California’s fiscal straightjacket

GOV. ARNOLD Schwarzenegger breezed into office in October 2003 announcing that he hoped to fix dysfunctional California government with some simple reforms, including an overhaul of the state’s budget structure. Now he finally has acknowledged that it’s not so easy.

“If I do my budget at home, yes, it’s easier to just say, ‘Oh, we spend less here.’ End of story,” Schwarzenegger lamented in unveiling his new state budget last week. But apparently that doesn’t work in Sacramento.

A major reason is that more than 70% of state spending, which totals a projected $126.6 billion in the fiscal year starting July 1, is already accounted for before he even begins the budget process. That money is mandated to be spent for specific purposes and nothing else. It’s a fiscal straitjacket that makes it impossible for the state to make logical choices and put its tax dollars to work where they may be most needed.

In theory, and in tradition, budgeters go about their business by determining state needs and then finding the resources -- usually tax revenues -- to pay for them. That concept has been turned upside down in California.

The problem began in 1978 with the passage of Proposition 13, the Jarvis-Gann measure that clamped a tight lid on property taxes. Schools and local governments that had relied heavily on property taxes then turned to the state to bail them out for the billions in lost income.

The state took on a greatly expanded responsibility for financing public schools. When the education lobby got nervous that the governor and lawmakers might siphon away school spending for other programs, it sponsored Proposition 98 in 1988, which fixed education spending permanently at roughly 40% of the General Fund budget. Proposition 98 still is a major factor driving budget-making in the state. In the coming year, state spending on education from kindergarten through community colleges will total about $40 billion, or a little more than 40% of the General Fund.

Other special-interest groups rushed to join the parade. For example, voters passed Proposition 99 (also in 1988) to raise the state cigarette tax by 25 cents a pack, and dedicated most of the money to anti-smoking campaigns. This year, two groups joined forces to press voters for an additional $2.60-a-pack boost in cigarette taxes to finance disease prevention, health insurance for children and to shore up faltering hospital emergency services.

In the new budget, billions in outlay are dictated by tax-and-spend formulas adopted by California voters over the years without any debate or consideration by legislators, who are supposed to have the expertise to make such decisions wisely.

No one disputes the needs of children without health insurance or the severity of the emergency-room crisis. Schools, healthcare and children draw heavy voter support. But ballot-box budgeting is insidious.

It dictates in isolation how the state spends its money. There is no balancing of one need against the other. It ties up tax revenues the state may need for more urgent matters. The resulting budget squeeze, in turn, forces the state to raise fees for college students and admissions to state parks -- in effect a tax hike on middle-income Californians. The problem is severe and is getting worse almost from one election to the next.

A corollary problem is that these initiatives tend to reach, time and again, into the same potential revenue sources -- generally the ones that are politically popular. Cigarette taxes, for instance. Or taxes on the wealthy.

In 2004, for example, California voters approved Proposition 63, which imposed a 1% tax on incomes over $1 million to fund expanded programs for the mentally ill. Now, actor-director Rob Reiner has won a ballot spot in the June primary for a universal preschool program in California. How would it be financed? A 1.7% tax increase on the most affluent Californians. Tempting as it is, the state can only tap the wealthy so many times.

AN ADDITIONAL problem facing state budgeters is that the levels of spending for many programs, including support and medical care for the poor, are dictated by federal legislation. Mandatory spending for health and welfare programs often increases during bad economic times just as the state’s ability to pay is hurt by declining tax revenues.

Schwarzenegger’s new budget allocates $107 billion virtually automatically to education, health and human services, transportation and corrections. That leaves less than $20 billion for everything else -- the so-called discretionary spending that includes all the things people normally think of as the state’s general government responsibilities, such as running the executive and legislative branches, the courts, parks and forestry programs, environmental protection and a broad spectrum of other functions.

The governor says nothing will solve the state’s budget problem “other than getting rid of those automatic spending formulas.” The only way to do that is a sweeping reform of state government, something that is not on the horizon unless people begin demanding it. All California voters can do for now is to keep things from getting worse by rejecting the new ballot-box budgeting initiatives that are certain to come.