A state trapped in fiscal inertia

In this economy, every state is hurting. Unemployment is in double digits, tax receipts are taking a dive and deficits are piling up. But, once again, California seems to be in a class of its own when it comes to financial dysfunction. The problems here eclipse those elsewhere.

California has the distinction of being the only state that is constantly running out of cash. California is the only one pleading with the federal government to backstop an emergency borrowing plan. California is the only state that never completely closed its deficit from the last economic downturn -- the one that began in the beginning of the decade -- with the hangover from that neglect hobbling efforts to solve the latest crisis.

The state has become a laboratory for what not to do when it comes to managing finances. The online news journal Stateline.org, which state government wonks look to for news on the latest policy trends, recently published a guide of sorts for bureaucrats and analysts who want to keep their state from becoming another California. Rest assured, the piece advised, most states are not likely to find themselves as troubled as the Golden State any time soon.

Size is a factor. “You are talking about the eighth-largest economy in the world, so the numbers involved are just so monumental,” said Sujit CanagaRetna, a senior fiscal analyst with the Council of State Governments in Atlanta. “The largeness of the problem makes it more intense.”

But there is also so much more.

The oft-cited waste and abuse is a problem, but the deficit is bigger than the entire state bureaucracy.

California could fire every state employee -- including well-paid prison guards and university professors -- close every government office, stop all travel and even cease the purchase of paper clips without closing the budget gap. The government would be gone but the deficit wouldn’t.

“When you have a budget gap of $20 billion plus, cleaning up waste and abuse just isn’t going to fix it,” said Susan Urahn, managing director of the nonprofit Pew Center on the States.

The runaway spending is caused largely by an ever growing group of Californians making use of basic state services as the cost of those services escalates. Since Gov. Arnold Schwarzenegger took office, for example, the amount the state spends on Medi-Cal health insurance for the poor has grown more than 40%, from under $10 billion annually to more than $14.4 billion. Spending on community mental health services has nearly tripled, and the state’s program that provides services for the disabled leapt from a $1.6-billion annual expense to nearly $2.4 billion.

This has happened despite efforts by the state to contain costs. Primary care doctors, for example, are paid just $26 for an office visit with a Medi-Cal patient. There is no simple way to seriously limit these healthcare costs short of eliminating the benefits for hundreds of thousands of Californians.

The same scenario holds true for prisons, where state spending jumped from $6.5 billion to nearly $10.5 billion under Schwarzenegger. The federal courts mandated much of that spending after ruling that the state’s prisoners have been widely mistreated. The alternative to spending the money is releasing tens of thousands of inmates and parolees.

Similar challenges confront other big states too. Yet few of them have plunged into the same condition of financial despair. They move quicker to spot and confront financial problems as they arise. Here, problems mount fast and then are left to fester as political leaders bicker.

The backbone of this inertia is a patchwork of state policies that work against good fiscal management. That these underlying mechanical issues with state government are fueling the problem is no secret. Legions of blue ribbon commissions, nonpartisan think tanks and elder statesmen and stateswomen have provided blueprints for fixing them. A fresh round of such reports is being worked on now. Among the likely recommendations:

Updating the tax structure

California is extremely reliant on personal income taxes to fund government. It is a source of cash that is unpredictable and subject to huge swings. When the stock market is soaring, it is great for the state.

California’s millionaires and billionaires contribute wads of capital gains taxes in those good years, and the state has consistently used that money to grow programs.

The richest 1% of residents end up contributing half of all the personal income tax the state collects.

As soon as the economy takes a dip and the stock market stalls, the money stops flowing and the state plunges into a crisis.

Ending the two-thirds rule

Only two other states require two-thirds of its Legislature to approve a state budget. The rule was added to the California Constitution by voters in 1933.

The idea was to make it exceedingly difficult for the Legislature to raise taxes. And it is. But it also has become exceedingly difficult for lawmakers to merely do their job and get any spending plan in place -- with or without new taxes.

GOP lawmakers, a minority in the Legislature, tend to use the influence they have over the budget to renew policy demands that had been neglected for much the year.

Democrats complain they are being extorted for budget votes. Gridlock follows.

Nothing happens until the state stops paying its bills or comes close to it.

Lawmakers rush a budget onto the governor’s desk that uses borrowing and other gimmicks to paper over much of the problem. The cycle repeats itself.

Reining in citizen initiatives

Voters have created a complicated and conflicting web of spending requirements and tax limitations. They have told the state to borrow billions for new programs without any plan for repaying the loans.

Last week’s special election embodied the problem. Voters refused to reallocate money they had previously ordered spent on mental health and children’s programs, but they also refused to raise revenues with tax increases and a plan to borrow against the lottery.

Building a serious rainy day fund

The one we have is full of escape hatches. It is regularly raided, leaving nothing to tap when the state finds itself in the kind of jam it is in now.

Getting some real oversight

Other states keep track of how well every program is functioning, requiring department heads to meet a strict list of “performance standards” or risk losing money. California has resisted this for years.

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evan.halper@latimes.com

Times staff writer Michael Rothfeld contributed to this report.