The ‘something for nothing’ state

You could see California’s 2008 budget mess coming years ago.

In 2003, it loomed on the horizon, in long-term fiscal projections that Legislative Analyst Elizabeth Hill published just days before Arnold Schwarzenegger became governor. Without “actions to bring spending and revenues into line,” she wrote, California’s budget gap in 2008-09 would be “in the range of $10 billion, assuming the [vehicle license fee] increase remains in place, and $15 billion if it is rolled back.” Borrowing to cover up the deficit would only put California on “a slippery slope” toward permanent crisis.

Despite Hill’s warning, Schwarzenegger rolled back the vehicle fee, then persuaded the Legislature and voters to approve $15 billion in borrowing to close the deficit, which drove up the state’s debt service.

In 2005, then-state Treasurer Phil Angelides cautioned that the state’s “unprecedented and risky” failure “to balance its budget and end deficit borrowing while the economy is still strong” could push the annual deficit to $9 billion when rising oil prices and the collapse of the housing bubble inevitably slowed the California economy. (Full disclosure: As deputy treasurer, I helped write that report.) “The time to act is now,” the report said.

Schwarzenegger and the Legislature didn’t.

Why were Hill’s prescient budget warnings in 2003 ignored and taxes cut to make things worse? Why didn’t the governor and state lawmakers follow Angelides’ advice and use the good economic years to set things right before bad times returned?

A lot of explanations get offered. Some blame hyper-partisanship in the Capitol. Others point to the two-thirds vote requirement in the Legislature to pass budgets and raise taxes. Still others finger rampant ballot-box budgeting that locks big pieces of spending into law.

All those interpretations capture part of the story. What they don’t explain, however, is why California stays stuck. Voters, after all, could punish politicians for their ideological stubbornness. They could eliminate the two-thirds rule (but when given the chance in 2004, they didn’t). They could stop ballot-box budgeting (but they don’t). Something is holding them back.

That something is the contradictory mix of preferences and desires that Californians hold in their minds, a mix amplified in the echo chamber of state politics. If the system is broken and stays that way, it’s because the way we think about budgeting and priorities is askew.

Consider the proposition that the state spends too much. That’s what Schwarzenegger said when he recently announced his proposed budget cuts. But most Californians don’t agree.

The main business of state government is to “educate, medicate and incarcerate,” to use the words of David Osborne, the author of numerous books on government. More than 80% of California’s budget goes to education, healthcare and criminal justice. And by overwhelming margins, Californians -- Democrats and, yes, Republicans too -- want the state to keep spending as much or more than we do now on those public goods, according to numerous statewide surveys conducted by the Public Policy Institute of California. The institute’s May survey showed that 90% of Californians said they want the government to spend the same amount or more on K-12 schools, while 87% felt that way about public colleges and universities. When asked about health and human services, 76% of Californians backed spending the same amount or more, while for prisons, the figure was 63%. The surveys also show strong support for more spending on transportation and water projects.

Look around the state -- at English majors teaching high school math and science classes; at an estimated 6.5 million people without health insurance; at congested and crumbling highways; at under-policed streets and overcrowded prisons -- and it’s hard to say they are wrong.

Logic might suggest that Californians who want these services and investments must also favor the taxes needed to pay for them. But here’s where logic falters and the contradictions begin. The same surveys show that Californians are usually evenly divided on the question of whether they favor raising taxes to pay for the services they want. They oppose most specific tax increases -- such as broadening the sales tax to services. And 71% cheered when Schwarzenegger rolled back the vehicle license fee increase, even though it forced the state to suspend Proposition 98’s school spending guarantee for the first time.

How do you square a strong desire to spend and an equally strong desire not to pay for it? Frequently, by magically wishing away the conflict. Yes, Californians want the services, but a majority of them -- again, Democrats and Republicans alike -- tell the pollsters that state spending could be cut by 10% or more without harm. Just get rid of bureaucrats, eliminate waste and ramp up efficiency and everything will be fine.

Unfortunately, this handy belief doesn’t fit California’s reality. Schwarzenegger admitted as much last week when he scoffed at the idea that stripping “waste, fraud and abuse” out of the state government would go a long way toward closing the budget deficit. State employees aren’t “bureaucrats” -- the majority work in universities or public safety, as professors, librarians, prison guards and Highway Patrol officers. And by national standards, there aren’t many of them. Only two states have fewer state employees per 10,000 residents than California, according to the U.S. Census Bureau.

California gets more out of its public servants than almost any other state. Teachers in our secondary schools instruct the largest classes in the nation. Elementary school class size is above the national average. Only three states have a higher inmate-to-prison-guard ratio. In health, the second-largest budget category, California spends less per MediCal beneficiary than any other large state.

State government could -- and should -- be made more efficient. But even if the productivity of state employees were to grow at the same rate as workers in the private sector, about 2.5% annually, the budget savings would amount to less than $1 billion a year, a fraction of the estimated deficit of $14.5 billion. Staying stuck in wishful thinking and budget turmoil comes with two price tags. One is tangible: the billions in budgetary borrowing, which Schwarzenegger proposes to expand, and all the added interest costs that imposes on taxpayers. Debt-service costs will reach $7 billion next year.

The second, though less tangible, is even more important. While we stay stuck, the world passes us by. Our schools aren’t geared to educate the workforce needed in the new economy. The University of California is losing out in the competition for top graduate students. Our tax system isn’t built for an economy that delivers most of its rewards to the very rich.

California has big things to talk about and do. But we can’t do them until Californians drop “something for nothing” as the state motto, and then insist that their leaders grow up too.