It is not the way Gov. Jerry Brown would have preferred to start his term of office, but he knew going in that his first order of business would be addressing the state’s massive $25.4 billion 18-month budget deficit ($8.2 billion for the remainder of the current fiscal year and $17.2 billion in FY 2011-12). Thus, his first governor’s budget proposal has plenty for everyone to hate. Below I will attempt to outline the good, the bad, and the ugly of the proposed budget.
First, the good. The governor’s budget contains $12.5 billion in necessary cuts. These include significant cuts to health, welfare, and higher education, as well as pay cuts of 8% to 10% for state employees not covered by collective bargaining agreements. Curiously, Democrats legislators and labor unions are showing begrudging support for the cuts from the new Democratic governor, despite the fact that they vehemently opposed such cuts, including many of the very same reductions, when they were proposed merely a year or two ago by Republican Governor Arnold Schwarzenegger. According to a Los Angeles Times article, Senate President Pro Tem Darrell Steinberg (D-Sacramento) admitted, “I hate the cuts, but I am not going to reject the cuts.” Added Barbara Blake, a registered nurse and state secretary of the United Nurses Association of California, “We’re feeling a little better about this budget.” The end of redevelopment funds would also be a good thing, as government should not be engaged in such subsidies.
The proposal would also rely on shifting some services currently provided by the state to local governments via block grants. Counties would be responsible for things such as foster care, adoptions, child abuse prevention programs, outpatient mental health treatment, psychiatric hospitals, and some firefighting duties. In addition, a number of prison inmates (defined as those convicted of “nonviolent, non-serious, non-sex offenses” who had no previous criminal records) would be housed in county jails instead of the more expensive state prisons. As Brown explains, “My proposed restructuring will return decisions and authority—as much as possible—to cities and counties and schools. And, in that way, there will be greater accountability, transparency, and hopefully citizen participation because government will be closer to the people.” This is a welcome development for all the reasons the governor stated. To the extent that government is necessary at all, decision-making authority should be provided at the most local level possible (and, ideally, the individual level).
Gov. Brown was absolutely correct when he asserted during his press conference Monday on the budget proposal, “For 10 years, this state has put together its budget with gimmicks and tricks and unrealistic expectations that have pushed this state deeper and deeper into debt.” Anticipating arguments that the state might try to address its fiscal crisis through borrowing or “kicking the can down the road,” Brown said, “The problem is, next year, there’s not that much more money, but then we’ll have debt service and a much bigger burden to pay back. It’s better to take our medicine now and get this state on a balanced footing.” These are important acknowledgements, especially for a state that has been addicted to spending, for the first step in breaking an addiction is to admit the problem.
That admission must be qualified, however. Gov. Brown relies on $12 billion in tax measures to plug the remainder of the budget gap. This comes primarily from extending the “temporary” tax hikes imposed as part of the 2009 budget measure for an additional five years (assuming, of course, that the state is not still spending everything it can and more, requiring yet another extension of these “temporary” tax increases!). In addition to acknowledging that borrowing and gimmicks will not solve the state’s budget problems, the governor and the Legislature must admit that spending, not revenue, is the real culprit.
California has experienced fiscal straits for many years, including long before the latest recession. The problem was that even when revenues were growing strongly the state’s appetite for spending was insatiable and surpassed revenues even when its coffers were flush. And, even after suffering a significant decline of nearly $20 billion in General Fund revenues from FY 2007-08 to FY 2008-09 during the depths of the recession, revenues have actually grown $11.5 billion (14%) in the two years since.
California is already one of the highest-taxed states in the nation and consistently ranks at or near the bottom of states in terms of business climate. This is why we have seen an exodus of individuals, businesses, and jobs to more tax- and business-friendly states like Texas, Arizona, Nevada, and Utah in recent years. The state must focus on encouraging economic growth by simply removing the shackles it has placed on economic activity by reducing taxes and burdensome regulations.
The proposed budget also falls short by failing to incorporate a number of other reforms that could help plug the budget gap and get the state back on the road to fiscal responsibility. I have written about a number of these before but I’ll mention a few of them here briefly. A good place to start would be the 1,200+ recommendations, estimated to save $32 billion over five years, made by the California Performance Review Commission in 2004 (and largely ignored since then). The state should also aggressively pursue privatization and employ a “Yellow Pages test” of state services. Basically, if the state is performing a function that can be found in the phone book, either the state should not be in that business in the first place or it should at least put those services up for competitive bid. Implementing priority-based and performance-based budgeting and spending/revenue and debt limits are also necessary to improve transparency, control spending, and result in a more rational budget-making process.
While Gov. Brown’s proposed budget addresses many of the state’s fiscal issues, it completely ignores the 800-pound gorilla in the room: state employee pay and benefits. Unionized state workers were conspicuously spared from the budget pain, despite the fact that U.S. government statistics consistently show that government workers typically earn higher salaries and significantly higher benefits than their private-sector counterparts, and that non-unionized workers are facing 8-10% pay cuts. Cuts to unionized state employees would require collective bargaining, but why isn’t this being proposed, especially considering how state employees have largely been shielded from the effects of the recession while the private sector has been forced to adjust? And then there are the retirement benefits. According to several academic studies, California’s unfunded pension liabilities lie somewhere in the neighborhood of $400 billion to $500 billion. That’s several tens of thousands of dollars per California household—and that does not even include an additional $50+ billion in unfunded retiree health care obligations.
I realize that the governor is focused primarily on filling the budget gap in the immediate term, and that savings from pension reforms would take a few years before they really started to accumulate, but any serious effort to address the state’s serious fiscal problems must incorporate state employee compensation reforms. Chief among these are: (1) switching new state employees from the existing defined-benefit pensions to 401(k)-style defined-contribution retirement plans in line with compensation levels received in the private sector and (2) implementing a constitutional amendment that would require voter approval of future state employee benefit increases.
Related Research and Commentary:
” How California’s Public Pension System Broke (and How to Fix It)
” “Comparing Private Sector and Government Worker Salaries”
” “A breakdown of Jerry Brown’s Budget” (Los Angeles Times)
” “Brown’s budget gets it half right” (Orange County Register editorial)