Letter Articles on the Budget – 2004-2008
“The Basic Budget Question” – January 12, 2004
I had just a couple simple questions about the Governor’s budget proposal that came out on Friday, so I looked at every budget story I could find in the newspapers. No answers there, but lots of stories about slashing cuts. I went to the Department of Finance web site and waded through pages and pages of information. My question that no body seemed to want to answer was this: How much money did the state take in last year versus this year and how much are we spending last year versus this year? It is the basic question that every family and every business has to ask in order to even start making a budget.
The best that I can find is this: During the 2003-2004 year, which is just half over, we are spending at the rate of $75 billion a year and we are taking in $74.6 billion so we are still spending more money than we have and have to resort to borrowing.
During the 2004-2005 year, which is the first Schwarzenegger budget, we are proposing to spend $79 billion-- a $4 billion INCREASE in spending-- and we are expecting $76 billion in revenue. To buy time to bring these expenditures under control, the Governor is proposing borrowing.
Those who wail and moan about the state budget must acknowledge that spending continues to increase. Revenues are not increasing fast enough to keep up with this insatiable demand. Governor Schwarzenegger has wisely said that his borrowing proposal is a one-time measure to give the Legislature time to bring things into balance or to give the people time to vote in the changes themselves.
“Workers’ Comp: The Real Story” – February 2, 2004
The story that broke last week about the Department of Industrial Relations running out of money failed to give the whole picture. The Department is running out of money because this was one of Governor Davis' phony budget cuts. The state budget ended the Department's funding effective January 1st. Instead of truly cutting the Department’s budget, the then-Governor asked for and got a new tax to be levied on employers to pay 100% of the cost of this department. Are they 100% beneficiaries of this new tax? No. Since 1911, this department has been supported by the General Fund taxpayer money because it helped workers, employers and the public. This botched transition is another legacy of Davis and his Legislature. The bill they passed to enact the tax was voided on procedural grounds. Not to worry though, the tax increase on business will pass this same Legislature quickly and be sent to the Governor soon.
“Big Court Case Could Lower VLF $1.3 Billion” – March 15, 2004
The Legislative Analyst reports that in September last year, the Fourth District Court of Appeals found against the state in a case concerning whether the cost of fulfilling state mandates for Medically Indigent Adults is currently an unfunded mandate on the counties. The suit was brought by the County of San Diego. The court agreed with San Diego that the program constitutes a reimbursable mandate. The state was ordered to reimburse San Diego $3.5 million. The state appealed the decision to the California Supreme Court, which denied the petition for review in December; therefore, San Diego has won.
budget writers knew in 1991 that shifting the cost of many statutory social
programs to the counties was a mandate. To pay for this mandate, the final
budget deal also put in place new depreciation schedule for calculating the
vehicle license fee that resulted in a tax increase for all vehicle owners in California. The counties were given no guarantee, however, that the tax increase would be
enough to always cover the mandate so a “poison pill” was inserted to
discourage the counties from suing the state. The poison pill language calls
for rescinding the 1991 VLF depreciation schedule in favor of a more taxpayer
friendly schedule if the counties ever successfully sued over the issue of
funding for Medically Indigent Adults. Now that the suit has occurred, all
that needs to happen is for the Director of Finance to notify the Director of
DMV and the vehicle license fee, according to the Riverside Press Enterprise,
would go down $1.3 billion for all vehicle owners.
Performance Review - II” – April 5, 2004
Last week I began a profile of the Governor’s ambitious California Performance Review. The first phase of the project is a review of and recommendations for restructuring the executive branch. I expect the Governor will make a separate announcement about this aspect of the project, probably when the legislature returns from its spring break next week.
The second charge to the project, which I will discuss today, is Program Performance Assessment and Budgeting. When the state budget is proposed and debated every year, there are rarely significant changes from the prior year. That is because the prior year’s budget becomes the baseline for the following year, adding to the cycle of growth in spending that has gotten us in this upside-down mess. Instead of assuming that any particular program is functioning well and deserving of growth, the services provided should be evaluated regularly. CPR intends to undertake detailed and rigorous assessments, focusing on priorities, return on program investment and effective program management. The state will then be able to make program elimination and or modification decisions and budget choices based on these evaluations, rather than on raw emotion or political demagoguery. Of course, the first step to such an open process is discovering the true costs of programs. Once we determine those costs and link them to actual services provided, we will also be able to compare our programs with those in other states. The goal, CPR says, is to make the state’s budget process into a management tool rather than just a financial exercise.
If Governor Schwarzenegger can
accomplish even a portion of this ambitious agenda he will have advanced
responsible fiscal management beyond what any other Governor has been able to
“Cuts or Increases” –
May 17, 2004
According to Cal-Tax review of the Governor's May Revise Budget, state spending in the coming year will increase by just over $1.5 billion. Again, when many interest groups talk about “cuts,” they are really saying that the increase they expected was simply not as much as they hoped.
“Budget Watch” – May 17, 2004
That loud sound you hear is that of Democrat legislators gnashing their teeth because Governor Schwarzengegger outmaneuvered them on the budget. The new budget proposal generally only cuts programs where the beneficiaries have already agreed with the Governor to absorb numbers lower than they desired. While many will (and perhaps should) question the wisdom of making another round of temporary cuts with promises of restoration during the next few years, the truth is that the state budget is a only a one year plan. No one is voting on what the state's finances will look like in 2006. The budget vote is on a spending plan for July 1, 2004 through June 30, 2005. Given the craftiness of the new budget proposal, there is no excuse for the Legislature to not pass this budget on time by June 15th. The next 30 days should be fun to watch as the majority Democrats in the legislature try to find a budget issue that has any traction with the press or public. The Governor likes to play chess. He just put the legislature in check and they have 30 days before they resign to the necessity of voting for his budget.
“How to Shrink” – June 1, 2004
The additional problem with halting pay increases is that it accomplishes little to balance the state budget in the long run. Imagine that Correctional officers forgo the pay increases already due them from the existing contract. Those increases will be restored eventually and when they are, a huge budget increase will occur. What is truly needed is not a temporary salary diet, but a serious liposuction of state employees. We have bloated bureaucracy upon bloated bureaucracy. Until we cut out the fat, and redistribute the remaining lean, we will continue to face burgeoning state spending and budget crises beyond any employee contract. Senate Democrats need to face this reality and begin seriously rethinking their approach to state services rather than tinker at the margins and settling old scores because of perceived political convenience.
“Snatching Defeat From the Jaws of Victory” – July 6, 2004
Republican Legislators started late last week to make public their criticism of the Governor's budget negotiations questioning his restoration of major spending proposals on a budget only balanced by borrowing. Instead of remaining silent and letting the press savage the Governor and the Republican legislators for this split, Democrat legislators stupidly brought up their own list of demands and have now managed to take ownership of the late budget.
What could the Democrat legislators be demanding that is so important? They are fighting for the right to steal money from local governments. That’s right: they object to the Constitutional Amendment that the Governor negotiated with local governments that protected cities, counties and special districts from again being victims of state mismanagement. Without Constitutional protections, local governments would still be subject to the whims of the legislature and the governor regarding local finances.
My thanks to these legislators for saving the Republicans (so far) from an embarrassing spat and for showing their true colors with regard to their lack of support for local government fiscal priorities.
“When a Deadline Is Not a Deadline” – July 12, 2004
Yes, I know the California Constitution says the state budget must pass by June 15th. The intent of this requirement is to give the Governor two weeks to consider the budget then sign it before the new fiscal year starts. But since the Governor's staff writes the budget, he really does not need two weeks. Yes, I know the fiscal year starts on July 1st and that if there is no budget, then there is no spending authority. However, court cases and emergency statutes have made missing this deadline virtually risk-free. No state employee is off the clock due to lack of pay. No vendor is getting checks any later than they already do. In fact, the bills for June just coming in now are paid with June money that is from last year's budget authority. July’s bills will not show up until August.
The truth is that once the self-imposed political barrier of July 1st is breached, then there are no consequences for at least two weeks (mid-July, when some state employees are due paychecks). Budgeteers have already suffered the bad headlines for being late, so now the pressure is on to gain some budget 'victory' that justifies holding up the budget. Not only do the terms of the budget have to be negotiated, but also the terms of who won and who lost have to be articulated so that everyone has something to allow them to save face.
Unless the courts reverse themselves to actually implement the Constitution the way it reads, there will always be late budgets. The consequences of being late are far less important than the philosophical fight over the direction of the state budget.
“Budget Kudos” – July 19, 2004
I want to give a high five to California’s local governments. The state budget fight has come down to the question of whether the state should be able to rip off local government revenue easily, as it has done to the tune of more than $44 billion in the last decade. Local governments have always objected to this, but they just as routinely caved in. This year is different. Republican and Democrat Mayors are standing together telling the Governor to stick with his deal with them and telling legislators to get the message to stop the bleeding. With so many legislators coming out of local government work one would think this message would be an easy sell. But Sacramento fever is a terrible disease. It captures otherwise common sense legislators and allows them to say silly things like: “cities are greedy” and “in times of crisis, the state needs local governments to contribute to the cuts.”
Credit goes to local government leaders for taking a stand and not backing down. If the legislature wants to continue to have the unbridled power to take property taxes away from local governments, then they are going to have to roll over the cities and counties to get there.
“What Would $300 Million Buy?” – July 26, 2004
One of the issues credited with (or blamed for, depending on your viewpoint and political philosophy) holding up the state budget, is school bus contracts. The Republicans would like to make it possible for school districts to bid out busing contracts in search of the lowest price. Democrats would like to continue to require that school districts use only government workers to drive buses. If the Republicans had their way, school districts around the state could save roughly $300 million per year. What else might school board members choose to buy with that money? They could afford one new textbook for every student in California, or 6,000 new teachers, or put a computer in every classroom in the state.
“Taxpayers Win One” – August 2, 2004
Though the recently approved state budget does not include tax increases, it also does not have a lot of good news for taxpayers in general. State spending is still up and true reform was scant. However, taxpayers can celebrate one big victory that was won for them last week with the leadership of Senator Rico Oller (R-Sacramento). Last year the Legislature adopted a law imposing a $35 per-parcel fee to generate $50 million to supplement the California of Forestry and Fire Prevention’s budget. This year, Senator Oller introduced a bill to repeal that law, arguing that the charge was not a fee, but a tax. Everyone benefits from state fire protection services not just landowners. Although his bill was defeated, Oller was successful in getting the Schwarzenegger administration to champion this cause in budget negotiations and the prohibition on such parcel taxes was included in the budget approved last week. One small victory for taxpayer rights, thanks to Senator Oller.
“Governor Being Set Up For Election Year Budget War” – November 22, 2004
Elizabeth Hill, the state’s Legislative Analyst, released the latest budget projections last week. This document confirms that last year’s budget bought the Governor time, but did almost nothing to solve the state’s ongoing fiscal problems. Stalling does have some virtue, given the financial circumstance we have been experiencing. As has been demonstrated, time is helpful when deficits occur during recessions. When economies rebound they have helped governments “grow” out of deficits. But while it is true that current revenues are outpacing what was expected this year by an estimated $2.4 billion, Hill does not believe that the growth of the economy alone will solve the deep discrepancy between what the state collects and what is spends.
The good news for the Governor is that it appears he will be able to negotiate a balanced budget for 2005-06 with relative ease-- both because of the unexpected new revenues and the potential cash still available from the deficit bonds authorized last summer that have not yet been sold. These unsold bonds amount to around $3.5 billion.
However, because this is merely painting over a structural deficit that is ongoing, Hill lays out a nightmare budget scenario for Schwarzenegger’s final year of this term should the hard decisions be delayed until then. Hill estimates that the structural deficit-- the difference between revenues and expenditures in state spending-- could reach $10 billion unless corrective action is taken before spring of 2006.
The question is, will the Governor choose to engage in a brutal battle over the hard choices this summer, or the next? Without the crisis atmosphere of last summer could he motivate the majority Democrats to cut new spending? In one scenario outlined by Hill, the legislature can simply halt the growth of Prop. 98 appropriations (dedicated funds to schools), sell the already approved deficit bonds, declare victory, and go home.
This points to the summer of 2006 as the big showdown. Having exhausted most one-time fixes (the few things remaining, like selling surplus state property, consolidating state departments would help but will not solve the problem) the Governor’s hand will be forced. He will either need to raise taxes or slash some of the major entitlement programs that make up the lion’s share of the budget. And he will have to do it in an election atmosphere where Democrats will not want to cooperate so they can ascribe to him all the blame and none of the credit for the hard choices. My prediction is that he will make a stand for fiscal responsibility in 2005.
“Paperless Budget” – November 29, 2004
For the nearly 30 years I have been studying the state budget, I have had to lug around several thousand pages of data in several books. This year, students of the budget will get less of a physical work-out because the Governor has announced that his 2005-2006 proposed budget will only be available on-line and via CD-ROM. A pocket-sized summary will be available in print, but all the detail will be paperless. The proposal is due out on January 10th and the paperless plan should save taxpayers more than $100,000.
“What the News Will Not Tell You About the Budget” – January 18, 2005
Last Monday Governor Schwarzenegger released his 2004-2005 budget. It is the most honest budget presented since before Gray Davis became Governor. There are no phony revenue projections or accounting gimmicks. The sad news, as Governor Schwarzenegger pointed out, is that this budget still relies on borrowing from our future because of the out-of-control auto pilot spending requirements buried in the law. To promote an honest discussion about the impacts of this proposed budget, I want to share with you some observations you will not see in mainstream media.
Thank you, Californians. The
Governor is expecting a 6.8 increase (or $5.3 billion) in tax revenues in the
budget over the current year. That is a pretty good return on anyone's
· The budget documents also project that on a net cash basis, the tax amnesty program for 2004-05 will bring in $211 million. The next year that figure drops to $52 million, and the following year it actually loses about $27 million. The highly touted amnesty program will only accelerate revenue that would have come in anyway without the program and will actually cost the state money in two years. Will Controller Steve Westly or author Assemblywoman Judy Chu ever admit that this is a failure?
· Non-Proposition 98 expenditures (that is, state functions except K-14 education) are UP $1.035 billion from this year’s spending compared to the budget year spending.
· Proposition 98 (K-14 education) spending is UP $2.408 billion from this year to next.
· Given those last two bullet points demonstrating that proposed spending is UP, the discussion you will hear about this budget being full of “cuts” is mired in gross misuse of the English language. In Sacramento, people use the jargon term “cut” when your budget does not increase as much as you would like it to increase. Keep that in mind as you read the press coverage and watch the interest groups apply pressure. So far I have found only one reporter who admits that state revenues would be going up and none who confessed that state spending is also up. Every story line uses the words like cuts, reductions, or layoffs, which do not paint a realistic picture of the budget plan at all. In case you still do not believe this (and it is difficult given how we have been brainwashed by this jargon over the years), look at this list of percentage increases or decreases by budget area:
Remaining Executive -4.2
State and Consumer Services 5.3
Business, Transportation and Housing 1.0
Resources/Environmental Protection 17.3
Health and Human Services 4.6
Youth and Adult Correctional 1.2
Non-Proposition 98 Education 8.6
STRS Contribution -49.4
Labor and Workforce Development 0.0
General Government -41.7
PROPOSITION 98: 7.1
· As you can see from the list, the programs hit by actual reductions in prior year spending are few and only two, STRS Contribution and General Government, are taking large percentage reductions.
