Bringing California's Budget Back From the Brink

John A. Perez, the speaker of the California State Assembly, was sitting in a corner of a hotel lounge in Washington D.C. describing in matter-of-fact terms how one of the largest economies in the world is coping with the greatest budget crisis it has ever confronted.  (He was in Washington to expedite federal spending that California believes it is owed.)

So how bad is it?

The budget cuts have been painful, provoking howls of outrage from every conceivable interest group. They extend deep into programs that care for the poor. The state has also, in essence, raided segregated funds set aside for specific purposes, like development. As the budget crisis developed, the state cut income taxes, fearing that more of its high-income earners would flee to other states, a fear that hasn't been born out by the facts. The stimulus package pumped billions back into the state economy and directly into the state's education system. No taxes have been raised.  Perez is fighting with Gov. Arnold Schwarzenegger, who wants to cut the budget with an axe, rather than a scalpel.  Either way, there is no imminent solution. When the economy recovers, California's budget may grow again. But as Perez sees it, California won't boom again unless the state changes the way it collects and spends its money.

 
It is the only state where passing a budget requires a bipartisan supermajority and that gives the governor a line item veto.

Perez has tried to change the budgeting culture of California. In past years, the speaker and the leaders of both legislative chambers and the ranking minority members -- The Big Five -- would present a fait accompli budget to their members.  Perez opened the doors, and has even held public sessions devoted to discussing the budget proposals in detail so everyone knows what's being cut, or not spent, where, and how.

How did California get into this mess?  Some blame the state government's iron clad contracts with unions. Perez was a labor negotiator in his past life. Others point out that California overspent in its boom times, when taxes from wealthier and wealthier tech entrepreneurs filled state coffers. The problems today aren't so much a result of the overspending, however, as they are the result of programs created to exist in perpetuity -- with no guaranteed or pre-determined funding to back it up. It's also very hard to raise taxes in California; a two-thirds majority of the legislature is required.

Perez doesn't want to change the tax requirement; that'd be too unpopular. "The overarching problem is that our budget is dependent on the wrong sets of things." He means that revenues come in from individual income taxes, meaning that it overrelies on people who earn a lot of money. At a local level, budgets are determined by sales taxes and transient occupancy taxes. "Both are very volatile," he said. "So when you get something like the global economic meltdown, you have lower tax returns especially among upper income earners and have huge drops in revenue, whiuch actually amplifies the economic downturn."

Closing the current deficit is an immediate problem, and politicians who cut billions of dollars are not popular, especially if they are Democrats.  Perez is pushing a set of reforms to the process he thinks will give the legislature more flexibility. The main one: pass budgets from simple majority votes.  Lest you think he's endorsing a way to raise taxes, he insists that he's not.  In essence, he wants to require that new state programs that aren't one-offs be either self-funding or are funded in such a way that their solvency is assured and general revenue doesn't have to be borrowed to shore them up. "Predictability" is the goal.  

"So much of our budget is pre-determined as a result of what our voters do in the initiative process, so we have less flexibility in certain areas. So when you try to make corrections, you end up having to venture into areas where you have flexibility."  Even law and order amendments like mandatory sentencing have budgetary impacts that aren't anticipated or paid for in the law. A special master currently overseas California's prison health care system, and when changes are demanded, the legislature must comply, and it's got to find the money from somewhere ... it usually comes out of the general treasury fund.

Californians seem to love their ballot initiatives and there is a psychological disconnect between the issues themselves and their second order effects. Might it make sense to change the political incentives that allow those interests pushing ballot initiatives to so easily hijack state government?

Perez was a member of a panel that proposed some reforms, like establishing the constitutionality of a prospective provision before a vote, or requiring that proposals provide a better accounting of where the money will come from.  Voters didn't like them.

"People are well intentioned in their votes. ... But often times voters aren't aware of the fact that there isn't funding to back it up, which means that there is all that much more pressure on the general fund."

It's remarkable, then, that a state used to budgets exceeding $105 billion is now making due with a budget of around $80 billion (with $20 billion left to cut).

"It's not as bad as last year, but it's bad. We're operating with a $20 billion deficit. When I came into office in September of 2008, we had a $42 billion deficit over a year and a half. And we've closed over $60 billion worth of deficit," he said. "Now...it's close to $20 billion dollars."