It’s Time to Put State Budget on a Two-Year Cycle

In June, the Legislature began its final negotiations on California’s annual budget. And like every year in the last decade, the Legislature failed to enact the budget on time. Once again, businesses with state contracts, cities, counties, school districts and other local government agencies throughout California will see payments stop as the state’s spending authority expires and the state’s coffers, which are overflowing, are locked up.

I offer to you a simple solution to this ongoing problem. California’s state government should run on a two-year rolling budget. The budget is a document, written each year, that allocates tax dollars to state programs as required by law or as a matter of state policy. That is all the budget really is. Why can’t we just expand the spending authority from one year to two?

A two-year budget is not a radical idea. Right now 22 state governments use one variation or another of a two-year budget. This is almost half the states in the nation.

Providing two-year budgets would allow California’s school districts, cities, counties and other local agencies to plan and operate more efficiently. They now must wait until after their fiscal years begin to adopt their own budgets, because the Legislature is consistently late. This means needless overtime expenditures to produce a final local budget and, in some cases, overspending in the beginning of a fiscal year. That necessitates layoffs and program curtailments in later months.

Orange County school districts typically approve their budgets in the spring, but must wait until June, July, August or September when the state budget passes to know what funding they will receive from the state. This poses a number of problems.

School districts are required by state law to notify employees of reassignment or that their services will not be needed for the next school year. Consequently, notices are sent to staff in March, and they are in a holding pattern until a state budget is passed and they are rehired. This damages morale, causes turmoil and is a waste of both time and money. A two-year budget in California would enable school districts to make long-term plans, especially in addressing staffing needs.

This year Orange County adopted a five-year strategic plan that identifies and forecasts all revenues, identifies the key needs of the county and provides the structure for the Board of Supervisors to choose which fiscal issues will be addressed first, and what the long-term implications of these decisions are. The board recognizes the need to plan, and I applaud the members for taking the initiative to do just that. The state could learn from Orange County’s example.

Cities know the importance of budget planning. The city of Orange approved a budget in May, two months prior to the beginning of the fiscal year. Although it has a budget in place, certain spending decisions cannot be made until a final state budget is adopted, which in many cases is months after the beginning of the fiscal year. If California moved to a two-year budget cycle, it would relieve some of the pressure from cities who depend on the state for funding.

Small and large businesses that do business with the state also are affected when the state fails to pass a budget on time. Businesses, such as pharmacies and those involved with nursing home care, depend on a reimbursement from the state for Medi-Cal benefits. But when there is no budget, there are no reimbursements. One businessman from Orange County must borrow money (and pay interest) in order to meet payroll while he waits for the budget to pass. A two-year budget would minimize the financial hardship and the disruption to businesses that provide goods and services to the state.

To make the two-year rolling budget work, the Legislature must have the discipline to provide a respectable reserve or contingency fund. Many governmental finance experts believe this should be between 1% to 3% of annual General Fund expenditures. In the event that unforeseen circumstance arise within the two-year budget cycle, such as an unexpected change in revenues or caseloads, the Legislature would have enough leeway to reopen the budget to bring expenditures in line with revenues.

In short, there is no reason why California cannot move to a two-year budget process. Doing so still would permit the Legislature to set budget priorities, to provide reliable funding to local government agencies and to pay state vendors on time.