Voters refuse to solve the state’s financial problems with gimmicks or tax increases. That’s the clear and unambiguous message from the defeat of Propositions 1A-1E. Less clear- to voters or budget planners- is where we go from here. With borrowing and tax increases off the table, where do we find a solution to the state’s $21.3 billion budget deficit?
The latest copy of the Journal of Consumer Research. Where else?
In studying consumer spending habits, economists Priya Raghubir and Joydeep Srivastava discovered that people are more likely to spend money if they are given small denominations.
"We’ve done some studies with four quarters and a dollar, and we found that people were much less likely to spend the $1 note that they were given than the four quarters they were given," Raghubir explained to National Public Radio on May 12th.
They call it the Denomination Effect, and it may hold the keys to explaining both the cause of and solution to California’s budget problems. Time Magazine offers a staggering explanation of the study’s findings:
“For example, in one experiment, the researchers gave 89 undergraduate business-school students from the University of California, Berkeley, and the University of Maryland a dollar. They told the students they could keep the money or use it to buy candy. About half the students were given a dollar bill, while the other half were given four quarters. Only 26% of the students who got the bill spent the money, while 63% of the students given quarters bought some candy.”
Legislators are like irresponsible college students only more so.
According to the Reason Foundation, “Since former Gov. George Deukmejian’s final budget in Fiscal Year 1990-91, California’s spending has skyrocketed 181 percent. Spending nearly tripled from $51.4 billion in FY 1990-91 to $144.5 billion in FY 2008-09.”
However, over the past twenty years, taxpayers cannot point to a major state project or expanded benefit to account for this new spending. California hasn’t built an aqueduct or major state highway in twenty years. Using the Denomination Effect to explain the spending, the growth of state spending came from legislators playing with small budget allocations. “A million here, a million there” is the state budget’s equivalent of leftover nickels, dimes and quarters.
New regulations and new programs- no matter how small- require new employees to enforce the rules. This theory is confirmed by the February 2009 Reason Foundation report, California Spending by the Numbers:A Historic Look at State Spending from Gov. Pete Wilson to Gov. Arnold Schwarzenegger: “The number of state government employees has risen 36.7 percent from FY 1990-91 to FY 2008-09.” On an individual level, state employees are not a major expense. Collectively, when factoring in salary, retirement costs, healthcare and other benefits, the impact on taxpayers is enormous.
This employee expansion is all the more troubling when considering the major technological advancements of the past twenty years. Technology, especially fast personal computers and internet connections, should have produced a more efficient government. For example, it takes less time and fewer employees to process an electronic tax return than a traditional return. Just think of how many state government functions have been (or should have been) automated over the last twenty years. Yet, state government has not fully utilized technology to save money; and, in the rare cases where the state has implemented new technological efficiencies, it has not reduced payroll expenses.
The Denomination Effect is also evident in wasteful government spending. Every week, Cal-Tax documents absurd and wasteful government spending in their newsletter segment, “Waste, Fraud & Mismanagement: Your Tax Dollars at Work.” Here are a few examples from just the past few Cal-Taxletters.
$5.7 million for an EDD Call Center Automated Message to inform callers that the line was busy.
$10 million: LAUSD pays annually to teachers not to teach. This month, the Los Angeles Times uncovered records showing that almost 160 school teachers are paid $10 million per year, not to teach.
$1.3 Million: Department of Corrections paid benefits to fired employees. “The California Department of Corrections and Rehabilitation spent nearly $1.3 million in just two fiscal years to pay unemployment benefits to workers who had been fired, according to a report released March 30 by the California Office of the Inspector General.”
Again, these individual projects cannot single-handedly solve a $21 billion budget deficit. But, a fiscal philosophy that underestimates these costs is the cause of our overspending. At the very least, state budget solutions should start by controlling these small dollar expenditures. A few small dollar ideas worth exploring:
1. Consolidate the Board of Equalization and Franchise Tax Board. My BOE colleague, Bill Leonard, has been advocating this consolidation plan for years. At a minimum, the state would save millions of dollars every year from eliminating duplicative functions.
2. Stop imposing state taxes and fees on state agencies. Last year, I uncovered how state agencies spend millions of dollars every year to comply with state use tax laws. Read more about it here.
3. Use technology to monitor, update and inventory state assets. According to the California Performance Review report, the California Department of General Services’ Office of Fleet Administration cannot account for roughly 25% of the state vehicle fleet.
Governor Schwarzenegger deserves credit for employing this strategy in his new budget proposals. He has returned to the ideas and philosophy of the California Performance Review. He’s proposed eliminating wasteful boards and commissions. He’s even proposed selling excess state properties. And these ideas have been criticized because they are small.
Exactly! It’s the small expenditures that got us into this mess. Being careless with four quarters makes us forget the value of money. Time to change our thinking. Time to flip our philosophy. Time to grab a copy of the Journal of Consumer Research and learn about the Denomination Effect.