Before delving into the regrettably long list of things that are wrong with California, perhaps we should begin by reminding ourselves what is right with California:
- The state has one of the best and brightest labor pools in the country to draw from;
- There is a large and diverse set of industries that offer numerous economic opportunities;
- Overall quality of life remains very high;
- Of course, the weather is great and it's simply a desirable place to be.
But the state government is not right. Despite all of the things that California has going for it, the state has been choked by excessive spending, borrowing, and taxes. Late budgets and the paralysis caused by the need to resolve massive structural budget deficits have become an annual occurrence. There are two sides to the budget equation: revenues and spending. California's problem has clearly been on the spending side.
The Problem is Spending, Not Revenue
California has some of the highest taxes in the nation and, for many years (until recently), state revenues have grown significantly. The problem is that whenever there is a period of economic boom and the state's coffers are overflowing, policymakers spend as though the good times will never end. When the inevitable correction comes, they are always shocked-shocked!-that revenues cannot keep pace with their unrealistic assumptions, and so we have another fiscal crisis.
If California had simply held spending to the average population growth plus the average increase in the cost of living during the past three gubernatorial administrations-starting with Gov. Pete Wilson in fiscal year 1990-91 and covering the Gray Davis and Arnold Schwarzenegger administrations-the state would have been sitting on a $15 billion surplus instead of having to plug the recent $42 billion deficit. That's a difference of $57 billion. In fact, after adjusting for inflation, California spends nearly 20 percent more per capita than it did at the start of Gov. Wilson's first term 18 years ago. I seriously doubt that many would argue that the state government is 20 percent better today than it was back then. Add to all this California's enormous debt burden, which has helped to earn it the dubious honor of having the worst state credit rating in the nation, and you have a recipe for fiscal disaster.
Poor Business Climate
California's high tax, high regulation environment has severe consequences, as it is driving many of its most productive people and businesses from the state. The American Legislative Exchange Council recently released a report entitled Rich States, Poor States, which analyzes the 50 states based on 16 policy variables, including top marginal personal and corporate income tax rates, property and sales tax burdens, state minimum wage, and the number of public employees per 10,000 residents. California ranked near the bottom, 41st overall, because it has the worst personal income tax progressivity in the country, the second-worst top marginal personal income tax rate, the second-worst average workers' compensation costs, and a high minimum wage.
"Despite warm weather, sandy beaches and the Pacific Ocean, Californians are leaving in droves to escape the state's oppressive tax burden," the authors of the report concluded. They added, "No state has ever taxed its way into prosperity."
Chief Executive magazine's 2009 "Best and Worst States" survey similarly exposed California's poor business climate. The survey asked 543 CEOs to assess their states based on issues such as regulation, tax policies, education, infrastructure, quality of living, and proximity to resources, and to grade each state on three criteria: 1) Taxation and Regulation, 2) Workforce Quality, and 3) Living Environment. California ranked dead last for the fourth year in a row.
As one CEO put it, "Michigan and California literally need to do a 180 if they are ever to become competitive again. California has huge advantages with its size, quality of work force, particularly in high tech, as well as the quality of life and climate advantages of the state. However, it is an absolute regulatory and tax disaster."
So, how is the state going to do a 180 and get on the right track?
California Performance Review
A good place to start would be the California Performance Review. In 2004, Gov. Arnold Schwarzenegger solicited government reform ideas from state and local government leaders, the business and labor communities, public policy experts, and members of the public. As a result, the California Performance Review Commission detailed over 1,400 recommendations with potential cost savings of approximately $31 billion over five years, including $10 billion in savings from the General Fund. These recommendations included such common-sense ideas as eliminating some of the hundreds of state boards and commissions, consolidating programs and government functions that are duplicative or overlapping, and selling off surplus property, such as state-owned golf courses, the Los Angeles Memorial Coliseum, and the MTV beach house in Malibu.
Unfortunately, hardly any of the suggestions have been implemented and the California Performance Review has largely been filed away as another blue ribbon commission report to be ignored. But if the administration already has so many ready-made, nonpartisan solutions, why not put them to use, especially now?
Another worthy reform that was abandoned was the state's pension system. Once upon a time, perhaps a generation or two ago, it could be argued that government employees needed greater benefits and job stability than private-sector workers because the government could not match salaries in the private sector. That clearly is no longer the case. Now government employees typically earn higher salaries and much greater benefits than their private-sector counterparts. Unfortunately, an effort to switch new state employees from the state's generous traditional pension plans to 401(k)-style defined-contribution plans more in line with the private sector was scuttled when some sloppy wording in the proposal led to fears that the widows of slain public safety officers would be denied disability pensions. Nevertheless, there is a reason that the private sector has been switching to defined-contribution plans for the past 30 years: traditional pensions are simply too volatile and unaffordable.
Since legislators have proven time and again that they are unable to restrain spending, California needs a strict spending and revenue cap, although they should not be forced into a Faustian bargain where they would have to agree to impose an additional $16 billion in taxes on themselves, as Proposition 1A on the May 19 ballot would do. California passed the Gann Spending Limit in 1979 with over 70 percent of the vote. The Gann Limit basically prevented state spending from growing by more than the growth in population and inflation, and any tax revenues collected above the limit were to be returned to taxpayers via tax rebates. Unfortunately, the Gann limit was gutted by Proposition 111 in 1990 and hasn't been effective since.
The very way the budget is crafted cries out for serious reform as well. Instead of the current line-item budgeting, which makes incremental adjustments to last year's budget for various spending categories, oftentimes with little or no justification, California should adopt performance-based budgeting. Under performance-based budgeting, legislators could use outcome measures adopted by agencies to link funding decisions with program performance. This would shift the focus from line items and object codes to programs and results.
Some states have taken this concept even further. Washington and South Carolina utilize a Priorities of Government (POG) budget process, under which government services are identified by activity, rather than by agency, and categorized according to a set of pre-established goals. The activities are then ranked in order of priority and effectiveness and funded from the top of the list down until all available revenues run out. One of the greatest benefits of the Priorities of Government system is that it makes priority and trade-off decisions clear to everyone.
Privatization and Outsourcing
Finally, the state should make much greater use of privatization and contracting with private-sector vendors to provide services. There are certain government services that can be provided more cheaply and effectively by the private sector, or that the government just shouldn't be performing in the first place. Hence, a comprehensive "Yellow Pages" test should be applied to state government. Simply put, if there are businesses listed in the Yellow Pages that are performing the same services as the government, the government should either put those services up for competitive bids for performance-based contracts or eliminate the service altogether.
California holds much promise, and we have a lot to be thankful for, but overregulation and the failure to contain borrowing, spending, and taxes have diminished our liberties, our economic opportunities, and our prosperity. There are numerous viable solutions to the state's budget problems, but vital reforms will take leadership and political willpower.
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. In order to put California back on the road to recovery and return to a state of fiscal sanity, we must break the state's spending addiction.
Adam Summers is a policy analyst at Reason Foundation.