Analysis
California is its own worst enemy
The Golden State's dysfunctional fiscal policies and past economic neglect are hobbling efforts to solve its recent budget problems.
By Evan Halper
Los Angeles Times
SACRAMENTO, Calif. — In this economy, every state is hurting. Unemployment is in double digits, tax receipts are diving and deficits are piling up. But California seems to be in a class of its own when it comes to financial dysfunction. Its problems eclipse those of other states.
California has the distinction of being the only state constantly running out of cash. It is the only one pleading with the federal government to backstop an emergency-borrowing plan. It is the only state that never closed its deficit from the last economic downturn — the one that began in the beginning of the decade — with the hangover from that neglect hobbling efforts to solve the most recent crisis.
The state has become a laboratory for what not to do when it comes to managing finances. The online news journal Stateline.org, which state government wonks look to for news on the latest policy trends, recently published a guide for bureaucrats and analysts who want to keep their state from becoming another California. Rest assured, the piece advised, most states are not likely to find themselves as troubled as the Golden State any time soon.
Size is a factor. "You are talking about the eighth-largest economy in the world, so the numbers involved are just so monumental," said Sujit CanagaRetna, a senior fiscal analyst with the Council of State Governments in Atlanta. "The largeness of the problem makes it more intense."
But there is much more.
The oft-cited waste and abuse are problems, but the deficit is bigger than the state bureaucracy. California could fire every state employee — including those well-paid prison guards and university professors — close every government office, stop all travel and cease the purchase of paper clips without closing the $24 billion budget gap. The government would be gone, but the deficit wouldn't.
"When you have a budget gap of $20 billion plus, cleaning up waste and abuse just isn't going to fix it," said Susan Urahn, managing director of the nonprofit Pew Center on the States.
The runaway spending is caused largely by a growing group of Californians making use of basic state services as the cost of those services escalates.
Since Gov. Arnold Schwarzenegger took office, for example, the amount the state spends on Medi-Cal health insurance for the poor has grown more than 40 percent, from less than $10 billion annually to more than $14.4 billion. Spending on community mental-health services has nearly tripled, and the state's program that provides services for the disabled grew from a $1.6 billion annual expense to nearly $2.4 billion.
This has happened despite efforts by the state to contain costs. Primary-care doctors, for example, are paid $26 for an office visit with a Medi-Cal patient. There is no simple way to seriously limit these health-care costs short of eliminating the benefits for hundreds of thousands of Californians.
Prison scenario
The same scenario holds true for prisons, where state spending jumped from $6.5 billion to nearly $10.5 billion under Schwarzenegger. The federal courts mandated much of that spending after ruling that the state's prisoners had been widely mistreated. The alternative to spending the money is releasing tens of thousands of inmates and parolees.
Similar challenges confront other big states. Yet few of them have plunged into the same financial despair. They move quicker to identify and confront financial problems as they arise. In California, problems mount fast and are left to fester as political leaders bicker.
The backbone of this inertia is a patchwork of state policies that works against good fiscal management. That these underlying mechanical issues with state government are fueling the problem is no secret. Legions of blue-ribbon commissions, nonpartisan think tanks and elder statesmen and stateswomen have provided blueprints for fixing them.
Among the likely recommendations are the following:
Update the tax structure
California is extremely reliant on personal income taxes to pay for government. It is a source of cash that is unpredictable and subject to huge swings. When the stock market is soaring, it is great for the state. California's millionaires and billionaires contribute wads of capital-gains taxes in those good years, and the state has consistently used that money to expand programs.
The richest 1 percent of residents contribute half of all the personal income tax the state collects. As soon as the economy takes a dip and the stock market stalls, the money stops flowing and the state plunges into a crisis.
End the two-thirds rule
Only two other states require two-thirds of the Legislature to approve a state budget. The rule was enacted as part of Proposition 13 during the tax revolt of 1978.
The idea was to make it exceedingly difficult for the Legislature to raise taxes. And it is. But it also has become exceedingly difficult for lawmakers to merely do their job and get any spending plan in place, with or without new taxes.
GOP lawmakers, a minority in the Legislature, tend to use the influence they have over the budget to renew policy demands that had been neglected for much of the year.
Democrats charge that they are being extorted for budget votes.
Gridlock follows. Nothing happens until the state stops paying its bills or comes close to it.
Lawmakers rush a budget onto the governor's desk that uses borrowing and other gimmicks to paper over much of the problem.
The cycle repeats itself.
Rein in initiatives
Voters have created a complicated and conflicting web of spending requirements and tax limitations.
They have told the state to borrow billions for new programs without any plan for repaying the loans.
Last week's special election embodied the problem.
Voters refused to reallocate money they previously had ordered spent on mental-health and children's programs, but they also refused to raise revenues with tax increases and a plan to borrow against the lottery.
Build rainy-day fund
The rainy-day fund California has is full of escape hatches.
It is regularly raided, leaving nothing to tap when the state finds itself in a jam.
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