Volume I, No. 7

December 18, 2008

Why Can't Sacramento Solve the State Budget Problem?

School district administrators, teachers, parents and California citizens are all asking why Sacramento politicians are not solving the current budget problem.

The general refrain is, “We elected them to solve the problem but they are not getting it done.”  There are some very good and practical reasons why the budget problem is not being solved.  It will begin with increasing tax revenue, then move to program cuts, review political deal making, and conclude with what I believe is necessary.

When Should Taxes Be Raised?

The general answer for most citizens is never.  Most economists believe it is counter-productive to raise taxes during a recession such as we are in at this time.  They believe tax increases reduce the economic growth that is needed to recover from a recession.  Also, California’s citizens do not trust the Legislature or Governor to spend the new tax money appropriately.  Public opinion surveys consistently have indicated California citizens do not trust the Governor nor the Legislature.  The voters believe there is waste in state spending.

The combination of negative economic effects from increasing taxes during a recession and the general negative voter attitude toward tax increases make increased tax revenues during an economic slowdown a very difficult policy action. 

If taxes cannot be raised during bad times, should they be raised in good times in order to build a reserve for the bad times?  Most of California’s citizens would say yes in theory, but no in practice.  If government has enough money from the current tax structure to pay for current programs, then the good times excess should be used for a reserve.  They ask, “Why should citizens pay more taxes to build a state reserve?”  Once again, the surveys have strongly indicated citizens do not trust Sacramento to wisely spend new tax revenue.

Dedicated Taxes

What if taxes were specifically limited to particular programs, such as protecting education?  If the tax revenue was restricted for a purpose the citizens supported, then the tax would have a greater probability of approval.  However, restricting a tax to particular programs, such as education, means the other programs such as prisons, health care, University of California, California State University, and general state employee costs, would not be protected.  They would bear the full brunt of any cuts.  Those programs, and their advocates, would oppose protecting education and having to accept deeper cuts in their programs.  Those advocates would strongly try to influence the Legislature to avoid dedicated tax increases that were not dedicated to their programs.

Program Cuts During Recession

If there are not reserves to carry existing programs through a recession, and if significant new tax revenues are not possible, then program cuts become the next alternative.  However, this results in cutting programs during a short-term recession only to turn around later and try to restore the programs when the economic conditions become better.  Restoring programs, however, is more difficult if the program staff know that they could lose their employment in the next recession.   This yo-yo program cut/restoration cycle makes planning and efficient program delivery almost impossible and does lead to a perception of government wasteful spending. 

Better economic conditions also may result in significant amounts of one-time funds.  Those one-time funds will be looked upon by program advocates as appropriate for ongoing program expenditures.  There are always many more ongoing program needs than there are ongoing program revenues.  This ongoing need versus one-time short-term revenue creates a constant conflict for the allocation of public resources. 

Cutting programs in a recession does not resolve that conflict.  As a matter of policy, however, it is difficult to avoid ongoing program expansion because there are program advocates and citizens who support such expansion during good economic times, without regard to the effects that will occur during bad economic times.

Cutting a Deal

Most Californians believe a balanced approach of cutting programs and increasing revenues needs to be used to balance the state budget during a recession.  Increased revenues can come from ongoing tax revenues, short-term borrowing or other short-term revenues.  In order to pass such a balanced proposal, there has to be a deal with both political parties in the Legislature, as well as the Governor agreeing to make concessions.

Although this makes some sense, it is difficult for any of the deal makers to ensure that any concession made today would still be in place in future years.  No Legislature can bind another Legislature.  So when a Legislature changes labor laws in order to receive votes for a tax increase, those labor law changes can be rescinded in the next legislative session or when there is a new governor who may be more amenable to labor laws.  Consequently, any legislator voting for ongoing tax revenues, in order to have environmental, labor or other business law changes, may be voting for an ongoing revenue increase with only a temporary change in law.  Even if those specific law changes are able to be made permanent, other laws could be passed subsequently which would have the same effect of increasing business costs and, thereby, undo the deal.

This means it is difficult to determine how agreements and deals can be made to last longer than a two-year session.  Term limits exacerbate this problem because a new member does not feel bound by a recently departed legislator’s deal.

How to Make a Deal

If there are obstacles to the Legislature and Governor reaching deals in bad economic times, then how can a deal be reached?  The answer is to take the issues to the voters and they will define what can be part of a deal.

The Legislature, Governor or interest group advocates can use the initiative and ballot box to resolve the problem.  Using the ballot box ensures that the voter-approved deal cannot be changed by a subsequent Legislature.   The Legislature probably cannot place on the ballot the types of voter options necessary to restructure the state budget and revenue process.  The Legislature can, however, hold hearings and help draft the initiatives for the Governor and/or advocates to put on the ballot.

New tax revenues also can be placed on the ballot by the Governor or interest groups through raising funds to qualify the new taxes and revenues for a vote.  Already the lottery securitization and a spending cap reserve fund are scheduled for the next statewide election.  Other reform and revenue items could be added by initiative.

Can 2009 and 2010 State Budget Problems Be Resolved? 

Yes.  It will take true statesmanship, as well as a combination of new revenues (taxes, borrowing and sale of assets), program cuts, new local revenue authority for schools, federal bailout funds and the willingness to respect the will of the state voters based on who they elected to the Legislature.

The people who want less government and a ratchet down of services have to accept they do not reflect the statewide voter consensus.

The people who believe the ongoing program level created in 2002 must be maintained and expanded through significant ongoing revenue increases also do not reflect the statewide voter consensus.

For a legislator to say “this is what my district elected me to do” is districtship, not leadership, and is not accurate. People vote for a legislator to solve problems.  Every vote for a legislator does not come from a voter who thinks the exact same way on every issue as every other voter who voted for the legislator.  Voters are not sheep.

There are leaders in both parties.  Unfortunately, there are not enough leaders in each party to successfully have a statewide solution under the current budget rules.  The rules have to change and only the voters can change the rules.

Until the districtship legislators believe the rules will change and they will be forever marginalized, there will not be a budget solution.  A special election in June, July or August 2009 could include the necessary rule changes on the ballot.

Conclusion – Long-Term Resolution

This article has identified some of the factors that restrict the state’s ability to address program cuts and imbalanced budgets during recessions. These factors lead to fiscal problems that occur in a cycle of the good times, bad times, good times.  A budget reserve probably would not change those underlying dynamics of advocacy groups and legislators responding to their constituents for expanding needed services during times of economic growth. 

Instead, the most direct means of resolving the budget cycle problem is to have substantive state budget reform.  Some reform examples are:

• Reducing the budget approval vote requirement from 2/3 to a simple majority.
• Requiring ballot initiatives to identify program cuts or new revenue for any new state cost from the initiative.
• Creating a strong rainy day reserve.
• Restricting one-time revenue to one-time expenses or to a reserve.

Additionally, the post-Proposition 13 shift of service responsibility from schools to the state needs to be reversed.  I do not advocate a repeal of Proposition 13. Rather, I believe in a restructuring of state and school district responsibilities. Local governments have the Proposition 1A protections to meet local responsibilities.  School districts will need similar local revenue authority to protect themselves from the volatility of state income tax revenues.  School districts need to be provided more general taxing authority similar to that available to cities and counties.

~David L. Walrath

dwalrath@m-w-h.com