

In many respects, it is a replay of 2009. In February of that year several Republicans agreed to a budget deal that included tax hikes through June 30,2011. Those Republicans were branded traitors at the subsequent GOP spring convention.

Even if some Senate Republicans eventually cast yes votes, peace cannot be declared. Negotiations will then shift to the Assembly, which is generally considered even more conservative.

So far, no Republicans in the lower house have stepped forward publicly to suggest they would be willing to deal on the tax extension vote.

But, if the budget drags out that long, some may come out of the shadows after the Republican Convention.

Not all Republican groups are issuing threats. The New Majority, a moderate group with chapters in Orange and San Diego Counties, has sent a carefully worded letter to GOP legislative leaders urging compromise.

In an interview, Joe Jubela , chairman of the New Majority’s San Diego County branch, said the group wants guarantees that the pursued changes are in place. “That must happen first,” he said.

Then, it could get behind a tax extension, but only then.

Jubela said the spending cap, cuts and pensions would send an important message. Now, he continued, “Californians are paying far too much for far too little in services.”
Orange County’s Larry Higby, the statewide chairman of the New Majority, said in an interview that his policy is “no loopholes, no delay” toward reforms.

“We don’t believe in any tax increases without simultaneously doing the cuts and reforms,” Higby said.

Democrat constituencies have resisted overtures. Labor unions oppose restricting pension plans. And environmental groups are lobbying against easing regulatory standards, which they claim will gut laws protecting human health and wildlife. Teachers and others strongly oppose a strict limit on spending, claiming education has been shortchanged for several years.

Pure politics may be in play as much as policy and philosophy.

Conservatives tend to dominate Republican primaries, forcing GOP candidates to lean right. The opposite is true in many Democrat-heavy districts. But that could change in some parts of the state next year. That’s because California will implement for the first time a “top two” system that will send the two highest vote-getters on to the general election. In some instances, that could mean a face-off between a conservative and moderate Republican in the general election, or a liberal and moderate Democrat.

Also, with the census finished, political boundary lines are being redrawn by an independent commission. That means some lawmakers may see their power base moved out of the district. In other instances, two sitting legislators may find their homes in the same district.

Personal ambitions also come into play. Of the GOP 5, one is termed out. Another must run again in 2012.

But three of the Senate Republicans do not go before voters again until 2014 – a lifetime in politics. They could be the ones demanding a shorter timeframe for the extensions so the taxes disappear before they are on the ballot.

Governor Brown could also offer plum appointments to those who cannot or will not seek reelection.

WHO ARE THEY:

Tom Harman of Huntington Beach: Former assemblyman will be termed out of Senate next year. An attorney, he will be 70 in late May.
Bill Emmerson of Hemet: A former assemblyman, he joined the Senate following a special election in 2010. Must run again in 2012. He is 65 and an orthodontist.
Sam Blakeslee of San Luis Obispo: a former Assembly Republican leader, he won a special election for the Senate last summer. Next election is in 2014. A geophysicist, he will be 56 in late June.
Tom Berryhill of Modesto: A former assemblyman elected to the Senate in 2010. Next election is 2014. A winegrape grower, he will be 58 in late August. His brother , Bill, serves in the Assembly.
Anthony Cannella: He is the youngest and only one of the five senators without experience in the Assembly. Elected last year, does not go before voters until 2014. The former mayor of Ceres and a civil engineer, he turns 42 on Tuesday (March 22).

WHAT THEY WANT:

