That huge imbalance comes from the steady growth of California's many spending obligations and the inability of the state's revenue system to keep up, a gap that remains clear even after state officials announced an unexpected influx of $6.6 billion in tax collections on Monday (May 16). A sum that huge would make lawmakers in other states jump for joy; in California, however, it does not come close to solving the long-term problem.
The fiscal pressures cut across state government. Health care rolls are swelling and becoming costlier because of inflation, more retired state workers are collecting pension checks, and expensive interest payments on billions of dollars in state debt are coming due. Meanwhile, a raft of political roadblocks, from ballot-box budgeting to powerful special interests that benefit from the status quo, only compounds the problem. For those with the responsibility of balancing the books, the result is a constantly shrinking pot of discretionary dollars — and a ticking clock.
In a recent letter to the chair of the state Senate's budget committee, Taylor and his analysts went "far beyond our normal comfort level" in examining what $14 billion in potential budget cuts could look like. They included a possibly illegal $2 billion cut to K-12 education, resulting in bigger class sizes and shorter school years; a 9 percent pay cut for hundreds of thousands of state workers; and another round of tuition increases and financial aid reductions in a higher education system that already has been chopped repeatedly.
Jerry Brown, the past and present face of California government, is also the central figure in its future. Brown, a Democrat who became one of the youngest California governors in 1974, returned this year as the oldest. Now 73, he has decades of hands-on experience in state government, pledging to bring "insider's knowledge but an outsider's mind" to Sacramento — a city that has become synonymous not only with fiscal but with political dysfunction.
For his part, Brown sees another way to address the ever-shrinking suitcase of California's finances: not simply by abandoning prized possessions in round after round of painful budget cuts, but by coming up with an entirely new way of packing.
Since returning to office in January, Brown has outlined an unusual goal for a state chief executive: taking the state out of large areas of government. Brown wants services delivered to a greater degree at the local, not state, level . His plans include transferring tens of thousands of low-level inmates who now sit in state prisons to local jails; shifting mental health, substance abuse, foster care and child welfare services to localities; and, eventually, handing over to local communities management of the state's welfare-to-work and food stamp programs.
For all of his years of experience, however, Brown is re-learning a tough political lesson: Sacramento is a brutally partisan place. This is truer now than in his first gubernatorial years nearly three decades ago. Legislative stalemates are far more likely than bipartisan breakthroughs, and since Brown last left the executive office in 1983, governor after governor has seen an ambitious state agenda derailed. This has happened to Brown even sooner than most: It has taken a mere five months for his own agenda to be knocked off its tracks.
Faced with a staggering $26.6 billion budget shortfall when he took office, Brown vowed to close it within 60 days — warp speed in Sacramento, where spending plans in two of the past three years have missed their June 15 constitutional deadline by 85 days or more. Brown sought to close the enormous gap in roughly equal parts by cutting spending and by extending earlier tax increases on sales, income and vehicles, money that would be redirected to the local governments at the center of his "realignment" proposals.
But more than 120 days have now passed and there is still no budget. More ominously for the prospect of future negotiations, Brown's originally friendly overtures to minority Republicans — just four of whose votes were needed to approve his budget legislatively — have collapsed in angry accusations. The same Brown who earlier this year insisted on a bipartisan solution to the state's fiscal crisis is now planning to bypass Republicans altogether and take his budget directly to the voters. If that happens, Republicans promise a bruising political campaign that likely would divide the legislature even more.
Why are California lawmakers unable to find common ground, even with such stark fiscal warnings on the wall? Far more than other large and fiscally troubled states, California is a victim of its own political structure, not simply of the tough times that have hit the rest of the country.
States such as Arizona, Florida and Nevada were crushed by the housing bust and declining tourism. In California, huge budget shortfalls were around long before the economic downturn came along and they will be there long after it ends. That is true even though a recent report from Wells Fargo found "the state's economy may not be as troubled as headlines suggest," and even though tax collections are now improving considerably.
California's partisan politics are not simply the result of lawmakers' personalities. While state legislators — who draw bigger salaries than their counterparts in any other state — may not relish protracted standoffs over spending, they also are not particularly vulnerable because of them. Heavily gerrymandered districts dominated by one party or the other have ensured that many lawmakers come from the extremes of the ideological spectrum and have little political incentive to compromise. Strict voter-approved term limits have further dissuaded many lawmakers from finding middle ground, since they will be seeking higher office in similarly skewed constituencies a few years down the road.
Meanwhile, the ballot box has upended the California budget process. It takes a two-thirds majority in the legislature to increase taxes — a voter-imposed rule that has made it exponentially harder for lawmakers to raise revenue, as Brown wants them to do. Even though Democrats control both chambers of the Legislature by comfortable margins, they have only been able to muscle through billions of dollars in spending cuts, not the parallel tax increases the governor believes are necessary. That is because almost all Republican legislators have taken a formal pledge not to raise taxes, preferring an all-cuts strategy to rein in what they see as out-of-control government spending.
"We've never really reconciled our taste for a high level of public services with our pocketbook," says Brad Williams, a former economic forecaster for the state and now a consultant in Sacramento.
As Williams and others point out, Proposition 13 ushered in dramatic changes to California's fiscal structure. The state now relies overwhelmingly on the personal income tax — and, within that tax, on the earnings of the wealthiest residents — to pay for the broad array of public programs that the voters want. But the personal income tax is among the most volatile of revenue sources, fluctuating wildly with the economy. That is especially true for the wealthiest earners, whose incomes are influenced disproportionately by capital gains.
The result is a roller coaster of state finances that can bring gaping shortfalls for years on end, punctuated by occasional surpluses. One difficulty is that on the occasions when California's budget has been in good shape, lawmakers have shown no inclination to build up a rainy day fund or, as Williams says, "do what a business would do" by preparing for the future. Instead, they have pursued tax cuts or spending programs, mostly to please their respective constituencies, on whom they rely on for tens of millions of campaign dollars. "When there is money," Williams says, "there is intense pressure to do something with it."
The current stalemate in Sacramento illustrates the extent of the problem. Brown and the Democratic majority in the legislature owe a huge debt of gratitude to the public employee unions that elected them, and have been unwilling to demand major union concessions that independent budget experts say are necessary. Brown recently negotiated a contract with the politically powerful prison guards' union that fell well short of the savings the legislative analyst recommended.
At the same time, Republicans not only have ruled out tax increases; they have refused to allow the voters to decide for themselves whether they want to pay higher taxes. Watching over the legislature's every move have been groups like the Howard Jarvis Taxpayers Association and Americans for Tax Reform, which grade lawmakers and make clear that they will face electoral repercussions for any moves that could lead to higher taxes.
Given the obstacles, it is hard to escape the conclusion that California's next decade will be defined not by innovation and adjustment to difficult circumstances, but by multi-billion-dollar budget cuts that will erode state services for years to come.