· Another sign of spending changes is the number of employees or personnel years in state government. Here are the budget numbers:
Personnel Years 2004-5 181,923.1
Personnel Years 2005-6 184,554.6
This is a continuing trend, with the current year number of almost 182,000 full-time employee equivalent being higher than the prior year.
“Governor’s Reforms: Public Employee Pensions” – January 24, 2005
The press has missed one important aspect of the pension reform debate. The press has compared the Governor's reform on public employee pensions to the President's reform on social security. While both are addressing the bump caused by baby boomer generation retirements, they are two different plans. Whether or not the government employees’ pension money investments are controlled by the employees directly in the form of some privatized plan or by the pension board of trustees as is currently done is not the real issue. The issue is defined benefit versus defined contribution. Defined benefit is the nature of the current public pension system. You get a pension developed by a formula that has nothing to do with the amount of actual dollars paid into the trust fund by you or your employer. Obviously this means that employees never have to pay for increases in benefits. Further, since the pension is a contract, the entire state of California budget could go in the red by billions and that pension obligation would still be owed.
A defined contribution plan is what the Governor is proposing. Employees put in their money, state government puts in its share, the money is invested by the trustees, and when the employee retires this entire amount -- whatever it is -- will be paid back to the worker. If employees want bigger pensions they can either: increase their own contributions, bargain under the labor contract for government to increase its contributions, or urge the pension trustees to make better investments that will return the most money when they retire. In this way the pension fund is never out of balance and all the incentives are for the money invested to grow for the employees’ benefit.
This is the only fiscally responsible pension plan and should be considered with all of the other budget balancing efforts. One last twist: because pensions are a contract with employees, the new defined contribution pension proposal would apply only to new public employees.
“Name Calling” – January 24, 2005
The public hates name-calling and so do I. The Governor made headlines for making a comment about Three Stooges who oppose his budget. He was responding to one of those so designated who called his budget morally unbalanced. Since budget documents are neither moral nor immoral, it was clear that Treasurer Angelides was calling Schwarzenegger morally unbalanced. I am not making a whining plea for us all to get along, but I am suggesting that the voters would be better informed if their leaders stuck to explaining why their proposals are good public policy and why other proposals are not so good. Schwarzenegger has made a good case for state government living within its means even as he explains that he proposes more borrowing to avoid real cuts. The Democrats pick and criticize parts of this proposal (all budgets are easy to pick apart), but they need to make a case for their own fiscal plan if it is to be a comparable alternative.
I suspect the only real comparison is going to be the Governor’s budget versus tax increases, which is why it is easier to call the Governor a name rather than debate the alternatives. That debate needs to take place so the leaders and the voters can choose which plan they like best.
By the way, I once was called one of the Three Stooges by a Republican disgruntled with my support for George W. Bush (then the Governor of Texas) running for President. The label quickly became a badge of honor from friends who also like Bush, as well as the many fans of the Three Stooges. Like the British who made up the slur name, ‘Yankee,’ to describe Americans, some names live on not in infamy, but in honor.
“A Bigger Budget Hammer” February 7, 2005
Last year the Governor received voter approval for Prop. 58 which was meant to put some teeth into the state’s budget adoption process. That plan authorized the Governor to call a special session of the Legislature to rebalance a runaway budget and to prohibit the lawmakers from working on any other issue until they fix the budget. Observers noted then that this was not really tough punishment for legislators since it did not offer any incentive for them to solve the problem.
Governor Schwarzenegger seems
to have taken this critique to heart and he is now pushing a new reform—one he
promised to take to the voters if the legislature does not enact it. This new
plan sets a 45-day deadline. If after that time the legislature does not resolve
the budget crisis, the governor will be authorized to tell the state controller
to cut every budget item including salaries, local government support, schools,
welfare, and all programs by whatever percentage is necessary to balance the
budget. This is a tremendous hammer. It means the fiscal problem will be
resolved in that same year either by bipartisan agreement or by blind
Those who oppose this reform should explain how to hold the legislature accountable if its members fail to act on a fiscal crisis within the 45 days.
“State Budget Primer – Part I” – February 8, 2005
California history is full of twists and turns. Until 1933, California had a majority vote budget, but the great revenue loss due to the Great Depression brought a number of new taxes, including the sales tax. To protect taxpayers, a new requirement was added that the budget had to be approved by two-thirds of the legislature rather than a majority if spending went up by more than 5%. In 1962 this 5% rule was repealed on the argument that every budget for decades had increased by more than 5%. Thus, today it takes a two-thirds vote of the Legislature to approve a budget.
There was an ongoing discussion during this entire period about whether the two-thirds vote only applied to spending in excess of the 5% level. For all the years from 1933 to 1962 it was not seriously contested and every budget received the required two-thirds vote. But the politics are interesting. If the majority passed a budget with no increases or minimal increases, then the debate would switch from the basic budget to the items of major increases. Would this better serve the public by focusing the budget discussion on the increases, or would it just allow last year's spending to run on autopilot?
“Not Exactly” – February 8, 2005
A reporter wrote a story last week that relied on a quote from this newsletter. The point of my piece was to decry name-calling by people of both parties because it distracts from the issues. Tom Elias, of DailyBreeze.com, decided to use my quote to attack the Governor. This is what he wrote:
"What's more, even some Republicans detested the tone of his (the Governor's) insults. 'The public hates name-calling and so do I,' wrote Bill Leonard, a longtime former GOP legislator now on the state Board of Equalization. 'I was once called one of the Three Stooges by a Republican disgruntled with my support for George W. Bush, then the governor of Texas. (It) quickly became a badge of honor.'"
Notice that Elias did not attribute this comment to the Leonard Letter; but more important, he omitted the fact that I was making a point about politicians in general, not singling out the Governor. This is what I actually wrote in the January 24th LL:
"The public hates name-calling and so do I. The Governor made headlines for making a comment about Three Stooges who oppose his budget. He was responding to one of those so designated who called his budget morally unbalanced. Since budget documents are neither moral nor immoral, it was clear that Treasurer Angelides was calling Schwarzenegger morally unbalanced. I am not making a whining plea for us all to get along, but I am suggesting that the voters would be better informed if their leaders stuck to explaining why their proposals are good public policy and why other proposals are not so good. Schwarzenegger has made a good case for state government living within its means even as he explains that he proposes more borrowing to avoid real cuts. The Democrats pick and criticize parts of this proposal (all budgets are easy to pick apart), but they need to make a case for their own fiscal plan if it is to be a comparable alternative."
It was after all of this commentary about the failure of the Democrats to honestly provide alternative budget proposals and instead resort to name calling early on, that I discussed my own history being named one of the Three Stooges.
See the difference? Tom, next time pick up the phone and call me.
“Budget Quiz” – April 11, 2005
Dan Carson at the Legislative Analyst’s Office has issued his eighth annual state budget quiz. He is testing how closely members of the Capitol Press Corps read the budget information produced by the LAO. To those trying to answer the questions, Carson warns, “As is often the case in budget analysis, the more absurd the answer, the more likely it sometimes is to be correct.” Though I am not offering the dozen Krispy Kremes to the winning reader as Carson is offering to the winning reporter, I believe you will find the quiz very entertaining and enlightening. I will share the answers in an upcoming issue. Here are some of my favorite questions:
1. The budget proposes to purchase firefighting helicopters to replace 11 choppers it received free from the federal government’s “surplus” fleet. How much does the administration estimate the new helicopters will cost?
(A) $1 million to $2 million each.
(B) $2 million to $3 million each.
(C) Up to $15 million for a whole new fleet.
(D) $7 million to $15 million each.
2. States and the federal government can sometimes transfer foreign inmates back to their country of origin. The state has about 6,500 inmates eligible for transfer now. Over the past three years, the federal prison system has transferred 857 foreign inmates. With an inmate population of roughly the same size as the federal system, how many foreign inmates has California transferred from its prisons during the same period?
3. The budget asks for additional funding for Caltrans to maintain storm water treatment structures. Based on a survey of four of the 12 Caltrans districts, the budget plan assumes Caltrans has 487 such structures. Based on a later survey of seven Caltrans districts, how many structures does Caltrans have to maintain statewide?
(B) Caltrans did not say, but indicates the seven surveyed districts alone have 881 structures with 109 more expected by the end of the year.
(C) Exactly 1,629.
(D) More than 10,000.
4. The state education system is currently not spending all of the federal money it is allotted for before and after school care for disadvantaged K-12 students. How much unspent federal money does LAO estimate could revert to the federal government by September 2006?
(A) $12 million.
(B) $23.6 million.
(C) $47 million.
(D) More than $100 million.
“Out of the Box Schools” – May 23, 2005
In recent weeks the public discourse on education has focused on spending. The fight between the Governor and the California Teachers Union over how much money our schools need has generated debates about how schools function and how students learn.
First, let me share an idea offered by Senator Tom McClintock. It is not new; I remember writing similar article myself nearly 20 years ago and McClintock has been doing a great job making education spending understandable for a long time now. After pointing out that the K-12 school budget proposed for next year is actually $2.5 billion more than this year, McClintock finds we will be spending $10,084 per student. After removing the money spent at the state Department of Education, we are left with $6,937 per student. McClintock then takes a hypothetical school of 180 students and budgets $6,937 per student. This would give the school “only” $1.2 million to get through a year. Rather then putting those students in an existing school (with the filthy bathrooms, leaky roofs and other physical problems we have seen), he proposes leasing luxury commercial office space. Then he wants to hire five teachers—associate professors from Cal State paid at their current rate. He says “since university professors generally assign more reading, we’ll need 12 of the latest edition, hardcover books for each student at an average $75 per book, plus an extra $5 to have the student’s name engraved in gold leaf on the cover.” He considers that since the childhood obesity epidemic seems to indicate that our P.E. classes are not working, he proposes an annual membership at a private health club for each student. “Finally, we’ll hire an $80,000 administrator with a $40,000 secretary because, well, I don’t know exactly why but we always have.” Here is the budget:
Five classrooms in leased office space: $158,400
150 desks @ $130 each: $19,500
180 annual health club memberships @ $480 each: $86,400
2,160 textbooks @ $80 each: $172,800
Five CSU professors @ $67,093: $225,465
One administrator: $80,000
One secretary: $40,000
24% benefits for faculty and staff: $109,312
Offices, expenses and insurance: $30,000
Total = $1,031,877
Second, I have heard many creative ideas from educators and parents. Consider these options: changing the school calendar so it is no longer based on the agrarian lifestyle; altering school hours and having schools offer before- and after-school programs; grouping students by ability rather than grade; having students work on computers that either move them forward when they have mastered a skill or keep reviewing a skill in different ways until it is mastered; creating classes that teach student work skills so that if they do not want to go to college they will be prepared to take on productive jobs.
All of these have value. Some schools might thrive in a non-traditional campus setting. Some students might excel in a technology-based environment. Some families might benefit from different schedules. The problem is that in our current, top-heavy, centralized education system, none of these options can be explored. Creativity is squashed. The pendulum swings all the way in one direction (“outcome-based” education) to the other (excluding everything that does not appear on a standardized test) and back again. We have to dismantle the system, toss out the concept that one-size-fits-all, and enable parents to find the education option that is best for their children.
“Don’t Forget the Blue Pencil” – June 20, 2005
The press is still not asking the right questions about the state budget. In a surprise move late last week the Democrats announced they would support Governor Schwarzenegger's education budget and drop their plans for a $3 billion increase. So on Wednesday the Democrats brought up their version of the budget, which is now only about $1 billion over the Governor's, but they got no credit for their concessions. Republican opposition prevented passage. I searched in vain for the breakdown of the $1 billion overage. If it’s a regular appropriation, then the Governor can blue pencil these items out and the Republicans might as well have passed the budget. But if any portion of that billion is locked in statute and not subject to the blue pencil, then the Republicans were justified in protecting the people and the Governor from an unbalanced spending plan. Even checking the Legislative Analyst’s quick summary of the Democrats’ proposal fails to show which items can be subject to the line-item veto. The Democrats would have been smarter to brief the Republicans and the non-partisan Analyst on these differences unless they are hiding something.
“More Power to the Governor” – July 5, 2005
Los Angeles Times columnist George Skelton opined (http://www.latimes.com/news/local/la-me-cap30jun30,1,6054733,print.column?coll=la-mininav-california) on the state budget situation last Thursday and he has it wrong again. Skelton says the current budget delay “highlights a glaring flaw in Gov. Arnold Schwarzenegger’s ballot initiative to limit spending and ‘live within our means.’” He says the measure would shift a significant amount of power from the legislative majority to the governor and minority party. Skelton sees that as bad; I think California needs it. The restraints Skelton lists unduly limit the Governor. Any Governor needs to have the power in a budget crisis to override the spending mandates that have pushed us to the brink of insolvency. Such executive power is really the minimum needed for any Governor to govern. All California’s Governors have had many of these powers until a hostile legislature forced Governor Deukmejian’s hand in 1983. The Legislature will always have powers to create new programs and to reallocate spending but they will have to be responsible in doing so or the Governor will be obligated to be the adult in the Capitol.
“Does a July Budget Mean No November Election?” – July 11, 2005
The legislature missed its constitutional deadline for passing the state budget, but it managed to pass the budget much faster than it usually does. Now the focus of politicians and pundits alike will turn to the Governor's Live Within Our Means initiative. The biggest issue for some with that measure is a portion that allows mid-year corrections to the state budget. This is fairly common at other levels of government; cities usually hold quarterly budget adjustment hearings to bring their budget in line with their actual revenue. Some argue that the Governor wants this mid-year adjustment authority more than anything else in the measure and that if he is given that authority, he may be willing to drop his support for the overall measure. (That rumor also says that attorneys have been tasked with determining if and how a governor can un-call a special election if a deal is reached.) Certainly there is authority for agreement. I encourage all to read Article 4 of Section 12e of the State Constitution:
(e) The Legislature may control the submission, approval, and enforcement of budgets and the filing of claims for all state agencies.
I believe this language, particularly the word “enforcement,” authorizes the legislature to develop a statutory means for the governor to have some kind of mid-year budget enforcement power subject to some level of legislative control or scrutiny. This language can get us to a place where the governor has proper fiscal authority with the proper balance of powers for the legislature. This is a proper role for the governor. The executive should have extensive authority to keep the state's fiscal house in order, just as all policy development really belongs in the hands of the legislative branch.