Few specifics are being revealed. But here is a broad outline of what they have been discussing for some time with no resolution: *
- Spending cap: A tight rein that can only be broken in emergencies. School funding would be a priority, allowing for more on per-pupil spending.
- Education reforms: Modifications to tenure that protects teachers. Tying jobs with performance, giving administrators more flexibility to fire bad teachers. Parents should have a right to choose schools.
- Pensions: End guaranteed, or defined, pension plans for new employees. Switch to 401K type plans and require workers to pay more into the system. End the policy of tying pension benefits to the last, and presumably, highest salary. Ban pensions that would exceed $100,000 a year.
- Regulations: Draft more business friendly regulations and require rules and laws to include the estimated cost on business. Also, more tightly control lawsuits brought against business.
- Government services: Allow private business to bid on more state services and projects.
- Tax reform: Adopt comprehensive reforms, particularly lower the tax rates. In return, close loopholes and broaden the taxpayer base.
- Redevelopment: Agree to some reforms on divisions of the property tax and limit the types of projects that can be funded. But, protect the basic structure and goals of redevelopment agencies and enterprise zones designed to encourage business investment in selected neighborhoods.
- Tax extension: Only agree to place a measure on the ballot if the above demands are complied with substantially. Even then, have the extension expire sooner than the currently proposed five years.
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Source: GOP proposal to governor and interviews.

By Michael Gardner of the San Diego Union-Tribune
For California Budget Watch

SACRAMENTO – For the past two years Californians have paid more on April 15, at the cash register and to the DMV.

How much more? About $260 each per year, or more than $1,000 for the average family of four.

These increases in the income, sales and car taxes were sold as temporary pain that would be relieved once California’s economic engine restarted and the state’s monstrous budget deficit was tamed.

But neither has happened. The economy remains sluggish and the budget gap stands at $26.6 billion over the next 15 months out of an $84.6 billion general fund.

So Gov. Jerry Brown is pushing lawmakers to ask voters to extend the taxes for another five years, with most going to selected programs.

Sound familiar? Then-Gov. Arnold Schwarzenegger and lawmakers submitted a similar plea in a special election in May 2009. Voters said no by a nearly 2-1 margin, 66 percent to 34 percent. In San Diego County, Proposition 1A lost 70 percent to 30 percent; and 74 percent to 26 percent in Orange County.

Brown insists times have changed enough to warrant a new “check-in with the people of California.” But so far Republicans have balked at providing enough votes to secure the desired two-thirds majority to place the issue on a June ballot. Negotiations have been running hot and cold for weeks.

Pocketbooks as well as principles are on the line.

For example: those with a $20,000 car have paid an extra $125 annually in vehicle license fees. A $500 iPad rings up $5 higher because of a 1 percent sales tax boost. And come April 15, a California family with one child and a gross taxable income of $60,000 in 2010 will send the state $340 more because of higher income taxes and a smaller exemption for dependents.

Those four extra taxes will bring in an estimated $9.25 billion , or more than 10 percent of the entire general fund, in 2011-2012, according to the state Department of Finance. The income tax extension and lower dependent care exemption would bring in about $1.9 billion for the current fiscal year, making the total tax package worth $11 billion.

Brown earmarks some of the money to guard against complaints that the new revenues would just fall into the Capitol’s black hole. Brown proposes to set aside the increases in sales and car taxes for local governments as part of his ambitious plans to shift some state public safety responsibilities, such as parole services, to counties. He would dedicate 6.5 percent of all net personal income tax receipts to K-12 schools and community colleges.

Brown and others have warned of even deeper cuts if the extensions are not granted..

The nonpartisan Legislative Analyst, responding to a senator’s request, conducted a broad-brush look at how the state could slash the deficit without new taxes beyond Brown’s already proposed $12.5 billion in cuts.

The analyst did not take sides. Rather, he outlined a list of possibilities that sweeps in schools, prisons, social services, environmental protection and general government. Combined the potential savings would approach $13.5 billion. Among the possibilities:

Schools: Savings: $5.23 billion out of K-12 and community college budgets. Among the targets: increase class sizes, starting kindergarten later, eliminate state funding for busing and hike per-unit fees .

Higher education: Savings: $1 billion. Slash budgets at UC by 10 percent, CSU by 5 percent. Further increase tuition by 7 percent t at UC and 10 percent for CSU students, and make broads cuts in enrollment and financial aid.

Health and social services: Savings: $1.15 billion. Slice wages paid to in-home aids for the elderly and disabled; eliminate adult protective services, end drug courts and cut benefits for noncitizen legal immigrants.

Prisons and Judiciary: Savings: $2.6 billion. End support for local police programs, delay construction of new courts, reduce felons convicted under three-strikes law to shorten sentences and send more parolees to local governments for supervision.

