Last week, in his State of the State address, Governor Jerry Brown acknowledged that California’s state government faces a number of outstanding commitments. He said, “Already, the commitments that the state made in the past two years are straining the state’s finances. Under a projection of current policies, the state would begin to spend more than it receives in annual revenues by 2018‑19 (by about $1 billion).”
These commitments – be they old or new, stable or growing – are substantial for many Californians. The state is facing hundreds of billions in unfunded retirement liabilities, exploding Medicaid costs, billions in short-term debt, neglected roads and infrastructure, and plans to increase and broaden K-12 funding. California finds itself in a precarious position when balancing its commitments and resources annually, let alone over the coming decades.
This is due in large part to California’s heedless budget process, which has become increasingly less predictable and methodical over the last couple of decades. Revenues are all over the place, and a penchant for over-commitment has set both long-term and short-term obligations on unsustainable trajectories. Frankly, responsibility for that fiscal disorder sits squarely on the shoulders of state policymakers.
Think of the California state budget as a loaf of bread: state revenues are its basic ingredients, and the recipe is carefully calculated to serve a certain number of people. When done properly, baking the bread is predictable – the right technique will yield the right loaf. Unfortunately, our budget bakers in Sacramento have too often forgone the recipe altogether.
Consider November 2012, when Prop 30 temporarily raised taxes rates on personal income, including capital gains, for the state’s wealthiest residents. The argument for Prop 30 was that those tax increases would help stabilize the state budget. Ironically (but not unexpectedly), Prop 30 further entrenched a system that forced the budget to rely on a small group of individuals with inconsistent earning potential and even more inconsistent ability to play the stock market. A Wall-Street-driven tax system is now inherently unstable, and so too is our state budget.
This year, the stock market has been performing relatively well, which has driven higher capital gains revenues for the state and an inflated annual budget. Despite the state’s sizable existing commitments, typically, the state legislature uses these temporary revenue spikes to start new and expand existing programs. Once those revenues dip, lawmakers are forced to respond with cuts to those same programs.
That kind of boom-and-bust budgeting defies both common sense and common decency. Those who are worst-off among us are hurt the most when their programs suddenly disappear.
For some, the state’s newly strengthened Rainy Day Fund seems to be the solution. Governor Brown’s budget argues the Rainy Day Fund “gives the state a critical opportunity to avoid repeating the boom-and-bust cycle of the past two decades.” Undoubtedly, it is a significant first step — but it is only that. With Prop 30’s expiration nearing and the state’s unstable tax system still unreformed, this reserve will only allow the state to adjust to year-to-year instability to a limited extent. It will not actually stabilize its foundation.
The past few decades have seen California’s leaders ignore existing commitments while piling on new ones. From both fiscal and governance policy standpoints, this spells disaster. Economic cycles dictate that revenues cannot rise forever. As obvious as that may seem, California state legislators have nonetheless made a habit of making new unsecured commitments that will grow indefinitely, while sidelining existing ones. For the security of current generations and future ones, I can think of little else more reckless.