California’s New Budget Already Coming Apart

Published December 13, 2010

It certainly didn’t take long for California’s budget to unravel after being signed in October.

According to a new report from the state’s nonpartisan Legislative Analyst’s Office, California is facing a deficit of $25.4 billion over the next 20 months. That includes a shortfall of about $6 billion for the remainder of the current fiscal year and a $19 billion deficit in FY 2011-12.

The budget analyst expects budget gaps of roughly $20 billion for each of the next five years.

The Los Angeles Times’s PolitiCal blog explained: “One main reason the deficit remains so large is that the spending plan signed by Gov. Arnold Schwarzenegger and approved by legislators 33 days ago relied on billions in accounting gimmicks, rosy assumptions and unlikely handouts from Washington, according to the report from the nonpartisan Legislative Analyst’s Office.”

Dubious Assumptions
These unrealistic assumptions include $3.5 billion in federal funds that have not been approved by the U.S. government, significantly underestimated costs for programs such as corrections and prisoner medical care, and billions of dollars in expected “savings” from collective bargaining agreements and other personnel actions, Medi-Cal reforms, anti-fraud activities related to the In-Home Supportive Services program, and information technology efficiency measures that will never materialize.

Moreover, the LAO notes even these projections are likely understated because its forecasts generally do not include cost-of-living adjustments, inflationary increases in departmental budgets, or other massive—and growing—unfunded liabilities.

Pensions, Other Costly Benefits
These liabilities include unfunded pension obligations estimated at several hundred billion dollars, unfunded retiree health care liabilities of more than $50 billion, and a $10 billion debt for the state’s unemployment insurance program.

Those who thought the pension reform, included as part of the recent budget deal, to roll back benefits to 1999 (pre-SB 400) levels for new state employees would solve the state’s pension problems are going to be disappointed. According to the LAO, salary increases over the next couple of years and rising employee health-care costs will swamp the savings from the pension reform.

It will take more significant reforms to stop the fiscal bleeding and even begin to address the enormous liabilities the state government has already racked up. This includes shifting new state workers to 401(k)-style defined-contribution retirement plans comparable to those received in the private sector and implementing a constitutional amendment to require voter approval of all future employee benefit increases.

Problems Continue to Grow
Here are some notable excerpts from the LAO report:

“The unfunded liabilities of state retirement systems, however, loom over the state’s budget prospects. Left unaddressed in the near term, costs to service CalSTRS, UCRP, and retiree health liabilities will only grow, burdening future Californians more and more and requiring even harder decisions about taxes and services. The state should look for ways to address these problems soon, to avoid passing these huge obligations to future Californians.”

“California faces immense short–term budget problems and perhaps even more troubling longer-term fiscal challenges. Without immediate action to begin tackling the structural deficit for the long term, the state may not be able in the foreseeable future to move beyond its current stumble from one terrible budget problem to the next. As such, it will continue to be difficult for the state to address fundamental public sector goals—such as rebuilding aging infrastructure, addressing massive retirement liabilities, maintaining service levels of high-priority government programs, and improving the state’s tax system.”

Necessary Reforms
The immense fiscal problems facing California will require political leaders and citizens to undertake a serious reevaluation of state priorities and discover the political will needed to make the significant—and painful—changes necessary to get the state back on the road to recovery. Here is my plan for reform:

Acknowledge that spending—not revenue—is the problem, and enforce a real spending and revenue limit that would cap budget growth at the rate of the increase in population plus the increase in the cost of living (inflation). California is already one of the highest-taxed states in the nation, and revenues have grown significantly until very recently due to the recession.

Implement a debt limit that would prevent the issuance of additional bonds or the placing of bond measures on future ballots whenever the amount needed to service existing debts exceeds 6 percent or so of the General Fund budget.

Adopt a performance-based budgeting process to tie funding decisions to program results and priorities.

Consolidate duplicative governmental functions and eliminate some of the hundreds of unnecessary boards and commissions.

Adopt personnel reforms such as reducing the number of state employees, cutting pension obligations for future employees to get workers’ benefits back in line with compensation in the private sector, and providing incentive bonuses to state employees for innovative ideas that lead to cost savings.

Aggressively pursue outsourcing and privatization. In addition, California should implement a “Yellow Pages” test: If the state is performing services that private companies listed in the phone book are already performing, it probably shouldn’t be in those businesses. At the very least, it should put those services up for competitive bid.

Implement education reform by cutting red tape, and adopt funding reforms such as merit pay for teachers and weighted student funding.

Reform health and social service programs by eliminating optional Medicaid services and reducing the waste from fraud through the use of recovery auditing.

Adam Summers ([email protected]) is a policy analyst at Reason Foundation in Los Angeles. A version of this article first appeared at Used with permission.