General government: Savings $1.5 billion. Cut state worker pay by 9.24 percent, reduce state contributions to employee health care by 30 percent, stop all bond sales and pay-as-you-go construction projects, eliminate victim service programs, and dissolve various state departments, including the Health and Human Services and Environmental Protection agencies.

Other: Savings: $2 billion. Mostly through new oil drilling fees and cuts, including in transportation.

Jonathan Coupal, president of the Howard Jarvis Taxpayers association said the list sends a message that taxes are not the only resort.

““It’s not pretty but it’s definitely doable,” Coupal said the cuts.

Coupal argues that it’s a “misnomer” to describe the taxes as extensions. He pointed out that the surcharge on personal income taxes and cut in dependent exemption credit lasted through the 2010 tax year – not 2010-11 fiscal year.

Sen. Mark Leno, D-San Francisco, urges a ballot measure. “Just give the voters a voice.”

Leno, the chairman of the Senate Budget Committee who requested the broad-brush look at alternatives to taxes, said, “The Legislative Analyst report indicates it will seriously dismantle the public infrastructure” to try to close the gap with cuts alone.

If so, individuals and families could lose more through higher college fees, increased class sizes for students and cuts in services, from firefighting to libraries, he said.

“The costs will pop up somewhere, one way or the other,” Leno said.

Negotiations are continuing in the Capitol.

Which taxes are at stake?
Sales tax: The state share was increased 1 percent, to 6 percent. It would raise $4.5 billion in 2011-12.
Income tax: There is a 0.25 surcharge. It would raise $2.07 billion in 2011-12.
Vehicle license fees: An increase of 0.65 percent to a 1.15 percent rate based on vehicle value. It would raise $1.38 billion in 2011-12.
Dependent exemption: A $99 credit, down from the $309 allowed two years ago. It would raise $1.25 billion in 2011-12.

Here is how much the extension of the temporary increase in personal income tax would cost typical California families.

Adjusted Gross Income* Cost without extension Liability with extension Increase
$60,000 $783 $1,123 $340
$90,000 $2,743 $3,158 $415
$100,000 $3,543 $3,983 $440
$150,000 $8,182 $8,746 $564

*Source: California Department of Finance. Figures based on income before deductions.

By Daniel Weintraub

As the Legislature moves closer to voting on a budget largely reflecting Gov. Jerry Brown’s proposed spending plan, Democrats are learning that a power they have long sought — to pass a budget with a majority vote — might not be the lever they thought it was going to be.

Democrats control both houses of the Legislature, and thanks to the passage of Proposition 25 last November, they now have the power to pass a budget without Republican votes. With a Democrat in the governor’s office, that should make for easy sailing for a Democrat-driven budget plan. No more partisan stalemates, gridlock and cash shortages that force the state to pay its bills with IOUs.

That was the theory, anyway. In practice, something very different is happening.

Democrats can pass a budget without Republican support. But they cannot pass tax increases. And the Democrats don’t want to use their newfound clout to pass a budget that gets by only on the revenues projected for the coming fiscal year, especially after the expiration of $11 billion in temporary tax increases. That would mean deep cuts in public schools, public safety and just about every other program funded by the state.

As an alternative, Brown has proposed, and Democratic lawmakers have embraced, a two-step plan to getting the budget done.

First, the Legislature would pass what amounts to half a budget, a plan that makes $12 billion in cuts — mostly to health and social service programs — but relies on the extension of those temporary tax increases to prevent even deeper spending reductions. And then the Legislature would place a ballot measure or a series of measures on a June special election ballot and ask the people to extend the temporary taxes and ratify some fund shifts that can happen only with voter approval.

Brown promised during his campaign last year to raise taxes only with voter approval. Even if he wanted to do otherwise, however, he would have a hard time doing so, because almost every Republican in the Legislature has pledged not to vote for a tax increase. But even getting those measures on the ballot so the voters can decide the issue requires a two-thirds majority in the Assembly and the Senate. At least two Republican votes in each house are needed to make that happen.

