Reforming California

Policy Study

Reforming California

How to fix California's budget and schools

Financially, California is in dire straits, but this situation did not strike like lightning. It took years of bad budget decisions to achieve the condition the state’s finances are currently in. For years spending has grown much faster than inflation and population growth-and revenue-and the growth in the state workforce even during a time of net outmigration has been explosive. Now taxpayers are paying for it.

Any true, lasting reform must fundamentally change the way in which this state conducts its affairs. Anything less may slow the sinking of the ship, but won’t prevent it. The reforms we recommend require significant restraint on the part of state legislators and executive officers, but it was lack of restraint that got this state in dire circumstances and nothing but restraint will get it out.

What we recommend reins in the excesses of past years, but causes no more pain than is being caused by the current situation. It took a long time to create these dire circumstances and it will take a while to right the ship. But it is necessary. On its current course no one wins. Over the last three gubernatorial administrations, California state government spending growth has consistently far outstripped the rate of growth in population and inflation. At the same time, state government went on a hiring spree, increasing the state workforce faster than population growth. These trends are not sustainable.

What California needs is a workforce that can flex with changes in population, in state cash flow, and in the vicissitudes of economic times. California needs a workforce that can bring new technology to the table, rather than having to pay to keep up with technology that advances faster every year. California needs a workforce that it can hire to work round the clock when it needs something fast, then let go when that need is filled, and this flexibility can only come from the private sector. It cannot be accomplished if the state of California insists on doing not only the “steering” but also all the “rowing” of every job that needs doing.

California can answer its needs more effectively by joining the many states that retain control of their budgets but outsource some of their workforce to attain that flexibility and tap into those resources that only the private sector can offer, and save much money in the process. To this end we recommend an expanded use of public-private partnerships in many areas of the government. While this results in fewer state employees, it increases the number of private-sector employees, bringing jobs to the state, so rather than curtailing the state, it transfers job opportunities to the tax-paying private sector. The use of public-private partnerships saves money by, among other things, enabling the state to employ better technology and more highly skilled workers than it can afford to purchase permanently and allowing jobs to be done on contract, with accountability measures built in, and without costing the state millions of dollars in pensions after those workers are no longer in the workforce.

The skyrocketing cost of pensions alone is enough to warrant close scrutiny over the number of new employees hired by the state and an examination of how pensions should be calculated in the state of California. We recommend reforming pensions for new hires from “defined benefit” to “defined contribution” to enable the state to forecast future budgets more accurately.
Many jobs are inherently governmental, but we don’t know exactly which ones are. Therefore we recommend appointing a commission to discern which government jobs the state cannot save money by outsourcing and take steps to make them more efficient and effective, as other states have done. Right now, the state of California has little data showing which of its agencies are effective, largely because there are few current benchmarks with which to assess how efficient or effective agencies are performing. Right now the state rewards poorly performing agencies with more money, workers and oversight, increasing the tax burden on Californians, yet without performance benchmarks, managers cannot steer their agencies toward solid performance no matter how many resources come their way. We recommend that the state develop and provide agencies with criteria to assess how well they accomplish their mission, and where an agency cannot define or accomplish its mission, assess whether that agency provides a necessary service at all, and dissolve it if it is not needed. This is the level of restraint necessary to bring state finances back in order.

Along with the expectation of higher efficiency and effectiveness comes the authority over budgets. Many managers are hampered by a lack of authority over how their funds are spent. These people were hired as managers because they were deemed capable of good judgment; they should therefore be given the authority to manage the funds specific to their agencies for maximum effectiveness and efficiency. Schools and parks specifically serve varying needs depending on who uses them. Therefore we recommend the state of California make parks self-sufficient, encouraging them to serve those who pay to use their services, and empower individual schools by granting principals increased authority over their own budgets to serve their particular needs. Instead of a central office determining what resources schools need, the principal should be able to steer the school’s funds to serve the specific and changing needs of the individual students served.

We also advocate, as has served other states well, the budgeting of schools to mirror the needs of students in those schools by student-based, rather than central office-based, budget allocation. These reforms will give principals the resources and authority they need to actively manage their schools for success. But California has many schools that have demonstrated a failure to succeed for many years. The time has come for California to concede that schools consistently scoring at the bottom are not benefitting from their current configuration and to allow private sector companies that specialize in this area to change the dynamic in those schools. If they can demonstrate increasing annual scores in these schools, then it’s a win-win situation for the state, the company, and, most importantly, the families served by these failing schools. As private schools have proved for decades, the private sector can educate, and educate well. In these failing schools, it’s time to give private companies a chance to turn them around.

Dire conditions call for dire measures. To this end we recommend that the state of California do a complete inventory of its possessions and assess whether they are in gainful use. Many unused or underused state-owned assets could be sold to help fill the ailing state coffers and be put to private use, increasing the flow of tax money to the state permanently.

California got in this pickle due to unfettered spending of someone else’s money–taxpayers. Taxpayers should be able to see, easily, how their hard-earned money is being spent, and since the computer age provides a vehicle to give taxpayers that information, state agencies should step up to provide it. To this end we recommend state agency budgets and expenditures be made public and open to scrutiny. Such transparency not only keeps citizens apprised of government spending, but makes public servants think twice about what they spend someone else’s hard-earned money on.

California needs to stem the hemorrhaging of its budget, but also assure that spending out of step with changes in population and inflation will not happen again. This can only be addressed legislatively, with a state spending limit tied to the rate of population and inflation. Just as millions of Americans struggle daily to live within their means, without just “getting more money,” so too the state must determine its means and constrain itself through legislation to live within them. For state legislators and executive officers it is the hard thing to do, but for the state as a whole it is the right thing to do. As California taxpayers, legislators and executive officers are learning the hard way, nobody wins when government goes broke. We should all welcome whatever spells success for now and in the future, however uncomfortable it may be in the short-term.

Leonard Gilroy is vice president of government reform at Reason Foundation, a nonprofit think tank advancing free minds and free markets. He also serves as senior managing director of the Pension Integrity Project at Reason Foundation, which assists policymakers and other stakeholders in designing, analyzing and implementing public sector pension reforms.

Adrian Moore

Adrian Moore, Ph.D., is vice president of policy at Reason Foundation, a non-profit think tank advancing free minds and free markets.

Anthony Randazzo

Anthony Randazzo is a senior fellow at Reason Foundation, a nonprofit think tank advancing free minds and free markets.

Lisa Snell was the director of education and child welfare at Reason Foundation, a nonprofit think tank advancing free minds and free markets.

Adam Summers is a senior policy analyst at Reason Foundation, a nonprofit think tank advancing free minds and free markets. He has written extensively on privatization, government reform, law and economics, and various other political and economic topics.