California Governor’s Revised Budget Still Lacks Needed Reforms

California Governor Arnold Schwarzenegger unveiled the May Revision to his state budget proposal today. The projected deficit dropped slightly to $19.1 billion from the $19.9 billion estimate in January, due primarily to $1.3 billion in budget cuts adopted during a special session of the legislature in February and $700 million from the federal government. These improvements were offset, in part, by continued revenue shortfalls. The state hopes to obtain several billion dollars more from the feds, but that has not been guaranteed.

Gov. Schwarzenegger reiterated his frustration with the legislature for failing to adopt serious budget and pension reforms, and vowed to refuse to sign any budget that does not contain significant reforms in these areas. He argued that the state’s pension system is unaffordable, chiefly due to significant benefit increases made in 1999, and noted, for example, that state employee retirement costs will exceed $6 billion this year. The California Public Employees’ Retirement System (CalPERS) alone will cost $3.9 billion for the fiscal year that starts July 1 if board members approve actuaries’ recommendations. This would represent a $600 million increase, and $400 million more than anticipated in the governor’s January 2010 budget.

Schwarzenegger’s pension reform proposal would essentially roll back benefits to pre-1999 levels for future state workers, but it would retain the existing defined-benefit system. While this would represent an improvement over the status quo, it doesn’t go nearly far enough. What is needed is a complete overhaul of the system, including switching to 401(k)-style defined contribution retirement plans (as private sector has done for decades), establishing government employee pay and benefits that are equal to those for comparable positions in the private sector, cracking down on pension spiking and other abuses, and requiring voters to approve any future benefit increases. (See here for more analysis of the Schwarzenegger pension reform proposal.)

The governor also spoke of the lack of an effective rainy-day fund to smooth out swings in state revenues, and of policy makers’ penchant for spending everything they can during good times and assuming that the party will never end.

The governor is correct about all these problems and, of course, he can’t fix things all by himself, but there are some other things I would have liked to have heard him address as well. For instance, instead of talking only about spending cuts or tax increases, why don’t policy makers use privatization and outsourcing to generate significant cost savings while maintaining services? A little competition goes a long way. If there are services the government is providing that the private sector can provide for much cheaper, why wouldn’t the state aggressively seek out these opportunities?

And what about the state’s apparent addiction to debt? Debt service is eating up more and more state funds, yet legislators keep pushing more borrowing, as evidenced by the pork-laden $11 billion water bond on the upcoming November ballot. The Legislative Analyst’s Office has stated that the investment community gets nervous when a state’s debt service ratio (the portion of the General Fund that must be devoted to paying off the state’s debt) exceeds 5% or 6% (see page 13 of the linked document), yet we are already beyond those limits. This is why we have the worst credit rating in the nation and, as a result, why our borrowing costs are so high. How about implementing a debt limit that would ban the state from issuing more debt or placing any new bond measures on the ballot when the debt service ratio exceeds 5% or 6%?

For that matter, how about implementing a real spending limit that would cap spending increases at the rate of population growth plus increases in the cost of living (i.e., inflation)? This would be like the Gann spending limit before it was gutted in 1990 (and it hasn’t been effective since).

How about refusing to sink billions of dollars into government boondoggles like the high-speed rail proposal, which even its proponents admit suffers from ridiculously optimistic cost, ridership, ticket price, and other assumptions?

How about adopting the more than 1,200 recommendations made six years ago by the California Performance Review Commission that would save an estimated $32 billion over 5 years? How about consolidating duplicative government agencies and functions, eliminating many of the hundreds of state boards and commissions, and eliminating poorly-performing or low-priority programs? On this last point, part of the problem is that there is currently no means of measuring program performance in any meaningful way or determining which programs are high-priority and which are lower-priority. To that end, how about adopting performance measures and performance-based budgeting, or “budgeting for outcomes,” to streamline government and produce a more rational budget process?

How about doing something about the state’s woeful business climate to keep our most productive residents and entrepreneurs from fleeing California’s high taxes and burdensome regulations for states that offer them greater opportunities? California once again placed dead last in Chief Executive magazine’s “Best and Worst States for Business” survey. Improving this reputation will require tax cuts and a significant rollback of job-killing regulations.

(For more on budget reform solutions, see my previous post on how to fix California.)

Gov. Schwarzenegger’s frustration with the legislature is understandable, but he needs to be more bold in his own reform proposals as well. There is no shortage of ideas and proven solutions to help fix the state’s budget mess. What is lacking is simply the political will. It seems that lawmakers are intent on putting off matters as long as possible, making things even worse in the long run. Will it really take a default on the state’s debt or riots in the streets, as in Greece, before lawmakers get the message?