Most Republicans have also vowed to oppose the governor’s ballot plan. A handful have said they are still open to the idea, and they have been trying to negotiate with Brown to win concessions from him and Democratic lawmakers in exchange for their votes. The Republicans want a spending limit, pension reform and regulatory relief for business, among other things.

But Brown and his Democratic allies have come under intense pressure from interest groups, especially the public employee unions, to oppose any spending limits or changes to the pension system. This has led to a recurrence of the same kind of partisan frustration and name-calling that has marked past budget stalemates, and which Brown promised to avoid.

The governor, for instance, has called Republicans “disloyal to California” for refusing to put his tax plan on the ballot. A handful of Republicans who were negotiating with the governor, meanwhile, threw up their hands earlier this week and said the negotiations were going nowhere because Brown refused to cross his public employee union supporters.

And Senate Leader Darrell Steinberg on Tuesday lashed out at Republicans for not being serious about the negotiations.

“The numbers are very stubborn,” Steinberg told reporters. “And we have to deal with them like adults. What the governor has proposed is fair — half cuts, and let the people decide that the cuts should not be doubled and impact public education and public safety — and we intend to do our jobs. That’s what we were hired to do. The other side needs to do the same.”

From all appearances, the sides remain far apart. Even if the Democratic leaders agree to Republican demands, it will probably take days to hammer out the details and get the legislation passed. And even that might be optimistic.

In other words, Brown’s self-imposed budget deadline of March 10 is about to pass him by. Soon he will be up against even stricter deadlines to get his package on the ballot sometime in June, before the start of the new fiscal year. And if he cannot get the taxes on the ballot, the constitutional deadline of June 15 to pass a budget will soon be looming. And the Democrats will be faced with the cruel dilemma of whether to exercise their power to pass a budget they hate or risk the wrath of voters who might now think they have more reason to hold the majority party accountable for the mess in Sacramento.

By Michael Gardner of the San Diego Union
For California Budget Watch

SACRAMENTO – California families commit to salting away a share of their income when they can, just in case the roof springs a leak.

But state lawmakers have learned that saving for the proverbial “rainy day” can be a challenge, given the competition for dollars and wildly fluctuating tax revenues.

“The state is a dysfunctional family with a number of relatives demanding services, demanding a piece of the nest egg,” said Ruben Barrales, a San Diego Chamber of Commerce executive who was part of a 2009 commission that vainly argued for tax reforms to reduce the state’s revenue swings.

The dilemma is magnified by California’s over-reliance on volatile personal income tax revenues, inflated mostly by capital gains that state residents realized after cashing in real estate or stocks during bull markets.

“When revenues were riding the rocket, that’s what fueled it,” said H.D. Palmer, a spokesman for the state Department of Finance.

But when the housing bubble bursts and the bulls turn into bears, “those receipts sink like a rock in the water,” said Barrales.

For example, taxable capital gains dove to $56 billion in calendar year 2008. That represented a 43 percent free-fall from the $132 billion realized in 2007.
That drop in the value of investments sold by Californians was quickly translated into a decline in tax revenue for the state.

At its 2000 pinnacle, the dot.com industry helped produce $10.19 billion in capital gains taxes. The next year, after the market crashed, capital gains taxes collapsed to just $3.96 billion.

More recently, the hot real estate market helped deliver $10.87 billion in capital gains taxes in 2007. In 2008, that cash to the state dwindled to just $4.55 billion.
And there was no reserve to speak of to cushion the fall.

For the past few years the state has struggled to maintain a savings account barely breaking 1 percent of general fund expenditures. Brown has proposed a 2011-2012 contingency of about $1 billion in a general fund budget of $84.6 billion. Lawmakers have passed along budget plans of their own with reserves ranging from $300 million to $600 million.

Even during good times, lawmakers have a hard time saying no so the money can be tucked away for future emergencies.

“When a surplus builds there is extraordinary pressure to spend it or cut taxes,” explained Brad Williams, a former policy expert with the nonpartisan Legislative Analyst’s office.

