Cuts, tax increases or both: What’s next for California?

Today’s topic: Now that voters have rejected the budget reform propositions, are tax increases inevitable? Or could the state shrink its way to a balanced budget without making disastrous cuts?

Expect painful cuts, but Washington may help us
Point: Daniel J.B. Mitchell

Tom,

The voters have spoken. They are unhappy with Sacramento and the fact that the Legislature and governor seemingly tried to turn budgeting over to the electorate rather than fix the problem in house. Voters are annoyed, but is their reaction entirely justified?

Let’s look at the budget crisis from the viewpoint of the Legislature. Over the years, voters have severely limited legislators’ ability to fix things in house. Proposition 13, which passed in 1978, indirectly pushed the burden of funding education from local districts -- which had depended on property taxes -- to the state. The initiative also imposed a two-thirds requirement for increasing taxes. In 1979, voters passed Proposition 4, which imposed a spending cap that eventually triggered tax rebates under Gov. George Deukmejian. The rebates and spending cap pushed the educational establishment to put Proposition 98 on the 1988 ballot. It requires that roughly 40% of the general fund be set aside for K-14 education. In 2002, voters passed Proposition 49, which put a formula into the state budget to fund after-school activities. Proposition 140 of 1990 imposed term limits, which is why most of our legislators are novices. Bond issues and spending plans are often put on the ballot by various interest groups. Those that pass further constrain the possibility of responsible fiscal policy to come from the Legislature.

In short, piecemeal direct democracy has played a major role in our current fiasco.

As we exchange views, Tom, I will come back to these points. But the issue before us, now that the election is over, is what is to be done immediately. My sense is that the next stop is Washington, where Gov. Arnold Schwarzenegger spent election day. There will be requests for federal guarantees of state borrowing -- and there will be requests for plain vanilla bailout money.

California has leverage. The Washington bailout frenzy started in financial markets, saving particular institutions on the rationale that their failure would trigger still worse consequences. There is yet another financial market that is potentially frail: municipal bonds. Although it is unlikely that California will default on state obligations, there are many local governments and districts that depend on the state in varying degrees for support. If the state cuts back on that support, raids local treasuries or simply runs out of cash to pay the locals, their default risk rises. That specter may buy us something in Washington.

Beyond the federal government, there is only the unpleasantness of budget cuts, layoffs, furloughs and so on. There has been some talk about clever schemes to get around the two-thirds vote requirement by turning the gas tax into a user fee. But with Proposition 1A’s failure, I doubt you could get a simple majority for that because 2010 is an election year in which legislators will be re-applying to voters for their jobs or for some other office. If cuts are not made explicitly, we may see a return to last winter’s scenario when Controller John Chiang became the de facto state commissar, determining who got paid and who got an IOU.

Tom, maybe you should run for controller!

Daniel J.B. Mitchell is professor emeritus at UCLA’s Anderson Graduate School of Management and School of Public Affairs.

Lay off teachers, or raise the gas tax for a year
Counterpoint: Tom Campbell

Dan,

We’re not far apart -- except for the bit about running for controller. I especially agree with you about the degree to which ballot-box budgeting has tied the hands of California legislators. More than 60% of our budget is already committed, every year, before negotiations even begin. I do part company with you about getting help from Washington.

As you know, I was congressman for five terms. California is not universally liked in Washington. If other states can live with the restrictions required for federal stimulus money, California will be expected to as well. The fact that House Speaker Nancy Pelosi is from California might actually cut against us, as she’ll be wary of being perceived as wanting a special exception that other states don’t have.

Here’s the truth: We’re now talking about actual cuts, not just reductions in the rate of growth of spending. The initiatives’ failure means $2.4 billion less for schools if nothing else happens. That’s because the Proposition 98 guarantee gives 40% of state revenue to schools, and the defeat of the initiatives means $6 billion less in revenue. I don’t bring this fact up as a scare tactic, but it is scary.

Our schools have many problems, and voters are disappointed in their performance. Despite this, laying off teachers is on the table as an immediate response to the budget crisis; long-term fixes are not. Our grade-school children should not be put in larger classes with less personal attention, and cutting funding to community colleges when we’re in a recession and Californians looking for jobs need retraining is terrible policy. That’s why I’m supporting a one-year increase in the state gas tax. The increase would bring the price of gas to where it was last November and raise the $6 billion needed to avoid the cuts in schools.

State spending has been too high for too long, but we’re now down to 1999 levels in real, per-capita terms. We could get by on $15 billion in cuts and $6 billion in gas tax revenue this year. I think this is still an achievable compromise if legislators do what the voters on Tuesday told them to do: Work together and abandon the slogans and partisan posturing for the good of all of us.

Tom Campbell is a former U.S. representative, state senator, state finance director and dean of UC Berkeley’s business school. He has formed an exploratory committee to run for governor.