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State’s budget no role model

Times Staff Writer

As Californians brace for big reductions in government services, the possibility of tax hikes and a long summer of budget bickering, they may be under the impression that everyone else is slogging through the same financial misery.

Not so.

Although the nation’s sluggish economy and mortgage crisis have put the squeeze on a number of states, many are humming along fine, without dramatic measures to keep them in the black. Some even have multibillion-dollar surpluses. And almost none of the states that do have fiscal difficulties face shortfalls on the scale of California’s.

Analysts say the state’s troubles stem largely from its budget system -- the most dysfunctional in the country -- and they look to California as an example of how not to do things. In a recent ranking of state policies by the Pew Center on the States, California scored D+ on fiscal management. The average grade was B-.

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“We have these problems that have long been understood, but we don’t deal with them,” said Jim Mayer, executive director of California Forward, a bipartisan think tank seeking to overhaul the budget process. “If we are going to fix this, we need to learn from what they have done in other places.”

Of the 46 states that began their fiscal year on Tuesday, California is one of just four that still have no spending plan. Lawmakers are nowhere near agreement on how to patch a $15.2-billion shortfall, and the budget will probably include borrowing, accounting shifts and other maneuvers that make money managers cringe.

An outdated tax code, voter-approved initiatives that lock in billions of dollars for programs, inadequate oversight of spending and the lack of a substantial rainy-day fund all add to California’s financial ills. Other states have addressed such issues with impressive results. But attempts at similar changes here routinely fall flat.

Virginia has achieved a balanced budget and a stellar credit rating by constantly updating its spending priorities, improving its tax system and setting funds aside to be tapped during hard economic times. The state is zealous about oversight, embedding independent investigators in state agencies to monitor how they are spending taxpayers’ money.

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Iowa, Maryland and Utah employ some of the same techniques, and there is momentum for such reforms in Ohio, Louisiana and Kentucky.

It is not just small states with limited government services that have a firm grasp on their finances, officials at the Pew Center point out. Places that have large, diverse populations and spend generously have also figured it out.

Some experts say the root of California’s problem is its unusual requirement of a two-thirds majority for the Legislature to approve budget-related measures. That standard exists in only two other states, Rhode Island and Arkansas, neither of which is nearly as complicated to govern as California.

Daniel J.B. Mitchell, a professor of public policy at UCLA, said the two-thirds rule has paralyzed a Legislature that is already intensely polarized. “The years go by and we don’t address these fundamental things,” he said, “and here we are in a budget crisis again.”

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Every change to the budget threatens to cost someone big money. Special interests are organized and ready to protect their turf. They have the ear of lawmakers who, as a result of term limits, constantly have their eye on the next office and are reluctant to rile their political patrons.

Gov. Arnold Schwarzenegger took a crack at forcing the state to, in his words, “live within its means” in 2005, when he called a special election to address state government issues. His plan was to put a strict limit on how much spending could grow every year. Democrats said it would strangle government and voters rejected it.

Other states have taken a more moderate approach and succeeded. Over the last decade, many have adopted laws requiring them to build substantial reserves, some as much as 10% of the general fund.

In Washington state, the first 1% of revenue the state collects automatically goes into such a fund. Georgia is weathering the economic downturn with ease, having built a rainy-day fund that equals about 10% of its budget. Nebraska, a state that spends just $3.5 billion a year, has socked away $500 million.

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In California, the leader of the Assembly’s minority Republicans, Mike Villines of Clovis, says he is perplexed by why California is not building a significant reserve. He said the issue came up during a chat he had with Michelle Bachelet, the Socialist president of Chile, when she visited the Capitol recently.

“She is a former communist, and she was talking about how you have to have a rainy-day fund to balance ups and downs,” Villines said. “If it is good enough for Chile and a former communist, it should be good enough for California.”

Another area where change has been resisted is the state’s reliance on income taxes, a volatile revenue source that plunges when the economy slows. Reformers are perpetually calling for revisions in the tax code that would bring more stability. Virginia, for example, has changed its tax code 15 times in the last 20 years to stay current.

The roadblock in California is largely Proposition 13, which limits property tax increases. Longtime residents and businesses have some of the lowest property taxes in the country because of that citizen initiative. If the state were to rely less on income taxes, property taxes might have to rise.

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Lawmakers don’t want to deliver that kind of news to voters. Proposition 13 is known in Sacramento as the “third rail” of California politics: Touch it, and your political career is dead.

So California continues to get nearly half its revenue from income tax, and once again finds itself in trouble. That’s not the case in most other states, which collect their revenues from a more diverse mix of sources.

Beyond the revenue issue is how the state spends its money. California’s financial oversight has yet to impress policy analysts.

Neal Johnson, director of the government performance project at the Pew Center on the States, said other places look carefully at how well government programs are meeting their objectives when deciding how much cash to provide them. Agency heads must show results, inefficiencies are rooted out, management techniques that have proved effective in the private sector are encouraged.

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But such an approach “has not gained traction in California the way it has in other states,” Johnson said.

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evan.halper@latimes.com

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Begin text of infobox

Money management

The Pew Center on the States studied how all 50 states manage their money and graded each one. The average grade was a B-. California and Rhode Island tied for last in the class.

A sample:

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Utah A

Washington A-

Virginia A-

Iowa B+

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Pennsylvania B

Texas B

Florida B-

New York C+

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Nevada C+

Rhode Island D+

California D+

Source: Pew Center on the States

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