“Infrastructure” – September 6, 2005
Governor Pete Wilson often said that the best social program is a job. He is certainly correct, but government does not provide jobs. The private sector generates employment. To amend his saying I would offer that the best government social program is infrastructure. I do not know if this makes me a big government Republican or a public works Democrat, but the point is that before jobs, before even schools, there must be the basics of life that government can actually provide. Clean water, sewer handling, flood protection, streets, highways, airports and ship ports are essential to modern life but are often left behind in budget priorities. Let California take this lesson from our suffering brothers and sisters in the south: we need to invest now in strengthening our networks of basic services commonly called infrastructure. The truth is that we are not prepared for floods, earthquakes or fires, and we are losing ground on providing water and electricity.
the Score Keeper Is Corrupt” – October 11, 2005
Newt Gingrich and Peter Ferrara co-authored an excellent piece in last Monday's Wall Street Journal, “Doesn't Anyone Know the Score?” They lament the near-universal sabotaging of President Bush's fiscal agenda by supposedly independent public agencies tasked with analyzing the future effects of the President's policies. Forecasting how policies will impact the budget is called “scoring.” When elected officials really want to get to the bottom of a certain policy, they want to know how much it costs, or what the score is. The Gingrich column points out that the forecasting, or scoring, of national policy have been so consistently erroneous it almost defies belief. Gingrich charges that these errors were not random but stem from an ingrained bias against pro-market, pro-growth reforms. Indeed, the current method of scoring is called “static analysis” because it assumes policies have no effect on human behavior, thus one only needs a calculator to come up with the cost of programs. Well, human beings are not calculators and businesses have been known to grow when government gives them a break. The contrary is also true: when government raises taxes severely, businesses do less well and consumers spend less, thus less tax revenue is generated. Not taking these very simple reactions to tax policy into account when scoring is intentional economic ignorance. And its effect is to severely hamper congress' ability to truthfully demonstrate to the American people how pro-market reforms work for the benefit of all.
Some highlights from the WSJ piece:
The Office of Management and Budget projected in February a federal budget deficit of $427 billion for FY '05. In July, OMB said $333 billion -- a 28% miss. In 2004, OMB February budget projection missed by $109 billion.
The Congressional Budget Office in March projected a deficit of $394 billion. Last month, $331 billion -- a change of $63 billion in five months.
Both OMB and CBO projected massive losses from the 2003 Bush tax cuts, which did not happen.
The Congressional Joint Committee on Taxation and the Treasury Department have also failed this administration. JCT scored the 1997 capital gains cut as a loss of $28.8 billion for 2000-07. Capital gains revenue is now expected to grow to double their 1996 levels, just before the tax cut.
It is clear that this problem has enormous implications for Social Security reform. According to Gingrich, the CBO scoring of private accounts assumes that stocks earn no more than bonds - which is totally, historically false. Gingrich turns to Harvard's Martin Feldstein, who believes CBO is thus undervaluing private accounts in excess of $10 trillion.
The opposite problem can also occur. Here in California, Pete Wilson's 1991 package of tax increases was scored statically by his Department of Finance. The result was a shortfall of $1.5 billion to the General Fund. I asked the Legislative Analyst's office to document this in 1999 -- email me if you want a copy.
There is no doubt that the erroneous scoring culture in government is a huge impediment to flatter, fairer, and simpler tax policy. This is the problem that should be corrected now.
“Budget Balanced on Backs of All Who Pay Taxes” – January 17, 2006
I watched the presentation of the Governor’s budget last week. The Governor was followed by his budget director, then by the legislative leaders. Speaker Nunez needs a new speechwriter. He complained that the budget is balanced on the backs of someone. Honestly, I forget who was his victim - the poor, the students, the employees, cats and dogs. But he is wrong. These groups may not be getting as big a share of the budget as he wants but budgets are balanced on revenue. And revenue comes from taxpayers. All government budgets are therefore balanced on the backs of taxpayers.
“Overlooked Budget Item Will Help Alleviate Health Care Crisis” – January 23, 2006
I have written many times on the wonderful benefits of tax-deductible Health Savings Accounts (HSA). Many Californians would be better off with a high-deductible health care plan. These typically call for subscribers to be responsible for the first $2,000 in medical expenses before insurance covers the rest. This allows people like small business workers or self-employed individuals to save hundreds each month on health care premiums. HSAs allow people to make a monthly tax deductible contribution to an account that covers the insurance deductibles. The savings can make a huge difference for people's budgets. High deductible plans would give tens of thousands of Californians affordable health insurance, extra money for a car payment, or a mortgage they would otherwise not be able to afford. The problem is that while Congress created the tax deductible accounts at the Federal level, the legislature defeated a proposal to make California conform to Federal law last year. This change is needed to give small businesses additional incentive to offer a high deductible plan to their employees.
I want to thank the National Federation of Independent Business for pointing out that the Governor's Budget provides for this conformity. See the Governor's Budget Summary GF revenue document http://www.ebudget.ca.gov/BudgetSummary/REV/8865909.html
The NFIB sponsored the conforming legislation last year and I commend them for pursuing the issue.
Pop Quiz” – March 27, 2006
Every year the Legislative Analyst’s Office invites the Capitol press corps to take its budget quiz and offers a box of doughnuts to the reporter who gets the most correct answers. This year, no reporters even attempted to answer the questions. Perhaps that’s because the LAO changed the prize from the traditional doughnuts to muffins and bagels. Or perhaps it’s because even the reporters who cover the state cannot make heads nor tails of this stuff. Judge for yourself with the sample questions below. The answers are at the end of this issue.
a) In February 2005, DMV proposed to contract out the new computer system to a vendor.
b) In May 2005, DMV proposed instead to hire staff to carry out the project.
c) In July 2005, DMV changed its mind and again proposed to hire a vendor.
d) All of the above occurred and the project is unlikely to be completed by the
October 2006 deadline.
b) $12 million.
c) $114 million.
d) $256 million.
a) School districts are reluctant to spend money on repairs because it is uncertain if the state will reimburse them for after-the-fact work.
b) Schools already had sufficient unspent bond funds available for these projects.
c) Continued litigation over the school repair issue has held up release of the funds.
d) Because of recent statewide school facility investments, only a limited number of school district have outstanding emergency repair needs.
Answers: 1) D; 2) A; 3) D; 4) A
“May Revise” – May 15, 2006
I am heartened to see the Governor correctly labeling the recent revenue surge from volatile sources as one-time revenues. On the one hand, his May Revision places $2.2 billion in reserve, which is not bad. He also proposes to pre-pay over $3 billion of future debts, which is terrific. However, the Budget fight is just beginning. He has already committed at least an additional $2 billion to be permanently added to K-12 funding. Additional funding for education will be made available through various one-time spending methods.
Governor Gray Davis had a similar approach to his 2000 budget but the big spending policies of the legislature forced him to capitulate to an out of control budget. Can Arnold Schwarzenegger break this pattern?
This proposal for 2006-07 still spends more than it receives so the deficit clock is still running. The new budget proposes to spend $100,985,000,000 in the coming year and collect taxes and fees of $93,866,000,000.
“Your Money=Angelides’ Expenditures” – September 5, 2006
You may have noticed that gubernatorial candidate Phil Angelides keeps suggesting new tax hikes for us to pay. The most recent was an auto services tax so that, for example, when you get your oil changed, you not only pay sales tax on the new filter, but also on the labor. So much for his argument that he only wants to tax the rich. For those of us who do not want to pay higher taxes, you may wonder where Angelides and the budget liberals in the legislature get the idea that you have so much extra money to share with the government.
Budget liberals have a unique way of viewing the world best explained by budget reports. Budget reports consist of what the rest of us have in our family budgets: revenue and expenses. But added is one thing normal people do not track: tax expenditures. This is a category that exists on paper that says “here is how much money the government would have collected had it not been for this particular exclusion, exemption, credit, incentive or subsidy.” That includes those evil exemptions advocated by the two largest and particularly scurrilous special interest groups in the state: home owners and food eaters.
A new requirement imposed by the liberals in the legislature is that the Department of Finance report to the legislature each year on each of these so-called tax expenditures in excess of $5 million. Liberals begin with the assumption that all resources belong to the government, so tax expenditures are just loopholes that allow people to keep resources that government ought to have. They need this new report to identify exactly how many “government” resources are slipping through these loopholes, so that they can find ways to further restrict them and keep more for government. I offer this very simplified tax expenditure report that gets to the heart of the liberals' intent:
Californians' Payments to IRS $ 221 billion
Total State & Local Revenues $ 192 billion
Total taxes to government $ 313 billion
Californians' Total Annual Income $ 1.4 trillion
That means that government is already getting 22% of all income in California, on average, but legislators are still worried that 22% is not enough!
“Change of Perspective” – January 2, 2007
The job descriptions of “legislator” and “executive” are different. Yet, one would hope that a person lives the same values no matter which title is held. That thought came to mind when I read a quote from now-Mayor Antonio Villaraigosa. As Mayor, Villaraigosa is facing a $250 million budget shortfall and wrote to his department heads asking them to cut their budget requests by 5% and make those requests “based on demonstrated results, not because a program has existed and operated for many years.” This is a responsible approach from a chief executive, but it does not reflect my memory of Villaraigosa as Speaker of the State Assembly. Indeed, I cannot find a record of him calling for such appropriate restraint when he was a legislator. Clearly his new executive branch responsibility has given him a new perspective; it is one that is much needed, perhaps we should find some way to help legislators see the budget from the executive’s broad perspective.
“CalFacts” – January 16, 2007
With all the budget stories this week there are good summaries of the Governor’s major budget proposals. I will be pointing out interesting other items as the budget details unfold. In the meantime there is good material about our finances available. A very useful reference guide about California’s economy and state finances was recently published by the Legislative Analyst’s Office. If you are curious about anything from education funding to wildfires to foster care to the gas tax, go to this link to read “2006 Cal Facts”:
“Spending Limit Success” – April 30, 2007
Budget season is approaching Sacramento again. We will once again hear complaints that the state does not bring in enough money to pay for all the “services” it must provide. There will be calls for higher taxes. A few sane voices will call for reducing spending. We are likely to be hearing the debate well into the summer rather than concluding it by the constitutional deadline of June 15th. Unfortunately, what I doubt will be part of any of these discussions is a reasonable spending limit. I urge lawmakers to review a brief report by the Main Heritage Policy Center by Geoffrey Segal. He focuses on how local governments have used shared services, introduced competition, leveraged public assets and linked appropriations to performance to control spending. He concludes, “Good government … requires that all ‘investments’ by government be routinely assessed for their actual effectiveness. Only those activities that provide the greatest benefit should be funded at a level relative to the goals and priorities set by the people.” To read Segal’s report, go to this link:
Paul Gann was ahead of his time in 1979 with the Gann Spending Limit. It worked wonderfully for the roughly ten years that it was in effect before it was watered down. Had been allowed to stand as originally passed, we would today be taking in more revenue than we would be allowed to spend, and enjoying a healthy surplus. One of the remarkable effects of this law was that in 1987 the state was forced to refund $1.1 billion in surplus revenues to all Californians. It is hard to imagine this happening today.
Michael New with the Cato Institute has a good summary of the Gann Spending Limit’s history:
“Unusual Budget Battle” – July 30, 2007
Often the summer tradition of a budget battle has been for the Senate Republicans and Democrats to cut a budget deal first, send the package to the Assembly and adjourn for the summer, usually before the Assembly even sees the agreement. For the first time in my memory it is the Assembly that has now done the deal and gone for the summer. I do not know if this has any long-term meaning, or if it reflects some other shift in how the houses work their internal affairs. But this is clearly a noteworthy year in budget history. The possibilities include the Assembly Speaker's desire to look productive (to enhance the term limits change he and other incumbents favor), and/or the Assembly members of both parties being less senior than their Senate counterparts are more sensitive to outside media and special interest groups that depend on the budget.
It may also reflect the growing frustration of the Senate Republicans with the state's deficit spending and the knowledge that a budget hold-out gets some bad press, but not in papers that their voters are reading. From my budget experience, no voter without a financial stake in the budget ever called me and told me to change my vote. The Senate Republicans know this, and know well that their unity and their principled goals can make the budget less bad.
In his Sacramento Bee column, Dan Walters suggests that Democrats should involve Republicans earlier in the process of writing the budget as their votes are needed to ultimately pass the budget. Walters is being kind to the Democrats as I believe it is illegal for the Democrats to pass items through committee with simple majority votes when those same items require a two-thirds supermajority vote by order of the constitution. Committees must follow the same rules as the entire body, but the press, it seems, does not want to call them on it.
“No Balanced Budget Without More Cuts” – August 6, 2007
Senator Tom McClintock (R- Thousand Oaks) pointed out in a floor speech that rather than the $700 million deficit the majority Democrats claim would result from their plan, the reality is more like $2 billion cash shortfall this year, and an additional $1 billion of future debt. From the Governor's May Revise, which I do not believe was changed much by the agreement that passed the Assembly, the projected (hoped for) Budget-year revenue is $101.2 billion with proposed budget-year expenditures of $103.7 billion. We are spending more than $2 billion than we will have under this plan before the start of next year. Obviously do not try this at home. It is only the carry-over reserves from last year that allow the claim of a balanced budget that also has a reserve -- and this is based on the sale of bonds, not prior year revenue.
So to have a budget we could say with some confidence is balanced, we would need to cut more like $3 billion from General Fund spending. McClintock pointed out how non-draconian these cuts would be considering that even if we cut $3 billion from the current proposal we will still be spending $8 billion more than we spent two years ago – and $22 billion more than we spent in Gray Davis’s last budget just four years ago.
The California Taxpayers Association site has a nice discussion of some of the near-term threats to state revenue, budget games, and the list of the cuts the Senate Republicans are looking for:
“Structural Deficit Still Haunts Budget” – August 13, 2007
I had an excellent discussion with Finance Director Mike Genest last week. Among things I learned why there is a difference between the way the Department of Finance and the LAO report budget numbers, although they arrive at the same conclusions.
On July 24, Legislative Analyst Liz Hill summarized the situation this way:
“Revenues and Expenditures. The budget assumes the state will start 2007-08 with a fund balance of $4.8 billion. It projects $102.3 billion in budget-year revenues, an increase of 6.5 percent from 2006-07. The budget authorizes expenditures of $103 billion, an increase of 1.3 percent from 2006-07. The resulting operating shortfall of $0.7 billion leaves the General Fund with a year-end reserve of $3.4 billion.
“Future Shortfalls Likely. Based on current estimates of the policies reflected in the package, the state would continue to face operating shortfalls of about $5 billion in both 2008-09 and 2009-10, requiring future corrective actions.”
Therefore, under the Assembly-approved plan, the state will spend more than it takes in this budget year and only by drawing down reserves is the proposed budget technically balanced. Unless the budget deal is modified, we will end the fiscal year with $3.4 billion in reserves facing a $5 billion structural shortfall for 2008-09 and beyond.
In sum, I believe that had the Governor got the CalWorks reform he proposed, along with his plan to pay down the recovery bonds sooner, while protecting public safety and education, then Senator Ackerman and his caucus in the Senate would have voted for the budget long ago. The choices today are difficult but next year is going to be much harder.