Indeed, legislators and governors love to send money back to the taxpayers. Ronald Reagan in 1969 mailed checks of up to $200 and in 1987 George Deukmejian approved rebates of between $32 and $136 for each taxpayer depending on income. Gov. Pete Wilson cut the car tax and Gray Davis temporarily reduced the state car tax. At the time, few argued for setting more money aside for the next downturn.

“Money in reserve is red meat,” continued Williams, now a partner in the Sacramento-based Capitol Matrix Consulting which advises private clients on fiscal issues.

Gov. Jerry Brown’s proposed 2011-12 budget estimates the state will receive $49.74 billion in personal income taxes, which make up a majority of the state’s general fund. The second largest contributor is the sales tax, which will bring in an estimated $24 billion.

Barrales, like many analysts, believes that the state’s money woes can be partly blamed on its failure to maintain a secure reserve and inability to compromise on tax reforms.
“It’s common sense planning,” he said.

But it’s not for lack of trying. Previous governors moved to establish special contingency accounts, only to see them vanish in the legislative process. For example, Gov. Arnold
Schwarzenegger infuriated Democrats, who filed a lawsuit challenging his move, when he vetoed nearly $500 million in spending 2009-2010 to maintain a reserve.

Several commissions, under governors of both parties, also advanced ambitious, but controversial, recommendations to stop leaning so heavily on transient tax sources.

A major problem in redrawing the tax code is it appears next-to-impossible to avoid having winners and losers if the goal is to keep the same amount of money flowing into state coffers. For example, cutting personal income taxes has been recommended to reduce reliance on capital gains. But to recoup the lost revenue, the sales tax would have to be extended to services, such as lawn care and lawyers.

Others propose a flat tax.

“It’s tough to redistribute the tax burden politically, but economically it would benefit the state,” said Joel Fox, president of the Small Business Action Committee who also edits the “Fox & Hounds” political blog focusing on business and political issues.

Fox said the current unrelenting budget woes present an opportunity to make repairs.

“Someone said ‘very little changes until the status quo is more painful than change.’ I wouldn’t be surprised if there are new attempts (at change),” he said.

There have also been stabs at requiring reserves.

“Once upon a time we did have a cushion,” said Williams. “The cushion was so big the voters took it away.”

Ironically, it was Brown, during his first go-round as governor, who presided during the buildup of a surplus that triggered the Proposition 13 property tax rebellion in 1978. The savings account nearly reached $4 billion, in contrast to $11.6 billion in expenditures. Then-Treasurer Jesse Unruh branded it an “obscene surplus.”

A year later, voters passed what was known as the “Gann Limit” to cap spending growth based on inflation and population. But a series of subsequent ballot measures protecting education funding and transportation revenues basically nullified the reserve requirement.

In 2004, voters approved Proposition 58 and established a “budget stabilization account” capped at $8 billion or 5 percent of the budget, whichever is greater. A share of the account is earmarked to repay deficit reduction bonds issued earlier, but the governor can suspend that requirement during a fiscal crisis, and the reserve has never come close to its projected level.

More recently, Schwarzenegger and lawmakers agreed as part of a package of measures to ask voters to establish a new mandatory reserve formula and give governors new powers to strike spending. But Californians in 2009 rejected Proposition 1A, which was linked to other unpopular measures, such as extending tax hikes. It was also opposed by the influential Howard Jarvis Taxpayers Association and the League of Women Voters.

Given the slim revenues, rebuilding reserves will be a tough sale. Lawmakers would have to leave cash unspent while at the same time slashing spending on schools, health care, parks and the disabled.

“The tradeoffs are too stark,” Williams said.

Voters may get another crack at requiring a healthy reserve in February 2012 – if not sooner. Lawmakers have put on the presidential primary ballot a measure that would impose a bigger commitment to a rainy day fund and make it more difficult to suspend annual contributions to the savings account. It includes language identifying a 10 percent reserve, but only as a “target “ and is not mandatory.

That measure could go to voters sooner, perhaps within a couple of months. The Legislature is debating whether to set a June special election for Brown’s proposal to extend temporary increases in the sales, personal and car taxes.

