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Commentary

The Golden State Gone Broke


     
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California Governor Jerry Brown proposes a $91 billion budget with dramatic cuts to medical, child welfare, disabilities benefits, and the court system. He also wants higher sales taxes and income taxes on the wealthy to reduce $8.5 billion from the $16 billion deficit. If this tax measure fails, Brown’s plan automatically cuts $5.5 billion from public schools.

Brown recognizes that something must give, and that cutting spending is unavoidable. This is, in some ways, marks an improvement over his fiscally reckless predecessor.

In 2003, Republican Arnold Schwarzenegger won a special election, replacing recalled governor Democrat Gray Davis. Schwarzenegger vowed to take the government’s “credit cards and throw them away, so our politicians can never, ever... spend more money than they take in.”

Yet he also proposed more spending on after-school programs. In 2004, Schwarzenegger pressured voters into approving two bond measures totaling $25 billion to “get the economy going” and to avoid “Armageddon cuts.”

In 2006, he unveiled a $97.9 billion budget—$7 billion more than the year before, despite projected revenues of only $91.5 billion—which increased spending on education ($36.3 billion to $40.5 billion), transportation, social programs and prisons. He also pushed $25 billion in bonds, promoted a 20-year $222 billion infrastructure plan, then backed another $42.7 billion bond package. In 2008, he championed $9.3 billion water bond.

The California general fund ballooned from about $77 billion for fiscal year 2002-2003 to more than $104 billion for fiscal year 2008-2009. Total annual state expenditures grew 39 percent, from $105 billion to $145 billion.

The governor and legislature addressed the 2009 budget crisis, mostly closing the $26 billion deficit, by trimming education and Medicaid by $15 billion, and papering over billions more with budget tricks. Even so, the state was still spending as much as it did in 2005—a “huge win for conservatives,” one writer complained.

Facing another huge deficit in 2010, Schwarzenegger proposed “draconian” cuts, but his budget for 2010-2011 was $82.9 billion—much larger than when he took office. All in all, he left behind over $50 billion in additional borrowing and considerable increases in taxing and spending.

Today, Brown’s $91 billion budget is hardly meager, yet many of his supporters decry the proposed cuts while loving his tax measure. Some see tax hikes as a panacea.

But California is already taxing heavily compared to other states and it is not working. Last year the state brought in just $2.44 billion, or 20.2 percent less than what was projected in tax collections. California spending habits have tended to exceed even without rising revenues. According to Adam Summers, general fund per capita state spending rose steadily through the last decade. So did revenues—from about $70 billion in 1999 to over $100 billion in 2009.

Many think that eliminating Prop 13’s cap on property taxes will do the trick. Tweaking the rate might bring in another billion or two, but that’s rounding error in contemporary California deficits. Meanwhile, the state has some of the very highest personal and corporate income and sales tax rates in the country. Many employers cite California’s taxes and regulations as reasons for leaving. Chief Executive Magazine has again ranked California the very worst state in which to do business for such reasons.

For lasting reform, we should consider the untouchable spending. California state and local employees are the best paid in America, making 60 percent more than the average private sector worker in the state. Then often enjoy lavish pension plans of which most members of the public only dream.

The last governor exacerbated this problem. In four years, salaries climbed 37 percent. Fifteen thousand employees were now making six-figure incomes. Prison guard salaries rose by more than a third.

Thousands of state workers now get over $100,000 a year in benefits. Retirees doing contract work can cost the state a million a year.

Brown’s pay cut proposal is a start, but disparities between public and private workers’ pay and benefits will still be extreme.

We must also face the exploding pension costs brought on by a terrible law passed in 1999. David Crane wrote in The Huffington Post three years ago:

California has kicked that can into a $200-300 billion obligation that grows every year that it’s kicked down the road again. That’s three to five times the amount of our general obligation bonds, and just as real of an obligation.

To be clear, we are supposed to have that $200-300 billion on hand for investment by our pension funds right now.

Only slashing benefits can address this. No tax increase will work.

What else can be cut? The justice system. Please. Between 1982 and 2000, California’s prison system exploded by 500 percent. The growth has continued since.

Each prisoner costs about $50,000 per year and cannot contribute to the market economy. The lobbies behind this spending are difficult to challenge. We need fewer laws, cops, and prisons. A good first step would be drug decriminalization. Washington, D.C., would resist it. So be it. California passed Proposition 215, legalizing medical marijuana. It’s time to put Obama on the defensive. The state should stop jailing for peaceful drug offenses, gun ownership, or non-violent parole and probation violations. We should move away from imprisonment and toward restitution for property crimes.

Billions more could be saved in a fire sale of assets unnecessary for basic governmental operations. “California is sitting on a gold mine of surplus property that could be sold for ready cash,” wrote economist William Shughart in 2008. “According to the real estate division of the Department of General Services, the state government’s landlord, on Jan. 2, taxpayers owned 22,727 buildings and more than 6.7 million acres of land at 2,313 sites.” Thousands of acres have been “declared surplus” by the state.

California is broke, with unsustainable deficits and pension programs, and tax increases won’t help. Both parties are to blame and can be traced back many administrations.

Reagan took office as governor in 1967 and left in 1975. During that time, this “fiscal conservative” oversaw 122 percent growth in the budget, a 22 percent expansion of the government workforce, the creation of the California Energy Commission and 22 other new councils and commissions, and the largest tax increase in California history. State income taxes nearly tripled under Reagan, then were later cut back by his Democratic successor—Jerry Brown.

Brown once before defied conventional wisdom, undoing some of the mess left behind by a film actor-turned-Republican governor who spoke about the dangers of big government while expanding it all the same. Brown can do it again. His budget cuts show he’s somewhat serious, but he must radically challenge establishment habits if the state of California is to remain golden for long.


Anthony Gregory is Research Fellow at The Independent Institute. His articles have appeared in the Christian Science Monitor, Bloomberg BusinessWeek, San Diego Union-Tribune, Portland Oregonian (AZ), Contra Costa Times, The Star (Chicago, IL), Washington Times, Salt Lake Tribune, Tallahassee Democrat, Albany (NY) Times Union, Raleigh News and Observer, Florida Today, and other newspapers.

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