“Living Within Your Means” – August 20, 2007
Proposition 58, which passed in 2004 with more than 71% of the vote, not only required a balanced budget but also mandated a reserve. Irwin Nowick, known to Capitol insiders as a savant on the budget process, reminds me that the biggest bar to spending next year is that Proposition 58 reserve requirement will rachet up to 3% of the General Fund with the mandate being that the money is untouchable and must grow to 5% of the state's budget. Thus, billions of dollars will be held in reserve and Legislative Analyst Liz Hill and other experts know that a larger portion than ever before of the state's revenues must be set aside and will not be available for the regular budget process.
The number of $5 billion of potential spending over available revenue reflects this fact. This assumes the usual growth in revenue, which is always an assumption subject to risk. And it assumes the usual growth in state spending, which is itself hugely dependent upon caseload assumptions. Caseloads are students (pre-school through UC), poor people (in both welfare and Medi-Cal programs) and prisoners. Unless a program is changed by law these people all receive state support on autopilot.
If you were spending 85% of your income on mortgage payments, car payments, and other locked-in items and you were told that your spendable income was being cut so your savings account could grow to a responsible level, my guess is that you would start now to bring your spending commitments in line with your adjusted income. But then again, you and your family have no choice but to live within your means.
“Talking Parrots” – August 20, 2007
Imagine a friend who owns talking parrots. All year long, he keeps the birds in a cage covered with a drape, feeds them only occasionally, and cleans the cage less often. Then once a year around June 30th when the relatives come to visit, he drags out the cage, pulls off the drape, and orders the parrots to talk. And then because they do not perform on cue, the parrots are called obstructionist, stubborn, uncooperative, and even terrorist. Now imagine those parrots are the members of the Senate Republican Caucus.
The truth is that the Democrat changes to the Governor’s budget have only been available since mid-June and the Republicans began detailing their objections to that “work product” as soon as it was public. I sympathize with those bothered by the lateness of the budget, but this outcome is entirely predictable when the budget itself has been kept under wraps for so long. California has a constitutional requirement that the budget bill requires a two-thirds vote of both houses. This is not a new rule. Past majority party leaders have tried to find ways around this rule and they have failed. So, there is no other choice but to engage the minority party in the debate, negotiations, and agreements. Why are the Republicans being treated like caged parrots when they are, by order of the Constitution, fundamental to the process?
There is a reason I am part of that small 12% of Californians who are following the budget standoff. I am not getting paid. That being said, it seems to me that very important issues have been raised by the Senate Republicans that deserve to be answered with thoughtful responses and not name calling or staged media events. While the budget document is technically balanced with a reserve due to previously borrowed money, everyone I have read or listened to agrees that the state’s spending commitments are outrunning its revenue. This is not economically healthy. With such a rare consensus on the facts of the situation, it is reasonable that now our leaders take steps to bring annual spending and annual revenue into balance into the future.
Some suggest that this “structural deficit” is tomorrow’s problem and that it is okay to ignore it for now just like we are ignoring the looming Social Security crisis, but I know it is difficult to identify and reduce low priority programs or to decide if particular programs should be ended as opposed to across the board reductions. These are all tough decisions even for those who believe the state budget is bloated. Given contracts and other commitments it can take a year or two to close a program. With this time frame it is crucial that we begin now.
“Dodging a Bullet – Democrats Could Have Declared Victory” – August 20, 2007
The Senate Republicans are making a big deal of their proposal to fund the government during July and August while the budget debate continues. And it really is a big deal. I am so pleased that the Democrats did not take up the offer as it is also a risky precedent. Continuing resolutions are how the Congress funds the various federal agencies with the actual budget often months later when the fiscal year is mostly over. By necessity these on-going appropriations just continue last year’s budget even if everyone agrees that that level of spending cannot be sustained. It removes flexibility to make changes in spending priorities or to match spending to upcoming revenues. It also compromises the ability to fund new programs or meet new priorities.
The Democrats would have been smart to grab the offer, declare victory, and go on vacation. Coming back the budget year would be two months older and it would have been even harder to make changes in spending patterns. It was a great and risky offer by the Senate Republicans and the result showed the continued refusal of the Senate Democrats to sit down with the minority party as equals when it comes to the Budget.
“BOE – What Budget Restraints?” – August 20, 2007
I was disappointed in the budget votes at last week’s BoE meeting in Sacramento. My Democrat-majority colleagues on the Board approved virtually every increase proposed for our budget. The total amount we are asking for is staggering. The requests are sent to the Department of Finance (which uses such requests from all state agencies to prepare the Governor’s budget proposal for the following year), and Finance needs to look very critically at these requests because if they are all approved our rate of growth will be astronomical.
In the current year, we will spend about $206 million from the General Fund. If Finance approves the request for more money, the BoE will receive nearly $242 million in General Fund dollars and 173 more positions in 2008-09 for our operations, an increase of more than 8% from the General Fund allotment in the proposed budget for 2007-08. If Finance approves, we will thus be looking at more than 17% General Fund growth in two years.
“Autopilot Spending” – August 27, 2007
The LA Times and many other newspapers wail about the supermajority requirement to pass a state budget. Under their doomsday descriptions the world stands still until the two-thirds vote is achieved on the budget. The truth is that the California state budget is on autopilot with more than 85% of the spending determined by statutory formulas that are appropriated without a budget. Having a majority vote budget would not affect the big spending programs since separate bills are needed to tweak those formulas every year.
It is these “trailer” bills that are even more critical than the budget. They are called trailer
bills because they follow, or trail, the budget when in reality they are “tractor” bills because they pull the budget into place. These trailer bills all require a two-thirds vote even if they do not appropriate any money. The reason is that another section of our state constitution requires that all urgency bills designed to take effect immediately must have a two-thirds vote. There is a good purpose for this. In return for the two-thirds vote, the people of California forfeit their right to referend all urgency bills. An urgency bill, no matter how bad it is, cannot be subject to a referendum and vote of the people, unlike all other statutes. Do the left wing media want the government to have this power?
The budget bill is pretty boring. It is the trailer bills where the real changes are made and the mischief takes place. I like the idea that two-thirds of the members of each house of the legislature have to go along with these changes to limit the mischief.
“Just Raise Taxes!” – August 27, 2007
Finally, an honest liberal. Just raise taxes! At last someone will admit this budget fight and much of the state spending battles are over the long term goal to raise taxes -- all taxes. Using a model totally opposite that of a business, which must price its products to what the market will pay, government prices its taxes to match the spending desired. I love the irony of Nellen's advice. She advises California to do what people who need more money do: get a better job. Of course many individuals have followed that advice and gotten better jobs in other states.
“Be Careful What You Ask For” – September 4, 2007
Budget trailer bills are dangerous
items. They are permanent changes in law, unlike the annual budget, and
they are rushed through the process without hearings often very quickly as part
of the deals to make the budget palatable. The county assessors just
learned this harsh lesson.
The county assessors asked for $3.5 million in the budget to be distributed to all 58 counties to improve the accuracy of the tax rolls, to process filings faster, and to make assessments sooner. This item was put in the budget early on and actually re-established a program that existed a few years ago and had a good record of success.
The county assessors also asked for an identical $3.5 million to be given to only three of the county assessors to implement an untried, controversial proposal to assess property taxes on the managers of corporate jet fleets instead of the many timeshare owners. This proposal was put in a budget trailer bill along with an estimate that it would raise lots of money.
So, the Governor sees two identical amounts of money to assessors (actually, one was to 58 assessors and the other to only 3) and he sees that one promises more efficiency and the other promises more money. And the Governor made a commitment to cut hundreds of millions of dollars from the budget. Here is what the Governor decided: The Governor’s veto message reads:
“I am deleting the $3,500,000 legislative augmentation for grants to county assessors... Local government is anticipated to receive $28,000,000 in property tax revenue in 2007-08 pursuant to a new method of collecting fractionally owned aircraft property taxes, facilitated by budget trailer bill legislation. As a result, this $3,500,000 augmentation is unnecessary.”
Be careful what you ask for. If you give a Governor choices, he will make them. My guess is if the 58 Assessors had been asked to choose between the program for all counties or the program for just three counties, they would have chosen the former. But that is not what happened, and the final irony is that many property tax experts believe that the $28 million that the Governor was promised by the three assessors is simply phantom revenue that may never materialize.
“Using Our Children as Budget Shields” – September 10, 2007
The annual rite of summer is
starting again: the call to dump the state constitution and abolish the
two-thirds vote requirement for the state budget. Behind such a push is the
idea that government by consensus be tossed aside in favor of tyranny of the
majority. Actually, the truth is somewhat different. California already has a majority vote budget for all special fund programs that are
supported by special taxes or fees. This includes Caltrans with its
transportation budget, and the Public Utilities Commission with its regulation
of utilities. And California already has a majority vote budget for all
of education, from kindergarten through community colleges.
So, what is left that requires the two-thirds vote? The welfare and general government budgets. Our Constitution writers wisely concluded that these portions of the budget needed a larger consensus before being adopted.
Now you might be asking yourself why the majority party does not just separate the majority vote portions of the budget from the two-thirds vote portions and get the bulk of the budget passed early. Great question! At the start of next year’s budget impasse, ask the liberals in the media and the legislature why they protect welfare programs by using education (i.e., our children) as a shield.
“The Final Budget” – September 10, 2007
This year’s state budget was two months overdue. That meant it was a constant topic of media coverage, but you are easily forgiven if you did not pay attention to the painstaking details of the final deal. If you are curious about how it finally turned out after all the banter, the Legislative Analyst’s office has produced a summary at this link:
As you look at it, think about this. The Governor sold his plan as having a “zero deficit.” Yet, his Department of Finance Director, Mike Genest, said he expects $6.1 billion of red ink in the 2008-09 fiscal year. Truly, the balanced budget is only good for this year.
“California’s Credit Crunch” – November 12, 2007
The Governor directed all state departments this week to prepare budget requests that reflect a 10% cut. The Finance Department explained that such cuts were necessary because the downturn in the housing and credit markets was having a negative effect on state revenues. As expected, there has been a hue and cry over the damage that such cuts will do to those dependent on government programs and the predictable call for increased taxes to prevent some devastation. It is reminiscent of the classic tale of the ant and the grasshopper. During good times, the ant worked hard and saved for the dark days. The grasshopper whiled the time away, not being productive, not saving and not giving a thought to the future, and is then dismayed when the ant will not share his hard-earned store of goods.
The housing crunch was not a surprise. It was projected many months out and such predictions should have been built into revenue and budget models long ago. Consider the dilemma faced by many troubled homeowners in our state. They bought at the height of the market. They did not have enough savings or income to qualify for traditional mortgages. They agreed to terms for adjustable-rate or interest-only loans and then lamented when the payments become more than they could pay. Many also took out equity from their homes to cover additional debt that went to pay for luxuries like pools, boats, upgraded home décor, etc.
Just like this individual homeowners, the state is mortgaged to the hilt. It has failed to economize when times were good to prepare itself for sustenance in the lean days. And instead of facing reality head on, making hard choices, and doing without things it likes, it looks to others for a bail-out. The Governor’s order is a good first step but much more will be needed.
“The State of Your State” – January 14, 2008
I have now endured or enjoyed my 30th straight State of the State speech. My thanks to those who voted to allow me to sit in those chambers and watch three decades of California history as told by our governors. Jerry Brown's speeches were so devoid of content that legislators and press would start pools on the length of the speech. Because George Deukmejian would not negotiate, his speeches were full of details about exactly what he wanted. During Pete Wilson’s speeches, we Republicans would compete with the Democrats to find applause lines we liked and see who could make the most noise. Of course, Gray Davis just had a hard time finding an applause line that appealed to either side of the aisle. And last week Arnold Schwarzenegger, who last year came into the chamber on crutches, stood at the same podium to acknowledge that the state’s finances are on crutches.
Schwarzenegger’s speech was entertaining. He was animated in telling about the fires and took a lot of time telling the story of the nurse practitioner Paul Russo who cared for the elderly evacuees at the Del Mar fairgrounds. When the Governor said that he helped by getting on the phone himself to find bed space, I could imagine the poor hospital administrator taking the call from a guy with a thick Austrian accent claiming to be the Governor. He also used colorful and evocative phrases. I cannot get the imagery of “binge and purge” state budgets out of my head.
Beyond entertainment, I hope legislators listened to one part of his speech. In a year when tax revenues are flat, inflation is flat, and neither business nor job growth is guaranteed, California government’s automated spending machine by law must grow by 7.3%. Even if all this government growth were to be spent on good, efficient programs (ha!), the money is not there to pay for it.
With vibrant phrases, Governor Schwarzenegger declared that the wolf is at our door and we have no way out except to face our budget demons. Since the Constitutional amendment regarding his budget reform package is not yet in print, I will have to wait for the next chapter of this story to see how we are to slay the wolf and exorcise the demons.
“Free Market Ideas for the Governor’s Budget Part I” – January 14, 2008
I applaud the Governor for offering real cuts in his proposed budget released last Thursday. This is a very tough budget year, but such tough times give the Governor an opportunity to fully realize his potential as a leader. One of the painful cuts the Governor is proposing is the closure of 48 state parks and beaches. That will allow the state to cut back on the personnel who secure and manage these state lands and then bank the savings.
The LA Times quoted the Parks Department explaining that those facilities “…slated for closure are the least used, produce the least revenue and are the easiest to secure.” What I like about this analysis is the criteria for judging which parks should be closed down. A market analysis is the right approach. What I do not like is shutting down these parks. Surfers and other users are simply going to go under, around, or through whatever barricades the state erects to keep people out. This begs the question: why is the state in the park business in the first place? Government is simply not a good landlord. Consider the millions of acres controlled by the federal government. These huge swaths of public land are easily identified from an airplane. They are the rotting, disease ridden, unhealthy forests that contrast sharply with the adjacent bountiful, healthy private forest lands.
Why should the beautiful, fun resources of California be off-limits to the people who love them simply because state spending is outpacing revenues? There is a free market answer to the problem. The state should privatize the parks or simply lease them out to local operators. When customers-- those who use the parks-- are directly charged for consuming what the park has to offer, we will have both better parks and lower taxes for those who do not use parks. Closing parks is a waste of our state’s bounty.
“The Budget, Your Way” – January 14, 2008
You have heard about the basic outline of the Governor’s proposed 2008-2009 budget. More details will be available in the weeks to come and I will continue to offer commentary and insights as I study the specifics. What I am interested in is your take on how California could cut the projected deficit. How would you save $14.5 billion (or more)? What specific programs would you cut? If you are inclined to raise taxes, which ones? I know we all have grandiose lists of programs we philosophically object to and would slash in an instant, but try this exercise realistically. Take a look at the current data and budgets past, and see if you can get a handle on state spending. Send me your specific ideas. And please pass this request on to any state employees you know who may have insider thoughts on how their own departments could cut some waste.