By Steve Levy

There is an ongoing debate about the state of the California economy. One set of voices argues that the state has a terrible business climate and that the state lags in job growth because firms are “fleeing” California. Another set of voices says “wait a minute”—the data show that the state’s poor job growth is the result of the housing bust and, more recently, the loss of government jobs. Both voices acknowledge that the state must deal with an ongoing budget deficit and develop an economic strategy for prosperity but they offer different roadmaps for success.

Recent revisions to job estimates added jobs in California while showing slower job growth in the nation than previously thought. What do these numbers tell us?

California added 82,600 nonfarm jobs between December 2009 and December 2010 for a gain of 0.6%. The state’s gain trailed the nation’s 0.7% job gain although both performances were disappointing to people hoping for a fast recovery and improvement in the unemployment picture.

However, California’s job picture improves markedly once construction and government job losses are removed from the data. In these data, California job growth more than doubles for 2010 and outpaces the nation.

California lost 51,500 government jobs in 2010 and 26,300 in the construction sector. Outside of these sectors the state added 160,400 jobs for a gain of 1.5% outpacing the comparable national job gain.

California’s largest job gains were in professional services and temporary help followed by health services and the leisure and hospitality sector, spurred by rising tourism activity. Wholesale trade reversed two years of job losses as the economy improved and trade volumes surged to near pre-recession levels.

Manufacturing and information posted modest job gains but within information motion pictures and Internet services recorded larger job growth.

So, all things considered, the state’s economic base came through the recession intact. The data confirm that construction and government sector job losses were the cause of the state’s relatively poor job performance during the Great Recession.

The California economy story is a story of two economies—the broader economy including construction and government and the economy without these two sectors where job losses have been concentrated. The state also has two economies by geography—the coastal counties where high tech, tourism and trade are rebounding and the more inland counties where the housing crisis and government job losses are holding back recovery.

The major tech and trade centers—Los Angeles, Orange and San Diego counties in the south and the San Francisco and Silicon Valley metro areas in the north–posted job gains in 2010. The Sacramento region had the most job losses led by declines in the construction/finance and government sectors. The Riverside-San Bernardino and East Bay area were also hard hit by the housing downturn. The San Joaquin Valley counties recorded small changes in job levels.

The Economic Outlook

The economic recovery will be led by tech, trade, tourism and the creative energy of Californians in a variety of sectors. Most of these jobs are on the coast. The state’s recovery will be held back by the lack of recovery in housing—probably at least a year away and by continuing job losses in government.

The state and nation are in a slow but strengthening recovery. The February national job gains and continuing lower unemployment claims raise hopes that the recovery will pick up speed as 2011 progresses. The recession created great hardship for residents but the state’s economic base remains strong if we can come together in the area of public policy.

The state faces two ongoing challenges for economic prosperity—1) developing a sustainable path for state and local government budgets and 2) developing an economic strategy that focuses on the areas of opportunity for the state.

Key elements of any economic strategy include the investments (with full funding) that make California an attractive place to work and live for our many innovative entrepreneurs and industries. But it will also be critical to address long-term retirement benefit reform for public employees and eliminating duplication and delay in regulatory policy.

Hopefully, these difficult choices can be discussed based on facts and not anecdotes about the state’s current economic situation and the opportunities and challenges that will determine the state’s future prospects for prosperity.

Steve Levy is director of the Center for the Continuing Study of the California Economy.

Wondering why the state can’t seem to make ends meet? Here’s one reason: California’s median income dropped by more than 5 percent between 2008 and 2009. Less income for California residents means less tax revenue for the government, helping to open a $25 billion shortfall projected over the next 16 months.

New numbers from the Franchise Tax Board show that the median income reported on personal income tax returns in 2009 was $34,079, down 5.1 percent from the year before. The median income on joint returns declined 5.7 percent to $65,025.

Median income is the point at which half of the income reported on tax returns is above and half is below.

The four Bay Area counties of Contra Costa, Marin, San Mateo, and Santa Clara continued to have the highest median incomes in California, as they have for the past 38 years. Marin County was highest at $108,465, although it still had a big decrease, of 8.6 percent.

Imperial County had the lowest median income, at $22,841.

–Daniel Weintraub