Four years ago, Gov. Arnold Schwarzenegger rode into Sacramento brandishing the sword of fiscal discipline. He vowed to avenge the California taxpayer and end the budget deficit created by former Gov. Gray Davis' profligate spending. "I will not rest until our fiscal house is in order," he proclaimed. Four years later, we are still not there.
The Legislative Analysts Office just warned that next year's state budget faces a deficit of $10 to $11 billion. To exacerbate the problem, California already has approximately $20 billion in debt due to previous budget problems. Rather than "blowing up the boxes" of state government, Schwarzenegger has continued to grow it.
Since his first budget, revenues have increased by approximately 32.2 percent while general fund spending has increased by 36.6 percent. This fact reveals the folly of believing that increases in revenue can resolve the fiscal imbalance. Increases in revenues simply trigger more spending.
Elizabeth Hill, the Legislative Analyst, tried to offer a measure of optimism suggesting that if current projections hold, the budget crisis could nearly correct itself within three years. But consider that even the most sophisticated analysts have been unable to accurately predict an end to the current economic conditions. And secondly, is it reasonable to anticipate that current projections will remain viable in three years? After all, the fiscal conditions of the state have worsened by $6 billion since August. The state has trouble with three month projections, let alone three year forecasts.
If Schwarzenegger is serious about getting the state's fiscal house in order once and for all, he should immediately declare a fiscal emergency and order a special session of the legislature—before the holiday break.
Schwarzenegger has proposed leasing the California State Lottery to a private entity for a lump-sum payment, estimated between $14 billion to $37 billion. Rather than using the revenues to finance his highly controversial universal healthcare proposal, the money should be used to eliminate the current deficit and create the time to achieve permanent budgetary reform. As such, during this special session, Schwarzenegger should tie efforts to address the current deficit to longer-term solutions that prevent this problem from occurring the next time the state economy slows.
Fortunately, the governor has already identified many of the needed long-term reforms in his landmark California Performance Review, which he can immediately implement.
For example, the Performance Review plan included an ambitious effort to trim some of the fat out of state government by consolidating similar departments, which would allow the government to take advantage of a continuing wave of state employee retirements to gradually reduce its workforce without firing anyone. This could save in excess of $3 billion over the course of five years, according to the report.
Similarly, the plan identified several billion dollars in surplus or questionable real estate owned by the state – think MTV beach houses - that could be sold to a more productive private use and could be realistically achieved within the next two years. This could easily contribute more than $1 billion and reduce ongoing state maintenance costs.
During this fiscal transformation, California could also shift to a performance-based budget where spending decisions are based on performance measurements of state programs—not just on what was spent last year as we currently do. Just because a program got money last year, doesn't mean it deserves money this year.
But to be truly successful, Schwarzenegger must limit the state's ability to spend recklessly. You can reform all you want, but if you do not put in place reasonable limits on state spending, the state will inevitably find itself in this position again.
Spending and revenue limits are effective because they force lawmakers to prioritize spending and make choices - the way normal families live every day. This is precisely what California needs – a fiscal policy that forces smarter spending.
Even recalled Gov. Gray Davis has seen the light. In a November speech, Davis said: "…every governor who serves more than just a couple years will experience both the good and the bad that comes with our economy…The answer, of course, is to adopt a spending limit which stockpiles money in good years that you can draw down in bad years."
Schwarzenegger has talked long enough about reforming the state's spending and his record has created a platform for his ousted predecessor to step to his right on fiscal matters. We have "torn up the credit cards" multiple times now only to order new ones. Now, is the opportunity for meaningful action, not more promises.