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Reason Foundation

California Won't Fix Budget Until It Cuts Spending

State deficit keeps growing despite revenue increases

Adam Summers
March 7, 2008

March has arrived, and as spring approaches we prepare for another season of new beginnings. That is, of course, unless you are a California taxpayer. Then it may be a new budget season, but it's the same old, same old in the fight to fix the state's structural deficit.

It should come as no surprise that the politicians in Sacramento are resorting to the usual tricks to try to paper over the growing budget gap another year without doing anything to solve the underlying problem: runaway spending. Government spending has significantly outpaced inflation plus population growth for years, and has even exceeded the profligate spending of recalled Gov. Gray Davis under Gov. Arnold Schwarzenegger's tenure.

The Legislative Analyst's Office (LAO) recently issued a report pegging the deficit through June 2009 at $16 billion, up from the $14.5 billion estimate contained in the governor's budget proposal issued in January.

To address the problem, the Legislature passed some "emergency" budget measures recently, but those measures are only expected to save about $2 billion. The bulk of the package consisted of more borrowing, transfers, postponements, and other accounting gimmicks that will only delay the tough decisions lawmakers appear unwilling to make.

Part of the problem is the way the state budget is crafted. California utilizes incremental, or "line-item," budgeting, in which budget allocations are made based on adjustments to the previous year's spending levels, often with little justification. This provides little incentive to identify and eliminate lower-priority, inefficient, duplicative, or poorly-performing programs. By contrast, the State of Washington uses a "Priorities of Government" (POG) system, under which the government performs a top-to-bottom evaluation of what services the government provides and how. Government activities are ranked from most to least important and are funded on down the list until available revenues run out. One of the greatest benefits of the POG system is that it makes priority and trade-off decisions clear to everyone.

Then there are the things government shouldn't be doing in the first place. Is it really a core government function to market agricultural products or license cabinetmakers, locksmiths, tree trimmers, and upholsterers?

Cutting such unnecessary programs is hardly the only solution to the problem, however.

Gov. Schwarzenegger is to be commended for reviving the idea of a meaningful spending cap with a rainy-day fund to smooth spending over economic cycles. In addition, he should dust off the recommendations of the 2004 California Performance Review, which detailed $32 billion in potential savings over five years through common-sense reforms like consolidating similar and duplicative government agencies, selling surplus property owned by the state, and adopting performance-based budgeting and contracting. Moreover, California must address its unsustainable retirement system by reducing salaries and benefits for future state employees so that they are in line with those of the private sector.

Despite what some lawmakers would like us to believe, this is a budget crisis borne of an addiction to spending, not a revenue problem. In the past four years, the state's general fund revenues have increased approximately 32 percent. In fact, total revenue has grown steadily since the early 1990s, shortly after major tax increases were imposed under Gov. Pete Wilson's administration.

Legislators intent on trying to solve their spending problem on the backs of taxpayers through tax increases would be wise to take this lesson to heart, especially considering the ongoing housing crisis and threat of economic recession.

Five years ago, we had a massive budget deficit and a Democratic governor accused of negotiating sweetheart deals with the prison guards' union, and who pushed through a "play-or-pay" health-care mandate on California employers (which was thankfully repealed by voters in 2004).

Today, we have a massive budget deficit and a Republican governor who is offering the prison guards' union a $260 million a year raise that the LAO says is unnecessary and unaffordable anyway in the present fiscal climate, and who has tried to ram through a $14 billion health care plan and mandate (which has thankfully been shelved-for now).

Hooray for the two-party system.

It is time for Californians and their elected representatives to undertake a serious re-evaluation of the proper role of government. Government has simply gotten too big and too intrusive. The casualty is individual liberty. Only when we rediscover the truth of the maxim - "That government is best which governs least" - will we be able to restore any fiscal sanity to our state government.


Adam Summers is Senior Policy Analyst


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