For details on the proposed budget, go to:
Market Ideas for the Governor’s Budget Part 2”- January 21, 2008
Last week I suggested the state privatize its parks or lease them to private entities rather than close them and waste the resource. Another opportunity for the state budget to embrace a market solution is the state’s rural fire protection. Right now the California Department of Forestry and Fire Protection does a good job with what they have, but it is not enough for them to provide adequate protection statewide. The Governor is proposing a surcharge on homeowners’ insurance to provide more funding. This is not the approach our Governor’s heroes, Milton Friedman and Friedrich Hayek, would take. Those economists would advance something fairer and more practical, like the idea that if people want to live in rural or semi-rural areas where the fire danger is higher than elsewhere, then they can pay for enhanced fire protection and/or make their properties more fire safe. Many are already doing this. Last fall’s fire season saw private contractors saving homes of the clients who paid for the service. As more people sign up for this protection, the less expensive the service becomes and more people get employed doing it. Presumably also, the cost of the protection could be tied to how well a homeowner clears brush and other unsafe debris. Yet instead of doing this, the Governor is proposing that every homeowner in the state pay an extra insurance premium to provide protection for other people. This means higher insurance for everyone, no incentives for people to make their property more secure, and no new jobs.
“The Tax Loophole Bluff” – January 21, 2008
It is difficult to conceive a more ridiculous idea to solve the deficit than Speaker Nunez’s idea to close what he calls “tax loopholes.” (The official name for these is “tax expenditure programs.”) The Legislative Analyst’s Office has a list of the top 12. Whatever you want to call them, there is no way we are going to bridge a $14 billion General Fund deficit by just closing them because the voters will simply not tolerate it and our economy and charities cannot take the hit. Follow me as we go down the list:
Number one on the list is the mortgage interest deduction from Personal Income Tax. This “costs” the state about $4.9 billion a year in tax receipts. The nearly 5 million Californians who take this deduction are not going to just lie down and accept it. Not only would their taxes shoot up, but there would be a related decline in the value of every home in California as the monthly carrying costs for mortgages goes up. But doing this barely gets us a third of the way toward solving the deficit, so on to the next.
Number two on the list is the Sales and Use Tax exemption for food products, which “costs” the state about $4.8 billion a year. Maybe Nunez can make an argument that our income tax is so hyper-progressive that making the sales tax more regressive so it hits poor people harder evens things out. California can have a tax to offend everyone! But alas, doing this along with the mortgage interest deduction still would not cover the deficit, so on to the next.
Number three and four are the employer contributions to pension plans and health plans. These deductions together “cost” the state about $8.5 billion a year. However, making California employers even more grossly disadvantaged compared to their competitors in other states and countries will result in these same employers transferring jobs out of California. Plus, removing an incentive for employers to help in their employees’ retirement is a dumb idea.
After looking at the top three “tax loopholes” Democrats think are a reasonable target for solving their problem, I find it pretty much a given that this is a really clumsy bluff. If we look at other tax expenditures on the list, we would need to do away with the next six to get to $14 billion. This would involve doing away with the basis step-up for inherited property, the exemption for gas, electricity and water utilities, the exemption for prescription medicine, capital gains exemption on sale of principal residence, the dependent exemption, the charitable contribution exemption, and so on.
The conclusion is the Democrats are lying or fooling themselves. There is no way any of this is going to happen. The only avenue left, other than cutting their sacred cows, is to propose a massive 9% sales tax, and a major increase in the top income tax rate. Raising the sales tax on already beleaguered retailers is not a good idea, and even if they end up proposing the highest income tax rate in America, it will still not bring in enough revenue to close the deficit.
Free Market Ideas for the Governor’s Budget, Part 3 - January 28, 2008
I continue to suggest modest ways the Governor can practice his admiration for the two economists he regards as heroes, Milton Friedman and Friedrich Hayek. The budget is a perfect opportunity for him to put into action his strong conviction in market solutions. Today, I reiterate that I am joining State Treasurer Bill Lockyer in calling for the privatization of the University of California. When the state did not have universities it was a worthy enterprise to use tax dollars to finance the capital cost of building the system. Unfortunately, since then, these institutions have become bloated and unresponsive to the people. The UC and CSU have little oversight through democratic channels, and their revenue stream from the budget allows them to not be responsive to consumer demand either. The corruption can be seen on many levels – salaries, perks, and a culture that is a version of utopia for political liberals. Moreover, these institutions have developed additional revenue streams from things like patents that have brought in billions of dollars. But again, my main point here is simply that making the UC a market-based institution by directly connecting education consumers with the education they want without the state being an unnecessary and costly middle-man will yield a better product without the fat. Universities would then also be free to do what they wanted culture-wise without people like me trying to rain on their politically-correct parade.
Perhaps all this is irrelevant considering the coming technological tsunami coming that will call into question the existence of brick-and-mortar school sites. If the UC and CSU do not have the incentive to adapt, private enterprises may overtake them anyway. Google will eventually give us access to pretty much all the written knowledge out there. With YouTube, private education companies could also provide lectures from the very best instructors in the world for free, perhaps on an ad-based platform that pays teachers more than UC pays them. Sites like these will soon be in position to give the UC a run for its money in the education business.
The state General Fund is going to provide more than $6 billion to higher education this year. The Governor’s Budget proposes a $197 million reduction for CSU and UC. However, the Legislative Analyst says this is “more than offset by student fee increases.” Good times, bad times, these institutions could not care less.
Budget Reform is the Golden Prize – February 11, 2008
Even if the Governor does not cut any programs this year he could still be seen as successful if he manages to pass meaningful reform that gives the Legislature and the Governor a way to cut future spending that holds them harmless politically. The current budget process is such a political hand grenade that elected officials, especially in the majority party, are loathe to upset their sacred constituencies that get the lion’s share of revenues. Everybody seems to agree that this volatility in budgeting is not good and that fiscal responsibility is important. However, there is no consensus on how to accomplish either of these goals.
The Governor credits the state of Arkansas for giving him inspiration for just such a reform proposal. In 1945, Arkansas adopted the Revenue Stabilization Law. It did two things. It stopped autopilot spending by having no program with a guaranteed inflation or growth factor. Second, the reform mandated the Legislature prioritize the General Revenues spending. This is how it works: Every two years, the Legislature decides on general spending plans: A, B, and C. All of A must be funded before B is funded. Then all of B must be funded before C is funded. The first plan has an excellent prospect of being funded, but the last in line is typically not funded unless the economy outperforms expectations. The Legislature also decides what proportion of each plan the agencies get. An agency may, for example, have 80% of its appropriation funded in category A, 5% in B, and the remaining 15% in C. After the Legislature has adopted the priority levels and passed the budget, the Arkansas Governor and his staff determine the upcoming revenues and assign the agencies their level of A, B, and C. funding. The Arkansas Department of Finance and Administration says that in the current fiscal year of 2007-08, all of plan A and 95% of B is funded. Unless more money comes, that is what they will spend.
Similarly, in Schwarzenegger’s Budget Stabilization Act, spending is directly based on revenues in two ways: automatic spending reductions in times of deficit and mandatory savings in good times. If the Department of Finance projects that there will be a deficit at year end, this proposed Constitutional amendment would require every state agency to reduce its spending by either 2% or 5% depending on the size of the shortfall. The proposal allows the Legislature to prioritize spending as soon as it is notified by the Department of Finance of an impending deficit, with the lowest priorities being the specific programs within agencies that would get cut automatically. If the Legislature does not do so, the Governor would be allowed to do it unilaterally in the middle of the fiscal year. Exempted from this are debt service, contracts, “other constitutionally protected payments,” and the Proposition 98 formula for funding schools. I have not seen the specific language, so it is unclear the extent of the protected payments, but my assumption is this includes salaries for civil service and other appropriations the courts have ruled must be made.
The proposal would also create a mandatory savings account the state must fund if it has revenues coming in that are above a reasonable long-term rate of growth. The Department of Finance would measure the revenue stream twice yearly and calculate how much if any of the state’s revenues would then go into the Revenue Stabilization Fund. When revenues are lower than average and California is not able to meet its spending commitments, only then could a transfer from this account take place. The Governor claims that there cannot be transfers from this fund to avoid deficits, and that it would only be used when revenue grows at a rate below the long term average. The description implies this is a recession fund rather than a way to facilitate over-spending. As of this writing, I have not seen any statutory language, so this is another key element that needs to be scrutinized closely.
The Arkansas plan is more sophisticated in that the Legislature and the Governor declare ahead of time their spending priorities rather than across-the-board cuts. What I really like about the proposal is that it allows the Governor and Legislature to put a plan in place to cut spending in bad times without having any one party or office having to take all the blame for cutting. This mediates the political dilemma of budget cutting and provides an alternative to running up deficits.
The Governor looked in the right place for meaningful reform and I support this proposal.
Thinking in Billions – March 3, 2008
I received an email recently with a list of all the things that were “a billion” ago. For example, a billion seconds ago it was 1959 and a billion minutes ago Jesus was alive. This made me contemplate how truly large the figure “a billion” is and then how staggering that is in terms of California’s $14.5 billion deficit. If we round off the state’s population to 37 million, it comes to roughly $392 per person. Of those approximately 37 million residents, there are just about 3 per household, so that is just under 13 million households, bringing each household’s portion of the deficit to about $1,115. Think about what California households can do with $1,115 each, and then contemplate how your household would be impacted by the loss of an extra $1,115 if you had to pay that much more in taxes. What would you have to give up to pay that extra tax bill? Your car payments? New school clothes and supplies for your kids? Eating out? The family vacation?
As budgets become tighter for California families, so too must the state budget get tighter. The solution cannot be to demand that families give more to the government. Assumptions the state makes about what it can afford must be reconsidered. To give you an idea about how difficult that is, consider the do-it-yourself budget offered by Next Ten. Next Ten gives you the chance to make changes in the state budget yourself and see how close you can get to balancing it. The problem is that the options seemed designed to make people perceive cuts as overly harsh and tax increases as merely overdue. For example, for K-12 education funding, the options are to maintain the status quo of per pupil spending, limit it to the rate of inflation, equal the national average, or raise it above the national average. The debate cannot be that limited because the success of our schools is not predicated on the amount of per pupil spending, no matter the teachers’ union would have you believe. Equally limiting is the option to raise the income tax, saying that if increased only for “upper income families” it will generate $2.5 billion in revenue. Next Ten has obviously vastly simplified the problems, but in doing so has demonstrated an ideological tilt that limits the possibilities. I hope that some one is willing to show the public the true options and opportunities that are available if we think a bit more creatively than we have been willing to do in the past.
Budget Process is Institutionally Corrupt – May 19, 2008
Special for the Flashreport: http://www.flashreport.org/
The budget crisis of 1983 changed the state’s budget process dramatically. New Governor George Deukmejian correctly realized that much of the spending was mandated in statute and could not be changed within a budget. This was a direct consequence of Governor Jerry Brown’s eight years of signing every spending mandate bill sent to him by the liberal legislature. So much of spending became tied up in statutory formulas and appropriations that Deukmejian calculated that 85% of the state spending was mandated outside of the budget.
For Governor Deukmejian to
propose an appropriation in the budget that was lower than what the law
required would have resulted in the state getting sued, and losing. So
the Governor proposed a budget implementation bill to accompany his proposed
budget. There was a semantic debate on whether this was a “trailer bill”
to follow the budget, or a “horse bill” to pull the budget into reality.
The name “trailer bill” won the day. That year the trailer bill was one,
large, multiple-subject bill designed to implement the budget. It was
debated through every committee, tweaked with amendments, and ultimately
passed, along with the budget, to help resolve a major crisis in excess
spending. Those spending advocates who did not like their precious
programs being tinkered with sued. In a bizarre decision, the California
Supreme Court ruled that the Deukmejian trailer bill was unconstitutional
because it violated the constitutional provision limiting bills to a single
subject, yet in said that the entire bill would take effect as written.
That is the judicial equivalent of mom saying, “Bad boy for stealing from your
sister, just make sure you don’t do it again.”
Flash forward to today and the May action by the legislature to pass nearly 50 empty trailer bills. These budget committee bills are literally empty of text. This action places these bills in position to allow the majority party to use the empty bills for appropriating the budget by adding last minute floor amendments that bypass all committee discussions and public hearings. I understand the single subject rule, and its virtue is to prevent rider amendments of bad ideas placed into must-pass bills. This is very typical in Congress, but California has now come to the point where the state budget is actually written into 50 trailer bills that are more important than the budget but get far less scrutiny.
The budget process is now
institutionally corrupt, which is even worse than a corrupt individual
politician. The whole body goes along with it (Since the empty bills have
no money, and no urgency clause, only a majority vote is required to pass them
out of either house and bypass all committees.) and nobody yet knows what the
bills will say. When the day comes to pass the budget and these trailer
bills, there will not be time to even read the bills, nor will any member of
the public be permitted to examine and give comment on the proposals.
Think about it: ideas like making it illegal for dogs to ride on your lap or wearing ear pieces connected to your cell phone all get extensive debate. Yet the important issues of how many billions of dollars are given to public schools, or whether the prison budget gets any money for job programs now get no discussion.
Moreover, these trailer bills corrupt the process in another way. If not all of the trailer bills are used for implementing the budget, then any member can amend his or her own pet project into one of these shells and declare that their bill is a budget trailer bill, which gives it an automatic rule waiver to avoid public hearings even though the idea may have nothing to do with the state budget.
Senator Tom McClintock made some excellent remarks in opposing the Senate’s passing of these empty trailer bills. I get the sense from the video (see link below) that more than anything McClintock is mourning the loss of the Senate’s committee process and lamenting the super -constitutional powers to the six members of the bipartisan conference committee. By preempting the process, the legislature does violence to open government and its own institutional relevance. Watch his comments here:
Read My Lips—May 19, 2008
Just as President Bill Clinton set certain precedents that have done extreme damage to the presidency, the first President Bush set a horrible precedent for Republican executives when he reneged on his “read my lips, no new taxes” pledge. Governor Schwarzenegger is now backing a proposal that should be anathema to Republicans, though apparently those of his stripe do not mind either borrowing money we cannot afford or raising taxes. To those who would increase taxes I ask this: what convinces you that Californians are undertaxed? Being for more spending on favorite programs is understandable, but jumping to the conclusion that taxpayers owe the government more is a big leap.
Senate Republican Leader Dave Cogdill said it well: “To hear my colleagues on the other side of the aisle talk, you would get the impression that state government is a bare bones operation that has been pared down to its limit, leaving us with no choice but to raise taxes, lest draconian measures be inflicted on vital state programs and the people they serve. Quite the contrary, state spending has increased by $25 billion over the past five years, well beyond the expansion that population growth and inflation might dictate…. Republicans know that Californians pay more than enough of their hard-earned salaries and wages in taxes to this state and to the federal government. We know, too, that raising taxes during a pronounced economic slowdown is a recipe for even greater fiscal and economic problems down the road.”
See some of the Senate Republicans’ research on California taxes here:
Phony Revenues in May Revise—May 27, 2008
I have now spent hours trying to explain the state budget to myself and ended up frustrated.
I did find in the Department of Finance information the numbers that the state expects to take in (with May and June included in advance). The total is $101.1 billion this year and, for the next year that everyone is fighting about, the take is projected at $102.9 billion. However, I have learned the Governor is booking new bond debt and his lottery sale proposal -- around $5 billion that is not real revenue, but actually is borrowing.
