How to Fix California

As the results of the California special election were coming in and it was clear that voters resoundingly defeated the so-called “budget reform” measures to increase taxes, borrow from future lottery revenues, and raid funds dedicated to children’s health and mental health programs, political pundits and elected officials began scratching their heads and asking, “What now?”

The notion that the propositions on the special election ballot would actually solve the state’s budget mess were false from the start. California’s nonpartisan Legislative Analyst’s Office estimated that even if the state had gotten the $6 billion it was planning on from the lottery, children’s health, and mental health measures, it still would have been $8 billion in the hole. It turns out that those projections were, once again, even rosier than reality, and that combined $14 billion deficit has now grown to an estimated $21.3 billion gap.

So where do we go from here? There is a roadmap to recovery. In 2003, amidst another budget crunch that was almost as dire as the one faced today, I and a number of my Reason colleagues performed a comprehensive review of the state budget. The culmination of this effort was an analysis and set of recommendations that we called the Citizens’ Budget. The study contained a 10-point plan to putting the state government back on the right path. The recommendations included the following:

  1. Avoid accounting gimmicks
  2. Acknowledge that spending–not revenue–is the problem (California is already one of the highest-taxed states in the nation and revenues have grown significantly until very recently due to the recession)
  3. Adopt a performance-based budgeting process so that funding decisions can better be tied to program results and priorities
  4. Consolidate duplicative governmental functions and eliminate some of the hundreds of unnecessary boards and commissions
  5. Adopt personnel reforms such as reducing the number of state employees, reducing pension obligations for future employees to get workers’ benefits back in line with compensation in the private sector, and provide incentive bonuses to state employees for innovative ideas that lead to cost savings
  6. Increase the use of competitive sourcing (The state could achieve significant cost savings and/or service improvements by contracting out numerous services to the private sector. Moreover, it should implement a “Yellow Pages” test: if the state is performing services that private companies listed in the phone book are already performing, then the state probably shouldn’t be in those businesses in the first place.)
  7. Implement education reform by cutting red tape, and adopt funding reforms such as merit pay for teachers and weighted student funding
  8. Reform health and social service programs by eliminating optional Medicaid services and reducing the waste from fraud through the use of recovery auditing
  9. Switch to a biennial budget and impose a real spending and revenue cap
  10. Improve the state’s business climate by reducing regulations and taxes that drive people and businesses out of the state.

To this list I would add adopting a debt-service limit so that the state could not issue bonds if doing so would cause its debt service costs to exceed 6% of General Fund revenues (the Legislative Analyst’s Office has stated that the investment community gets nervous when a state’s debt service ratio exceeds 5% or 6% (see page 13 of the linked document), as we have now seen firsthand) and returning to a part-time legislature. The state should also finally implement the more than 1,200 recommendations made by the California Performance Review Commission in 2004.

These ideas are not new, but they are at least as relevant today as they were back in 2003. It is time for the governor and the Legislature to dust off the reports and utilize them to make real changes to the way California’s state government operates, rather than merely trying to tinker a bit at the edges and kick the can a little further down the road.

I discussed the Citizens’ Budget reforms recently on a special 3-hour election night broadcast of the “IE News Hour” with Lou Desmond on 590 am KTIE in Corona. Podcasts of the program are available on the KTIE Web site here (scroll down to the segments from the May 19 show).