Reforming California

Text of speech to California Commission on Taxation and the New Economy

Mr. Chairman and members, thank you for allowing me to join today’s discussion about reforming the budget process, eliminating the structural deficit, and increasing accountability across government. While it is imperative that we confront the state’s budget crisis, it is important to highlight another crisis our state faces-what I call the “competitiveness crisis”-a crisis that makes our budget-related challenge all the more difficult.

Almost weekly I read a new article about California’s competitiveness crisis-how other states are targeting their business development resources on California companies, how companies like Buck Knives and Fidelity National Financial, long-time southern California employers, are moving out of state.

At the same time California cities are in a tailspin in national rankings like the Forbes index of the most competitive cities for business. Last year, six of the top ten cities in that list were from California. This year, the highest ranked California city is 23rd. Los Angeles is no longer even in the top 125 cities.

Some argue that this crisis is caused exclusively by taxes and regulations. I believe its roots are deeper—they reach all the way to our quality of life. We have increased education spending by 60 percent over the past four years and have little to show for it. Workers’ Compensation costs are three times what they are in Arizona. Los Angeles has fewer miles of freeway per capita than most major metropolitan areas.

In near universal fashion, California taxpayers and businesses pay more and get less than what they can receive elsewhere.

So, how do we solve the budget crisis without undercutting our quality of life or worsening our competitive position relative to other states?

Clearly we cannot just cut or tax our way out of the problem. If we increase the cost of government and reduce the output of services, we will be paying even more for even less.

Instead, our goal must be to achieve greater value for the taxpayer at lower cost, and structural reform plays an important role in achieving greater taxpayer value.

Earlier this year, Reason Foundation and the Performance Institute released a comprehensive budget plan that demonstrated how we could balance the budget without raising taxes and without undercutting quality-of-life priorities. We provided specific, short-term recommendations as well as suggestions for tackling structural challenges. I’d like to summarize a few of the more germane concepts today—

Spending/Revenue Limit

Before we can eliminate the structural deficit, we must understand why it exists in the first place. The structural deficit is not the result of a revenue shortfall; it is the result of excessive spending. Quite simply, we are spending more than we are bringing in. Over the past four years, the state grew by 21 percent in terms of population and inflation. Revenues outpaced this, growing by a very healthy 28 percent. Expenditures, by contrast, grew by more than 36 percent (twice the national average of other states). Now, there were a variety of reasons for this spending/revenue disconnect. One of the primary causes, I believe, is the absence of a functional constitutional limit on spending.

For that reason, California needs a restored Gann Spending Limit, as well as a Colorado-style revenue limit. Together, they provide effective protections against over-spending and, at the same time, ensure that revenues are available to meet the state’s needs.

Importantly, this revenue limit must include a “Rainy Day” Fund to offset the fluctuations in the business cycle and protect quality-of-life priorities like education.

Biennial Budget

We strongly support shifting to a two-year budget cycle because it improves legislative oversight and increases transparency.

Right now, the budget-the single most expensive and important piece of legislation that the state confronts-gets only a few months of budget subcommittee hearings.

Under our proposal, the two-year budget would be the exclusive focus during the first year of the legislative session. Other legislative priorities could be dealt with in the second year of session. During that first year, the legislature’s singular focus should be on producing a timely, effective, and watertight budget.

Biennial budgeting also increases transparency. The 2003-2004 state budget utilized numerous gimmicks and accounting maneuvers to balance on paper-such as shifting Medi-Cal from accrual accounting to a cash basis. Had a two-year budget been in place, these gimmicks would be far less attractive and far more visible to the public.

Finally, a two-year budget also affords ample time for programmatic reform. Sadly, when you discuss fundamental reform with the budget-writing staff, they are typically only interested if you can demonstrate current year savings. Restructuring programs takes time—in some cases you will not see savings for a year or more. Hence, shifting to a biennial budget allows time for the reforms to occur and the savings to be achieved in that same budget cycle.

Performance-Based Budgeting

Beyond the budget calendar, California also needs to shift the focus of the budget discussion away from the intentions of a proposed expenditure and toward measuring the actual results of that spending. As I mentioned earlier, current budget oversight occurs for only a few months each spring. That limited time is mostly spent evaluating spending requests for next year. What the legislature should ask state agencies is “what did you achieve with the money we gave you last year?”

Performance-based budgeting focuses on this question and, hence, increases accountability.

Performance-based budgeting information is a very powerful tool to help the legislature identify poorly performing programs, duplicate activities, and assets that are underutilized.

In the absence of good, performance-based information, we are often left with “across-the-board” cuts—and those run counter to efforts to improve the performance of government because they treat successful and important quality-of-life programs the same as ineffective waste and bureaucracy.

Competitive Government

Finally, California needs competitive government institutions.

For starters, the state should subject its commercial activities to competition between public agencies and private sector providers. When you look at services like fleet maintenance or landscaping around state buildings, there is no legitimate reason that those services should not be subject to competition. And, importantly, even though the public sector will win those competitions most of the time, taxpayers will still gain through lower cost, higher quality, and increased accountability.

Secondly, California needs to shift away from “fee-for-service” contracts that reward effort, and adopt performance-based or fixed-price contracts that reward measurable performance.


California faces a river of red ink in a structural deficit. We also face a competitiveness crisis with our businesses being cherry-picked by other states. We also face the challenge of improving poor-performing public services.

The bottom line is that California will only be able to tackle these competing challenges and re-emerge as the Golden State of Opportunity by overhauling the manner in which government operates. And that is going to require serious outside-the-box thinking.

With that in mind, I want to thank this commission for asking the big questions and helping sketch that roadmap to reform that California so desperately needs-and which Reason Foundation is honored to aid in the creation of.

George Passantino is director of government affairs at Reason Foundation. He served as a director on Gov. Arnold Schwarzenegger’s California Performance Review.