If you and I count money as revenue, we have to pay income taxes on it. However, if it’s a loan we do not have to pay taxes on the money because the IRS/FTB do not consider it revenue. But if you are state government, borrowed money is called revenue even though it was not earned nor collected as taxes and must be repaid. Most budgets would make the distinction between earned revenue and borrowed revenue. Too bad governments are not held to those standards.
You would think by the scary headlines and the dire warnings that taxpayers in California had all left and no one was around to pay the bills. In fact, on the next table in the report, the Governor predicts that the sales tax, the corporation tax, the motor vehicle fee/tax, the liquor tax, and the tobacco tax will raise more revenue next year than this year. Only the personal income tax will raise less money than the current year, and it is down less than 1%. We may be in a water drought, but we are not in a tax drought.
The spending side is much dicier. The Governor says that during this current fiscal year, which is almost over, the government will have spent $103.5 billion. Note that the spending is over $2 billion more than the revenue during the current year including those bond sales. We do not have a balanced budget this year and we really have not had one for several years running. The only reason that we are still able to pay our bills (and since the state government is a notoriously slow payer, even the phrase “pay our bills” is a joke) is that we are spending all of the reserves we have, and we are borrowing from cash in places like the highway account, and we have issued bonds to borrow even more.
For the coming year the Governor is now proposing spending $101.8 billion, which is commendable because this is actually a real reduction in spending over the prior year. Although two agencies (Health & Welfare, and Business, Transportation & Housing) are actually slated for increases, K-12 education is up for one of the larger decreases in spending over the prior year. I cannot yet tell how much this might be due to reductions in student enrollment versus the calculation of the extremely complex Proposition 98 education finance formula.
State Budget Deadline Day +1 – June 16, 2008
Yesterday was the deadline for the state legislature to approve a budget to send to the Governor for signing before the June 30th constitutional deadline. It is a surprise to no one that the day came and went without the legislature even being in session. As the days continue to tick by without an approved budget you will hear the name calling and accusations of fault fly. One of the most popular is that the minority Republicans are simply being obstructionist and have nothing productive to offer.
To pre-empt that one, I share here a proposal by Senator Dave Cox to eliminate the First Five program and transfer the $2,447,338,951 (yes, that is way over two billion dollars) hoarded by its 59 bureaucracies to local governments with 50% of that going to schools. The other half will go to cities and counties to keep law enforcement on the streets or help with other program in these challenging budget times. The ongoing revenue generated by Prop. 10 would, in the future, go the State General Fund specifically for Healthy Families and Medi-Cal.
A decade ago, First Five was created by Prop. 10’s 50-cent-a-pack tax on cigarettes but the entire program lacks accountability. (Remember the questionable spending of tax dollars on a public relations campaign to help another Rob Reiner ballot measure?) Instead of genuinely helping with early childhood education, Prop. 10 simply created a new tax, tons of new bureaucracy and inflated bank accounts.
I encourage you to read up on Senator Cox’s smart proposal at this website:
Pay particular attention to the First Five LA grants and the advertisement run by First Five Sacramento wherein playgroups are invited to apply for tax dollars to fund singing circles.
State Budget Deadline +15 – June 30, 2008
Controller John Chiang has posted a list of the state’s bills that his office can continue to pay despite the absence of an approved budget and those that he cannot pay without a budget in place. For example, federally mandates services such as Social Security Income/State Supplemental Support Payments will continue. Vendors who provide products or services to the state after July 1, will not be paid until there is a budget. I do not get paid. Despite the list, all the rest of last year’s spending continues, even without a budget. No program ceases to exist, no state employees stop coming to work, no savings occurs. Down the street, under the dome, some legislators argue about the numbers, but the whole burgeoning bureaucracy just keeps rolling along, ignoring the fact that it can no longer support its own weight.
Best Budget Quote – July 21, 2008
USC Professor John G. Matsusaka caught my eye this week with his LA Times commentary on the state budget. After noting that state government is spending a “whopping” 40% more money this year than just four years ago, he concludes: “Voters are criticized for wanting more services yet being unwilling to pay higher taxes. That is unfair; Californians have repeatedly demonstrated their willingness to fund valuable programs. But if spending can go up 40% and most of us can’t discern any difference, can we blame voters for being hesitant to put even more tax money in the hands of the state?”
Read the full commentary here:
Sales Tax Hike Analysis Available – July 21, 2008
In remarks last Thursday, the Governor announced that raising the sales and use tax is something he is considering. Since my department collects the tax, I recently asked our chief economist to prepare a dynamic revenue analysis of an increase in the sales and use tax. A dynamic analysis seeks to predict how a tax increase would affect economic activity, and thus provide a more realistic idea of the revenues that will actually come in. A static estimate assumes the policy change will have no economic effect and is a simple calculation.
The state’s static revenue estimate for a one percentage point increase in the sales tax is $6 billion per year. The dynamic estimate I requested takes into account how the increase would affect economic activity over time and concludes the state would actually take in $5.69 billion, which is over $300 million short of the state’s official (static) estimate. This would be an ongoing year over year shortfall once the effect of the tax hike filters through the state’s economy. This is eerily familiar territory for those who remember Governor Wilson’s tax increases came in $1.8 billion short of static estimates over the first three years.
The new estimate concludes the tax hike would also result in more than 50,000 jobs lost in California from the reduction in economic activity. I have posted the revenue analysis here:
Spending Proposition 10 Money – July 21, 2008
I have written before about Senator Dave Cox’s idea to recover a half billion dollars a year from First Five California to help balance the budget. The First Five program uses cigarette taxes to fund early development and non smoking programs for kids in their first five years. This is money from Proposition 10, the 1998 Reiner initiative that levied a massive cigarette tax and created 59 state and county bureaucracies to distribute the money. In short, Cox found these county programs were not only misusing the money but they have hoarded almost $2.5 billion unspent since 1999. Since the money is mostly county-controlled it is difficult for the state to oversee. Cox wants to redirect all future revenues -- around a half billion dollars a year -- to the state’s Healthy Families and Medi-Cal programs, covering 200,000 kids who are currently eligible but not enrolled in the program. As for the $2.5 billion that is available to be spent now, Cox’s proposal gives 50% to schools and the other 50% to those city and county offices that are headed by elected officials who are accountable to the public. More on the Cox plan here: http://cssrc.us/web/1/news.aspx?id=4210
Some Republicans are opposing the Cox plan and rallying around the status quo. Shawn Steel, Republican National Committee member-elect, penned a column for www.dailybulletin.com in which he argued that Orange County is running their program well, and as long as a bad tax is on the books, Steel thinks that letting locals spend it is a better alternative than Cox’s proposal.
Adam Probolsky was on a similar wave length on the OC County blog a couple weeks ago. He thinks the Cox proposal is about getting more people hooked on big government services and is a bad idea.
In short, both Steel and Probolsky want local control rather than giving more revenue to a bloated state bureaucracy. Regardless of the mismanagement at many county programs, Steel wrote that Orange County’s First Five Commission, “consistently receives top marks for effectiveness and efficiency…” However, the dirty secret is that many of these county First Five programs are targeted at children of illegal aliens. What I would like to know is whether the Orange County First Five program is offering services to illegal immigrants.
The Cox proposal would divert $600 million a year from the Prop. 10 account and direct these to Healthy Families and Medi-Cal programs that have clear income and residency requirements. Cox’s plan would also eliminate the waste and abuse found in 58 county commissions, including Orange County to the extent it is funding programs for illegals.
Cashing in on High Gas Prices– July 21, 2008
With the drain of your wallet at the gas pump, some government accounts have been swelling. When the price of gas goes up, the amount of taxes collected rises, too. A reader was curious about just how much so I had the amounts graphically assembled:
The total amount of motor fuels taxes received by California state and local government in 2000 was $2.1 billion. By 2007 it was up to $4.3 billion. The debate is this: is that new tax money coming out of your budget, or are you shifting your spending from other taxable items to gasoline? The statisticians and I disagree on this. They believe you are simply shifting your spending by buying fewer taxable items (clothes, restaurant food, etc.) to pay the higher gas price, including the tax. I believe there is a shift in spending going on, but that it is just as likely to be from non-taxable items, say your premium cable package or movie tickets, or to go further afield, maybe even less food and medical services. You end up cutting costs in one area, but those savings are more than eaten up in the higher gas tax due on each fill-up.
Be Wary of More Bond Debt--- July 28, 2008
The Legislative Analyst’s Office has released its analysis of this fall’s ballots measures.
While the reading on the individual policy matters is interesting, the most relevant information for voters is the primer on state bond debt. Four of this fall’s measures propose using bond financing for various projects: Prop. 1 offers $9.95 billion for high-speed rail; Prop. 3 offers $980 million for children’s hospitals; Prop. 10 offers $5 billion for renewable energy; and Prop. 12 offers $900 million for veterans’ home loans. The first three of those are General Fund obligations, while the Cal-Vet money would be paid back by mortgage payments. The amount of interest paid on Props. 1, 3 and 10 would be about double their face value. The LAO estimates that when all the bonds are sold, the total annual budget cost would be about $1 billion. You can read more about bond financing, the state’s debt-service ratio and current bonded indebtedness here:
Every voter should understand the full financial impacts of bond financing even then they consider the causes worthy. Then again, given consumer debt levels, people have just become accustomed to credit card financing in their personal and public lives.
Budget Deadline +35 --- August 4, 2008
As the summer marches forward without a budget in sight, the public face of the crisis has boiled down to Democrats saying they want to raise taxes and the Governor and Controller fighting over whether to pay some state employees minimum wage to preserve the state’s cash. Clearly, neither of these points is sufficient to solve this year’s budget puzzle much less fix the state’s structural and political problems that lead us to this stand-off year after year.
One place I see the type of solutions that do promise to help dig us out of this nightmare on a permanent basis is on the Senate Republican Caucus budget website at:
The Senate Republicans offer several plans, for education, economic recovery, budget reform and government reform. The two points from the budget reform plan that deserve the most attention right now are these:
1) Establish a Spending Cap. Year after year, California finds itself in this same situation because spending has outpaced revenue. Sensible spending caps would provide for government growth at a responsible rate, and at the same time protect taxpayers from out of control state spending.
2) Create a Rainy Day Fund. When the economy slows down, or when disasters strike, it makes sense to have money put aside to cover the costs of these unforeseen, yet inevitable events. Unstable government funding only puts vulnerable Californians at risk and creates the bizarre situation of state government ripping off local governments and special funds to force a balance.
These are the common sense approaches to a spending plan that every Californian needs to live by, whether regarding their household budget or the state’s coffers. It does not matter what one makes if one spends too much, and everyone, no matter how poor or wealthy, needs to have a savings account. As we get closer to running out of cash and pressure mounts for a solution, legislators and the Governor need to focus on these long-term ideas, not quick fixes that will leave us in this same situation again.
Public Should Demand Dynamic Forecasting --- August 11, 2008
Within hours of Governor Schwarzenegger’s announcement on Tuesday that he wants to increase the sales tax a smart reporter posted an article pointing out the BoE revenue estimate is almost a half billion dollars a year less than what the Governor claims the tax increase would generate. The difference is the BoE estimate is a dynamic estimate, whereas the Governor’s estimate is static. Static forecasting is the least honest. It assumes taxpayers will have no reaction to tax increases and ignores the possibility that people modify their behavior when faced with higher costs, which is totally absurd. Since virtually everybody is basing their revenue numbers on these static estimates, our state and local governments are engaging in mass deception. Remember, Pete Wilson’s tax increases in the late ‘90s came in several billion dollars short of static expectations. It should be the government’s sacred obligation to present the most truthful information it can. Static revenue estimates – because they are calculated as if tax increases occur in a vacuum – are known in advance to be wrong and thus betray the people’s trust.
I have posted a simplified “cheat sheet” of the dynamic sales tax increase estimate and impacts:
A Bad Budget Idea--- August 11, 2008
Last week I commended the Senate Republicans for offering solid solutions to our state budget problem and pointed my readers to a website featuring those ideas. Then I learned that Senate Republican Leader Dave Cogdill had been talking about the idea of borrowing local government funds to help bail out the state. This is a bad idea. The state has a poor record of using local government money, including funds set aside for transportation and policing, for state purposes, leaving local governments holding the bag. Voters grew tired of the theft and passed ballot measures requiring the state to keep its hands out of the local cookie jar except in emergencies. By “emergency” I do not believe the voters meant the state’s failure to get its own financial house in order. I believe voters were thinking more along the lines of a major earthquake or other natural disaster. Now legislators are talking about borrowing this local money and then paying them back with bonds sold against future earnings of the California Lottery.
So, the idea is to borrow money that voters appropriately intend for use by their cities, then borrow more money to pay that back and then hope that enough people gamble in the future to pay that back. It is crazy talk, but if my friends in the Senate Republican Caucus honestly believe if it is a viable budget option, then their web page touting their budget ideas should at least mention it.
Pay to Park--- August 11, 2008
There are many government services that we all pay for because we cannot distinguish who benefits from them. For example, we all pay for law enforcement because we all benefit from having officers patrolling the streets and arresting bad guys. However, many Californians do not tangibly benefit from our state parks. It is unfortunate, but many residents have never set foot in one. I, on the other hand, have visited about 25 California state parks. I have hiked, camped, seen the sights, learned the history, laughed with family and friends—all that our state parks intend. Yet, I cannot get on board with a proposal floated by Assembly Budget Chair John Laird and backed my former colleague Bruce McPherson to impose a $10 surcharge on all non-commercial vehicles in the state and then grant every vehicle with a California license plate free access to the state parks.
A friend of mine, Earl DeVries, got it right when he reacted this way: “I’d love to have free/cheap steak. I wonder how much support there would be for a ‘tax’ on every one including the vegans and vegetarians so I can get steak for free.” On top of that philosophical point, there are two more practical issues. First, taxes proposed never raise as much as their advocates promise so the $282 million Laird is wishing for will not materialize. Second, what if everyone suddenly decides to go to the state parks when they become “free”? You can forget the idea of communing with nature when crowds like that show up.
Our state parks are beautiful and an important resource worthy of our attention and their share of the budget. Those who enjoy them should pitch in admission to help maintain them. Those who do not go should not be burdened with supporting my love for picnicking and hiking.
The ‘No-Budget’ Budget --- August 18, 2008
As everybody knows from
family or business budgeting, some 85% of spending is the same year after year
with some adjustments for inflation. The real decisions are over the
remaining 15% of available revenue, when it is available. The California state budget is the same. Except when it is warped by excessive borrowing
(which is the current problem), the spending programs grow at a predictable
rate. When spending gets out of hand there are major reforms that come
together to make changes as we have done with Medi-Cal, welfare, and worker
compensation spending in the past. However, most of the state spending is
by formula, which is predictable and basically operates continuously year after
I propose that the Constitution be amended so that the 85% of the spending plan is done automatically by the Department of Finance, or other state agency. This would no longer permit the majority party in the Legislature to take the budget hostage for their demands on the Governor, and no longer permit the minority party to make demands as a condition of supplying their few votes for the budget. Thus, most all of state work would go on without interruption, legal challenges, or uncertain delays. This automatic level of spending would go into effect July 1st. The Legislature could intervene to make changes, mid-year corrections, or other tweaks, but if they did not act the state would still have a budget.
