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Reason Foundation

California's Budget Crisis Continues

State still doesn't have a budget, but plenty of bad ideas are coming out of Sacramento

Adam Summers
September 3, 2008

It shouldn't come as a surprise that the state of California is facing a massive budget deficit (between $15 billion and $17 billion, depending on the source), or that a politician has broken a promise. We in California have certainly been accustomed to both, for many years. But that doesn't make it any less frustrating or infuriating.

After promising to fix California's structural budget deficit and reform government not merely by thinking outside the box, but rather by "blowing up the boxes" of state government, Gov. Arnold Schwarzenegger has, during his tenure, offered such innovative solutions as more borrowing, more taxes, and more fees.

Gov. Schwarzenegger has now proposed increasing sales taxes across the state one additional percent. (This, on top of more than $8 billion in tax increases that Democrats in the legislature have already proposed.) This "temporary" tax increase would be scheduled to last three years, after which time it would be reduced 1.25 percent to a minimum of 7 percent (the sales tax rate is higher in some counties that have approved additional local sales taxes on top of the state rate). Nobel Prize-winning economist Milton Friedman once said, "Nothing is so permanent as a temporary government program." That goes double for "temporary" taxes.

On the plus side, the governor's proposal is coupled with a constitutional measure to implement a rainy-day fund, into which the legislature would be required to contribute three percent of state general fund revenues per year until the fund reaches 12.5 percent of the general fund budget. Those funds could be tapped in a fiscal emergency. Given the state's budgetary history, a little fiscal prudence would certainly be a welcome thing, although a stronger measure, such as one that would cap spending at the rate of population growth plus the rate of inflation and require the return of all excess revenues to taxpayers, would be an even better solution.

There was a time, not so long ago, when Gov. Schwarzenegger did actively seek out innovative solutions to improving the budget situation and reducing waste and inefficiency in state government. In 2004 he solicited reform ideas from state and local government leaders, the business and labor communities, public policy experts, and members of the public. As a result, the California Performance Review Commission detailed over 1,400 recommendations with potential savings of approximately $31 billion over five years, including $10 billion in savings from the general fund. These recommendations included such common-sense ideas as eliminating some of the hundreds of state boards and commission, consolidating programs and government functions that are duplicative or overlapping, and selling off surplus real estate, such as state-owned golf courses, the Los Angeles Memorial Coliseum, and the infamous MTV beach house in Malibu.

Unfortunately, the California Performance Review has largely just been filed away as another blue ribbon commission report to be ignored. But if the administration has so many ready-made solutions, why not put them to use, especially now?

Another worthy reform that was abandoned by the administration was that of the state's pension system. Once upon a time, it could be argued that government employees needed greater benefits and job stability than private-sector workers because the government could not match salaries in the private sector. That clearly is no longer the case. Now government employees typically earn higher salaries and benefits than their private-sector counterparts. Unfortunately, an effort to switch new state employees from the government's generous traditional pension plan to a 401(k)-style defined-contribution plan more in line with the private sector was scuttled when the sloppy wording of the proposal led to fears that the widows of slain public safety officers would be denied disability pensions. Nevertheless, there is a reason that the private sector has been switching to defined-contribution plans for 30 years: traditional pensions are simply too volatile and unaffordable.

Despite the numerous reforms mentioned above, California will never return to a state of fiscal responsibility until policymakers acknowledge that the state's woes are due to a spending and borrowing problem, not a revenue problem. General fund revenues have increased more than 34 percent since Gov. Schwarzenegger took office, but spending has outpaced even former Governor Gray Davis, who was recalled from office largely because of his lack of fiscal discipline.

If the past is any indication of the future (and the California government's penchant for making the same budgetary mistakes over and over makes it a good predictor), higher taxes will just lead to more spending-and we'll still be left with a huge budget deficit.

California taxpayers and consumers should not be punished for legislators' profligacy and irresponsibility. It is no secret that Californians are facing a tough economy. The housing and credit crises persist, consumers are struggling with high gas and food costs, and the state's unemployment rate has hit 7.3 percent, a 12-year high and currently fourth-highest in the nation. In addition, a recent Forbes report ranks California 40th on its list of the best states for business (including a ranking of 45th for regulatory environment and dead last for business costs). Higher taxes in such an economic climate will only suck more money from the private sector, where its investment is badly needed, and hurt taxpayers (who really do have to balance their checkbooks) even more.

Some will say that the budget cannot be balanced with spending cuts or other budgetary reforms and that increasing taxes or more borrowing are the only answers, but that's the same thing they have been saying for years (all the while spurning any serious efforts to cut waste and inefficiency from state government).

For years, those who must balance their personal budgets have entrusted the state treasury to those who are apparently unable to do so. No one said the budgetary tradeoff decisions would be easy, but it's time for legislators and the governor to do the job they were hired to do by reining in spending and returning California to a state of fiscal sanity.


Adam Summers is Senior Policy Analyst


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