This does not bar the
Legislature and the Governor from using separate bills to make major changes that
affect the budget-- like contracting out the state parks system, privatizing
the University of California, or reducing Medi-Cal benefits to be no better
than state employees get.
By doing this the real fight on new fiscal priorities would switch to separate bills that can be debated and amended and voted on for their merits. If there is a constitutional formula or a statutory appropriation which is proposed to be suspended or revised then it can and should be done by a separate bill that does not hold up the rest of the budget. Other bills might propose new programs or modifications of existing programs. If they require money to be appropriated from the state's reserve funds then they appropriately require a 2/3 majority vote of the Legislature. Since 85% of the state spending is already determined, new programs can only be funded by cutting an existing program or by raising taxes. Tax increases, of course, require a 2/3 vote.
The great debates on priorities for the people of the state will still take place and controversial programs and taxes will still be subject to recorded votes so that the voters can judge the efforts of the Governor and Legislature. However, this will all be done with the basic state programs off the table.
The State Department of Finance, the Legislative Analyst Office, the Joint Legislative Budget Committee, the now defunct Commission of State Finance all have the talent to determine what a baseline budget would be and how to make a reasonable estimate of expected state revenues in order to calculate the automatic 85%.
Correcting Cogdill Confusion --- August 18, 2008
Having been misquoted and taken out of context several times over my years in public service, I have empathy when Senate Republican Leader Dave Cogdill tells me that is what happened to him over the issue of proposed state borrowing schemes from local government, which I passed on in last week’s issue. Since then the San Diego Union Tribune has issued a correction.
In a letter to the newspaper, Cogdill explained, “I firmly believe real solutions to the state’s $15.2 billion shortfall do not need to involve tax increases or borrowing schemes….If Democrats insist upon increasing spending, they are going to have to find a way to pay for it. If they choose to use borrowing to fund their level of spending, it is our position that it should be done on a short term basis and include a strong plan to repay that money before the end of the fiscal year. Regardless, any budget solution must also include meaningful budget reform to prevent future deficits.”
I am pleased to have – and to share – the clarification that Senator Cogdill is not proposing borrowing from locals, and I hope all of the legislative Republicans hold this line and that Governor maintains his commitments to local government as well. The state’s budget is a mess, but most cities’ budgets are not. It is harder to get away with massive, ongoing spending hikes on one-time funds, creative bookkeeping and irresponsible borrowing schemes when your voters attend your meetings just down the street at city hall. However, since very few people have the means, free time or patience to observe the state budget process, the people in the Capitol building have been able to wreak havoc.
the Neverending Story --- August 25, 2008
My suggestion last week for a No-Budget Budget received a lot of favorable comments. While some hold to the ideal that a budget spending plan should be zero-based with no bias to spend again, the reality is that most state spending programs are unlikely to ever be repealed. The other problem for those of us who wish that budget reviews would be in-depth every year, is that there are simply too many programs and departments to be completely reviewed each year. My suggestion of putting into place a spending plan based on the prior year's spending without a vote in no way prevents the Legislature from intervening with bills to reform programs, change program priorities, or even shut down programs. In fact, I believe it would give legislators the time to look in-depth at those programs considered to be failing.
Others have made suggestions on a parallel track with mine. Several reform groups are working on language that would have a standby budget waiting to go into effect automatically and immediately if the Governor and the Legislature do not agree to a new budget by June 30th of each year. The idea would be that the standby budget is simply the last year's spending plan either with or without some adjustments.
Of course, others are suggesting that lowering the vote requirement from 2/3 of both houses to a majority of both houses would solve the problem. Since the majority party is proposing tax increases this year -- which separately requires a 2/3 vote of both houses -- it really does not matter what the vote is on the budget this year. There are others who suggest we look to the past and revisit the California Constitution of a few decades ago that required a majority vote of both houses only if the spending was less than 5% over that of the prior year but a 2/3 votes if the budget proposes to increase spending by more than 5%. That seems to be a fairer way to determine spending priorities.
Clearly, Californians are tired of the annual budget fandango with lots of press conferences and not a lot of budgetary review or agreement.
Quote of the Week --- August 25, 2008
“After six years without a state sales-tax hike…” is how the Modesto Bee staff reporter Michelle Hatfield began her August 25th story on the Governor's August idea of a 14% sales tax increase. Since the sales tax is indexed to inflation (the tax base is the same goods that inflation measures), it is already a tax whose revenue increases even when the economy is not growing. The idea of some kind of regular annual hike in the sales tax rate is enough to drive the rest of California retailers and consumers out of the state. It is interesting that while the reporter's bias is that taxes should be increased regularly, the headline was written as “Could the 1-cent sales tax raise be the last straw?” reflecting the reality that tax increases do have negative effects.
Betting on the Lottery --- August 25, 2008
Part of the potential “solution” to this year’s budget stand-off is a reliance on the state lottery. I am skeptical. I was opposed to the lottery when it was proposed. Not only do I disapprove of gambling in general, but I thought dedicating the proceeds to K-12 education would mean that legislators would simply cut some other source of education funding. Certainly, the lottery has not been the windfall to schools that voters were led to expect. So now talk is to ask voters to change the lottery. Instead of the proceeds going toward schools, the money would go the state’s General Fund. At the same time, the lottery would be “modernized.”
Here is where another batch of skepticism kicks in. The proponents of this idea say that they can make changes to our lottery to make it more like other states’ lotteries that do much better than ours. Ours is only about half the size of some states, and there are some other states whose lotteries do two to three times as much business. They want to make higher payouts to lure in more players, which will generate more revenue. The plan is then to securitize that incremental revenue (i.e., take out a loan against future ticket sales) and use that to help get the state’s books in order. It is as much of a gamble as it was for the state to plan on a few individuals’ one-time dot-com boom money to keep poring into state coffers year after year.
Republicans Show Their Budget – September 1, 2008
You are invited to review the Republican budget proposal at their website or
at the FlashReport
Without the resources of the Governor's Department of Finance nor the huge staff of the majority party, the legislative Republicans have come up with a remarkably detailed budget. No taxes and no unsecured borrowing is their theme. Building on the latest proposals from the Governor and the Democrats, they make specific targeted recommendations for cuts as the way to bring spending in line. The recommended cuts are laid out in detail department by department reflecting why they are lower priority in these times of crisis. I would love for the legislators to fully debate each of these items in public so that we could hear just what these monies go for and judge just how important, or less important, they really are. I know this is not likely to happen, but this debate really needs to take place.
If You Are Feeling Generous– September 1, 2008
Last week several “high income-earning” people in California sent a letter to the Sacramento Bee expressing their willingness to have their “income taxed at a higher rate” because a budget solution with cuts only will “cause the greatest harm to the poorest in the state while hurting each and every one of us.” Senator Jeff Denham clarified for these generous folks that while they cannot set their own tax rates, they are more than welcome to make a cash donation to the state to offset the $15 billion budget deficit.
If you would like to help the state, too, you may send your extra money to:
State of California
c/o Mike Genest, Director
Department of Finance
State Capitol Room, Room 1145
Sacramento, CA 95814
In fact the state government actually has a form for you to fill out in order to make a gift. The form is available at:
In the meantime, you may be curious about who these generous folks are. I searched the Internet for many of them. Psychotherapist. Literary agent. Doctor. Fundraiser for non-profit organizations. Engineer. Attorney. College Professor. The professions I saw did not make products or employee many people in California. I am pleased these folks found ways to make plenty of money in California, but raising taxes on them or others is not the long-term solution to our state’s burgeoning deficit. We simply have to stop spending more money than we have.
Across the Board --- September 8, 2008
My rough numbers looking at the Governor’s August compromise and the Democrats’ budget conference report is that the spending difference is down to about $6.7 billion out of a $107.9 billion budget. I recommend a 7% squeeze across the board on all state and local programs constitutionally possible, while holding harmless individual Californians who receive assistance from the state. (I know that debt service is protected and cannot be squeezed). This would solve this year’s budget with everyone equally unhappy, even the voters.
In some political fights I conclude that the possibility of winning is overwhelmed by the risks of losing. It seems to me that both the Democrats and the Republicans face this dilemma for the 2008-09 budget. The Democrats want tax increases to pay for their growth in spending. The Republicans wants spending cuts for the government to live within its current tax structure. The Governor seems open to anything, except this week he has opposed borrowing to finance the on-going spending.
Complicating this whole mess is that a vote of the people is required in order to implement either the borrowing ideas or to enact long term budget reforms. Since the next election is November 4th that would mean that any budget compromise that involves borrowing or reforms would not be in effect until after the election and would only be implemented if the voters went along with the compromise. That is a big “if.”
I am convinced that the votes are not there to raise taxes. With Presidential nominee Senator Obama’s promise to enact tax cuts along with Presidential nominee Senator McCain’s tax cut plan, those who advocate tax increases are themselves marginalized with no support.
So, if tax increases are off the table and borrowing faces an uncertain electorate, that leaves spending cuts as the last option. I understand that the Democrats are opposed to spending cuts because any program targeted has its own lobbying group within the Democrat coalition. For Democrats, it is like picking out one of their own children for sacrifice. In its place I suggest an across the board squeeze.
A spending squeeze leaves all programs in place but forces them to tighten their belts and go on a diet for the year. An across the board squeeze does not discriminate as every program is hit by the same percentage. While it would be nice to fix next year’s problem at the same time as addressing this year’s gap, there is no consensus on how to do this and the clock is running.
I am also convinced that the Democrats will not vote for cuts to directly impact people so I suggest an across the board squeeze of state and local government agencies, but not a reduction in payments to individuals. So, no welfare grant cuts to people, and no cuts to doctors or other individual medical providers who serve poor people. Again, this eliminates no programs and leaves individuals where they were in June at the end of the last fiscal year. It is a get-out-of -town budget that postpones the fight to January after the next elections.
The Big Squeeze Solution Would Have Been Better–September 22, 2008
The press accounts of the final budget deal indicate this is among the worst “get out of town budgets” in memory. It is already out of balance. And it has made future year budgets worse off with accounting gimmicks of revenue accelerations and prospective tax cuts along with no meaningful cuts in any state or local program.
I wrote before that my rough comparison between the Governor’s August compromise and the Democrats’ budget conference report was a difference of about $6.7 billion out of a $107.9 billion budget. An across-the-board cut of 7% for all state and local budget items would have achieved that wonderful, elusive pot of gold at the end of the rainbow – a balanced budget. It would have achieved balanced AND made everyone equally unhappy. Most important, by restraining spending, it would have balanced the budget for this year without gimmicks and avoided digger ourselves into an even deeper pit. Maybe next year.
BoE Asks for More Money Despite Budget Crisis–September 22, 2008
This year California is likely to spend $11 billion more than it takes in. And, despite the fact California has been doing this since roughly 2001, the Board of Equalization members voted last week to ask the state even for more money for next year.
The Board voted to ask the Governor’s office for additional funding to hire 54 new employees and to convert 118 limited term positions into permanent positions at an additional cost of more than $22 million per year.
While there is some justification for a few of the ideas, most will not bring in the new revenue promised. In the Board’s letter to the Department of Finance, it is claiming these permanent employees are going to bring in $146 million per year in additional revenue. That is not going to happen.
Meanwhile, just five blocks away, the Capitol is imploding and utterly failing to reign in the spending.
Maybe Senator Tom McClintock is right. Perhaps the whole enterprise of state government is based in such a world of unreality that we have reached a tipping point where our accumulated debt cannot be bridged by either conventional trimming, or taxes. These are very challenging times indeed.
Live From New York –September 22, 2008
My quote of the week is from New York Governor David Patterson who earlier this month ordered his state agencies to submit 2009-2010 budget requests that keep their spending flat compared to the current year and “break the cycle of increasingly unaffordable budgets.”
California budgeteers should take note of Patterson’s sentiment: “In these difficult times, our state simply cannot afford another ‘business as usual’ budget process. Our government has used that approach far too often in the past. Spending, borrowing, and taxes have increased at unsustainable rates, limiting our ability to provide for our citizens and damaging our business climate. Combined with the impact of high property taxes and a declining manufacturing base, the result has been that millions of our former neighbors have left the state in search of the jobs and opportunities they cannot find here at home.”
Keep in mind that the New York budget deficit “already totals $5.4 billion”— about one-third of what we are facing in California. Patterson then points to two problems that keep making budgets worse:
“First, once a program is added to the state budget, it becomes extremely difficult to remove it, regardless of whether the initiative is effective or essential. Taxpayers are often forced to pay for funding decisions that were approved years or even decades ago. And spending on these same policy priorities has increased year after year, usually beyond the rate of inflation.
“Second, when analyzing the state budget, stakeholders usually imply that reducing the rate of projected growth in funding for a program is a ‘cut.’ This thinking has impeded numerous attempts to halt unsustainable spending growth. If a private corporation had used this type of accounting, it would have gone out of business years ago.”
Both of these are issues in California, too. May Governor Patterson have more success in overcoming them than we have had thus far here. If we cannot get our own house in order, we will be setting precedents in state government bankruptcies for the rest of the nation.
The Details – September 29, 2008
The Governor has made available the details of the state’s new budget on-line here:
You can click around and see where the revenue estimates changes, get the specifics on the tax law changes, and see expenditures by agency. One of the thoughts I had while perusing it is how sad that this is so very complicated that most Californians will not take the time to understand it. People’s level of frustration and hopelessness about the budget—and the federal bailout, by the way—seems to increase as the complexity of the finances do. How can we know whether a particular policy is good or bad if we cannot grasp the implications of it because of accounting tricks? Indeed, are not such schemes what got us into these messes in the first place? It is overdue that we return to a simpler way of thinking about our spending so that people can begin again to have trust that their elected representatives are making intelligent, informed decisions. Right now, that trust is eroded and we all believe that the nonsense will simply continue to be imposed on us because the fox is guarding the henhouse. It’s time for truth in budgeting.
Revenue Shortfall Another Sham
What incredible chutzpah our political culture has. Last week, the news came out that even though it is less than a month since the budget was passed, revenues are already $1 billion short of expectations. I went to Controller Chiang’s website to look at the revenue picture and saw that revenues this year so far (July 1-September 30) were $21.5 billion. But revenues for the same period of 2007 were $21.7 billion. By my math that $200 million difference between identical periods is under 1%. That is not falling revenues; that is flat revenues.
By comparing actual revenues to out-of-date, inflated estimates of future revenues, the state fiscal people have done themselves a disservice. To knowingly use these same bad estimates to paper-over continued growth of government is worse.
That the public is being ill-served by the state budget process is an obvious understatement. It is just embarrassing to need to suggest another budget reform, one that is just simple integrity: Whatever month the budget is passed in, the revenue projection it relies on must not be more than 30 days old.
Not So Fast, Mr. Lockyer – October 20, 2008
Last week George Skelton’s Los Angeles Times column described a phone conversation with state Treasurer Bill Lockyer, who elaborately insists Republicans are to blame for the state’s fiscal mess. Lockyer concedes the state has a spending problem, but argues that we are not bringing in enough revenue. His theory is programs the Democrats want to protect from cuts– welfare and K-12 education– have been costing the state less over the last decade after taking into account inflation and population growth. He then points to major spending areas Republicans support--like prisons and the car tax cut-- and says that because these have grown faster than inflation and population, it is Republican spending that is busting the budget. Therefore, he argues, Republicans ought to support tax increases, or else they are hypocrites.
Well, there is more than one way to crunch numbers. Lockyer focuses on General Fund spending over the last decade. What he conveniently ignores is revenue over the same period. Since he focused on General Fund spending, I will do the same with revenues. Looking at the major revenue totals at the Legislative Analyst’s site, it shows that in 1998-99, major General Fund revenue was $58.2 billion. In 2008-09, it is expected to be $98.4 billion. That is a 69% increase over the period. Adjusting for inflation, it is still a 27% increase in real spending. Adjusting for inflation AND population growth, per capital spending has increased from roughly $1,780 per Californian to $1,950, which is about 10% more per Californian. That is plenty of extra cash to cover a 7% annual increase in prisons, just one category of spending. It is also plenty to cover a 25% increase of the cost of the car tax over the decade, with plenty left over.
Californians continue to give more of their money– yes, in real terms– to the state of California. California government continues to spend even more. We do not have a revenue problem. We do have a spending problem.
Budget Target: Schools --- November 3, 2008
The day after the election, the Governor has called a special session of the lame duck legislature to deal with the state budget. Everyone knew the budget they approved just a few short weeks ago was inadequate so now they will try once again to head off impending fiscal disaster. Already the budget is upside down by billions, ranging from $5 billion to $15 billion depending on which horror story you buy.
The Governor has said that this time the solution must include public education. I do not think it is a scare tactic or idle threat. The fact is that K-12 education takes the biggest portion of the state budget and simply must be part of any workable budget solution. My suggestion is the Governor target his school cuts. I believe the excess administrative expenses of schools could account for the entire amount he needs to trim education spending. In other words, we can achieve the savings needed without touching anyone who interacts with students on a daily basis. The state and district offices might have to make do with fewer staff, but there is no reason that teachers, aides and others who work on campuses need to be fired. Another way to save money without hurting children or teachers is to suspend purchasing new textbooks. The books are very expensive and the quality of instruction should not suffer because few-year-old books are being used. Schools should only purchase those books necessary to replace those that have gone missing or are in such bad shape that they are rendered useless. Such targeted cuts can help solve the state budget problem, take the sting out of the proposal, and help us begin to cut the fat in education spending.
LAO’s First Report Reads
Like Fan Mail– November 17, 2008
The new Legislative Analyst, Mac Taylor, released a report on the Governor’s special session proposals. I have never seen or read an Analyst’s report that praised a Governor more than this one. Since past reports from the LAO have favored tax increases combined with spending reductions, it is not surprising that this report likes the Governor’s plan. What struck me was the overall tone of the document. In particular, the way the Analyst treats the Governor’s proposed tax hikes.
The report says the Governor’s estimates of the revenues from higher taxes are “potentially low.” We have a deepening recession after a stock market collapse, lower housing prices, and rising unemployment. How is it possible to understate a tax increase? Yet, Taylor writes in the report, “Specifically, our estimate of the revenue impact of the Governor’s tax proposals indicates that actual revenues may exceed DOF [Department of Finance] estimates by as much as a combined $1 billion over the two years involved.”
The question I have is, did the Legislative Analyst do a dynamic analysis of the proposed tax increases reflecting changes in taxpayer behavior, or did his staff just plug numbers into calculators? I observe that retailers are struggling to stay in business. Employment is dropping like a rock. Housing has not bottomed. Internet competition is growing. But the Analyst thinks a huge sales tax increase is going to bring in more revenue than promised in the Governor's proposal.
Pardon me, I am not convinced by mere assertions.
When Autopilot Spending is the Problem– November 17, 2008
Most of us cannot order up more income whenever we want to cover increases in our spending. The fact that government leaders are asking Californians to increase the government’s income shows that governments just do not operate in the same universe as the rest of us.
Mike Genest, the State Director of Finance, in his column defending the Governor's tax increases, made an important point. That is the growth in spending is not due to Schwarzenegger proposals or to growth in discretionary programs. Schwarzenegger is still trying to wrestle the spending promises made by Davis and previous Governors.
The spending increases are deeply embedded and they continue to drive the state budget deeper into red ink. Spending for entitlement benefits, caseloads, and mandatory formula driven programs in health, welfare, education, welfare, and prisons are driving the spending faster than the economy can fund. Budget cutters will have to address runaway entitlements in order to enact long term fiscal responsibility. Any spending that grows faster than the economy must be changed and if there is some fast growing program that is too important to cut then another program will have to been repealed not just reduced.
Be Aware of Triggers – November 17, 2008
Among all the thousands of pieces that make a state budget is an annual calculation on whether or not to continue a “temporary” 1/4 cent sales tax increase. If the two conditions are met then the trigger will pull and the sales tax will decrease. The problem is that those who have a vested interest in seeing the tax continue are those in charge of making the calculations, and the thresholds are easy to fail to meet. One test is that the state's reserve is down below 3% on June 30th. Even in good budget years it is easy to manipulate this number and spend down the reserve on June 30th by transferring the money to another account for a day.
The second test is the one that bothers me the most and that is that actual revenues for the prior four months have to be higher than the estimates made at the start. It seems to always work out that the revenue estimates turn out to be higher than the actual revenues. Go figure—it’s easy to overestimate revenues then post this finding so that the conditions to lower taxes on the people of California are never met. It is, therefore, absolutely no surprise to anyone when the Department of Finance issued its annual findings letter that declared that the “temporary” 1/4 cent sales tax will continue.
Legislators will be tempted to pass contingent tax increases that would only go into effect when certain conditions occur. Be aware that a triggered tax increase that is certain to be pulled is exactly the same as a tax increase.
California Forward Budget Reform, Part I – November 17, 2008
I have been working with California Forward, a bi-partisan policy group, to come up with concrete suggestions to fix California’s budget process. I would like to share with you some of our ideas so far, in four parts.
This week I focus on the problem of the structural deficit. A big contributor to this is our focus on a 12 month budget. By not focusing further out in time legislators avoid the full cost associated with decisions that are politically popular or just expedient; and in doing so, they ignore or undervalue choices that have long-term benefits. This contributes to growing demands on the budget that are routinely passed on to successors.
To solve this, we propose the budget process instead digest a multi-year time span rather than the current 12 months. Our idea is the Governor’s proposed budget would include program-level information for the prior year, the current year, and the next two fiscal years. Major program initiatives would include a two-year estimate of implementation costs and how to finance them.
The final Budget Act adopted by the Legislature would cover two years of anticipated spending. Appropriations for the budget year (first year) as well as baseline appropriations for the second year would be authorized. The following year’s budget would include proposed changes and adjustments to the baseline budget adopted in the prior year to maintain fiscal balance, and/or adapt to changing circumstances. To the extent that new programs require additional resources, their sponsors would have to include a pay as you go provision, either of cuts in other programs or tax increases, and find the extra votes needed to approve these changes.
Under this system, in the spring of each year, the Legislature would consider expenditure and program changes that would cover a 24-month period. The requirement for fiscal year balance would remain. Program changes necessary to maintain fiscal balances would be identified and enacted. Strategic planning and performance measures would be needed to identify the issues to be addressed and bring about program improvement and accountability for how money is spent.
Budgeting Responsibly – November 24, 2008
Last week I read stories about the mayors of Los Angeles and San Francisco (both big time Democrats and probable gubernatorial candidates) proposing real reductions in city spending and even layoffs of city employees. What is it about city government that makes even liberals more fiscally responsible? In Sacramento, their liberal cousins complain that spending has already been cut too much, so only taxes and federal bailouts are the answer.
I need to go do more research because I cannot remember one item of state spending that is lower now than it was last year, nor has there been any mention of layoffs. In fact, Governor Schwarzenegger's idea of a day a month furlough has already been shot down faster than the San Francisco 49ers.
There is certainly a big disconnect here.
California Budget Reform, Part 2 – November 24, 2008
This is the second part of my series on California Forward, the bipartisan budget reform group I am working with to generate ideas to fix what is broken about our state’s budget process. This week I share what we have come up with to deal with the problem of the state’s boom and bust revenue cycles. California’s dependence on the hyper-progressive income tax system results in General Fund revenues that are extremely volatile. Since 1990 revenues have fluctuated from a decrease of 5 percent to an increase of 23 percent. This volatility makes managing revenues difficult. We need to identify nonrecurring (one time) revenue and ensure that such revenue is reserved for years when there is a shortfall in General Fund income.
Senator Roy Ashburn’s constitutional amendment from the September budget session created a mechanism to do this. SCA 30 requires the Controller to calculate and put into the General Fund the same amount as the prior fiscal year with adjustments only for population and cost of living. Any money in excess of that will stay in the Budget Stabilization Fund, which acts as an emergency savings account for the state. With this reform in place, legislators’ hands will be tied so they cannot use one-time revenues for ongoing expenses, and it is one step toward implementing budget reform in 2009.
This fund can only be accessed by a declaration of fiscal emergency by the Governor and a 2/3 vote of the Legislature. The goal is to build a 12.5% reserve to actually stabilize the budget spending. It is expected that the Governor will call a special election in 2009 to ask voters to approve this reform.
Defining Dysfunction –
December 1, 2008
Last weekend’s newspaper stories portrayed the final legislative budget votes as examples of a dysfunctional legislature. Rather than citing a titanic clash of values, reporters treat the legislature like a sports event where ties are not allowed and someone has to win. They also imply that the differences are narrow and that some compromise deal is easy to find if legislators were not so stubborn. The truth is very different. Democrats and Republicans look at the problem from such different perspectives that even defining the problem is an issue, much less finding common ground on a solution.
I think we have a spending problem and that state spending has to be brought under control. Others think we have a revenue problem and that taxpayers should contribute more. Those are distinct viewpoints and each is claimed by a substantial portion of the electorate. When legislators then stake their positions on these different points of view, they are functioning as representative government should not being dysfunctional. It is not pretty, nor is it conclusive, but it is very reflective of the same disagreement among voters whether spending should be cut or taxes should be raised.
I am intrigued by reports that at least some Republicans are saying that a combination of spending cuts and temporary taxes would be supportable if accompanied by budget reforms that cap state spending and force the Governor and the Legislature to never get into this deficit budgeting again. To me, the press should be looking into the details on how that might work while giving credit to those working to address irreconcilable differences. I, for one, would like to know more to figure out if this is even possible.
Special Session x2 --- December 8, 2008
The new legislature is now convened in two separate special sessions according to the Governor’s proclamations last week. For the first session (called X1), the Governor says he is introducing legislation to address the state’s current fiscal emergency. In his press conference calling this session, he referred to his earlier announced plan “to get our budget back on track, invigorate our economy and generate jobs for the state's unemployed”:
The proclamation for the second session (X2) includes a three-point to do list:
1. To consider and act upon legislation to address the economy, including but not limited to efforts to stimulate California’s economy, create and retain jobs, and streamline the operations of state and local governments.
2. To consider and act upon legislation to address the housing mortgage crisis.
3. To consider and act upon legislation to address the solvency of the Unemployment Insurance Fund.
The first session has a 45-day deadline, which makes for a dreary holiday season for our legislators, which about matches the general mood of Californians shopping for holiday presents. The Legislature is not allowed to adjourn or consider any other issues until this 45-day special session has run its course. So it is not clear whether legislation from the second special session can move while the first session is running.
The most exasperating part of all these proclamations and plans is that nowhere can I find the detailed legislation that is being proposed. The Governor talks about increasing the sales tax; there have been talks about tripling the car tax; many legislators talk about federal support. However, there seems to be a consensus building that all the possible cuts have already been made. That is discouraging
First special session proclamation:
Second special session proclamation:
California Budget Reform, Part 3 – December 15, 2008
This is the third part of my series on California Forward, the bipartisan budget reform group I am working with to generate ideas to fix what is broken about our state’s budget process. This week I share our thoughts on how to deal with the problem of the state having no strategic vision.
There is a tradition in state spending where programs get what they got in the prior year – plus growth. And then cutting the growth is called a cut, so new programs get a foothold that locks spending and adds another layer that eliminates discretion how to employ the state’s dollars. While the budget appropriates more than $140 billion a year, it does not set clear priorities or ensure that dollars are allocated in the best way to achieve results.
The solution is to make results the focus of the process. The Governor’s budget proposal should establish strategic goals and objectives with performance targets. The Legislature should incorporate cost and performance information in its deliberations on the best ways to achieve objectives. The state also needs to consider delegating authority and responsibilities to local governments and regional groups. A results oriented budget process will bring these opportunities out.
Californians and their elected leaders should have information on the quality of public services and the impact of those services on individuals and communities. Agencies should define their objectives and then report their results to the public and Legislature. Last, citizens should have access to performance information to better understand the quality and outcomes of public services.
New Tax Commission=New Taxes? --- December 15, 2008
The Governor and the Legislature made their appointments to the state’s new tax commission last week. I hoped the body would seriously dissect the state’s complex tax system, speak to reforms, and enhance justice for taxpayers. Unfortunately, my review of the appointees dashes my hopes. What I see looking down the list of commission is 2/3rds of them who are already disposed to tax increases. If it is not a set up, it is very close.
The First Step, Too Late --- December 15, 2008
One item in the reports of the special joint session of the Legislature on Monday struck me as backward. Treasurer Bill Lockyer threatened the legislators that if they did not solve the problem before the next Public Works Board meeting in mid-December then he would stop selling bonds and stop state building projects. Since selling bonds adds to the general fund spending obligations it seems to me that that should have been the first cut on the way to solving the problem. Apparently, we have been trying to sell state bonds while ignoring the fact that the general fund cannot afford new obligations. It would have been better if Lockyer would have challenged the legislators by example saying that he has stopped all new public works borrowing thus saving millions in new debt service payments.
California Budget Reform, Part 4 --- December
This is the last part of my series on California Forward, the bipartisan budget reform group I am working with to generate ideas to fix what is broken about our state’s budget process. This week I focus on the problem of inadequate public debate and oversight. Elected officials spend way too much time debating incremental changes in state spending and spend very little – if any – time looking at whether money is being spent well.
Program oversight by the legislature is mostly driven by scandals or headlines. There is no institutionalized process, no information base for legislators to review program spending results. The Legislature needs to reorganize its fiscal activities to focus on goals and outcomes. A Joint Legislative Budget Committee dedicated to frequent oversight hearings could be useful for reaching broad agreement on goals and perform performance reviews in public.