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A Billion Here, a Billion There and Soon We are Talking About Real Money

A printed in the San Diego Daily Transcript; May 1, 2008

Erik Bruvold

Thursday, May 1, 2008

When Governor Arnold Schwarzenegger unveils his revised Budget proposal in two weeks, he is likely to announce that the State of California faces a deficit that has ballooned to at least $10 billion and, in the worst case, almost $20 billion.

That, as they say, is serious money. It exceeds the total amount spent on both the entire UC and the CSU systems. The state could close down every prison and still not close the gap. At the high end, the deficit is equal to nearly two-thirds of the money that Sacramento invests in K-12 education.

How we got here is a troubling story of missed opportunities and failure in the California’s body politic. Sacramento politicians, with very few exceptions, could not resist increasing spending when state coffers were full. With most of the mainstream media either unable or unwilling to report on what they see as the dull details of the state’s fiscal affairs, the resulting void has made it far too easy for interest groups to brush aside efforts to institute fiscal discipline. As noted on these pages before, the state’s fiscal system is too volatile – relying too much on taxes collected from high income individuals whose incomes greatly vary year to year.

Since January, when it became obvious that the era of smoke and mirrors solutions was at an end, little real progress has been made and both sides of the ideological spectrum must shoulder some of the blame.

On the one hand there has been no rationality in the debate about education funding, by far the largest single item in the state’s budget. In January the Governor proposed that the state invest $49.3 billion in K-12 education. This represented a 2.2% decrease in funding from FY 2008 levels. Not an unmanageable reduction.

However, several of the state’s larger school districts are party to multi-year contracts that call for salary increases in FY 2009. In addition, the vast majority of teachers in the state are on a “step” system where they get a raise as they gain an additional year of seniority. Since faculty salaries are by far and away the largest item in most district’s budgets, these automatic increases help explain how a 2 % reduction creates the kind of fiscal mess that results in thousands of layoff notices and hundreds of PTA members protesting at the capitol.

At the local level we are still in the period of time where political posturing is winning out over real solutions. Events in one San Diego school district are instructive. Teachers were presented with an emergency plan that would have “rolled back” by one year the salary increases that were in their contract. Since existing faculty members would still have advanced a “step” on the seniority table, many would have held their own or even seen a very modest increase in pay. That concession, however, was rejected in an informal vote by 56% of the faculty members even though it would have meant far fewer layoffs and lessened the impact on that district’s kids. In the memo communicating the results, it was stated that, ,”While such a rollback might solve an immediate problem, it would not address the basic education funding issue itself and may indeed mask that issue for many of the public.”

It isn’t just the supporters of larger government and the status quo that are at fault.
While it would do very little to close the deficit, it was sheer stubbornness that led state conservatives to reject reforms that would have closed a loophole that allows owners of luxury yachts and airplanes to avoid paying sales tax. An honest discussion about the state’s fiscal situation would acknowledge that the state’s tax code is rife with these kinds of special interest favors and reflect policy choices that are no longer rational. At the risk of being labeled an apostate, one has to wonder about the economic logic of a property tax system that taxes businesses in the new economy at levels astronomically higher than older companies like railroads, utilities, or agro-businesses, who have held property for decades.

Ultimately closing a $10 billion dollar deficit is going to require compromise and creativity as well as beefed-up efforts from the Sacramento press corps so that Californians can sort out political posturing from hard fiscal facts. If the deficit comes in at the high end of the estimate, it is clear that there is going to have to be a combination of deep cuts and new revenues. In addition, it is vital that accompanying that grand bargain is a set of reforms- a real spending cap, a simplification of the state’s tax code, a devolution of power from the state to local school boards – that will significantly strengthen the state’s fiscal situation and make state government much more efficient and effective.

Samuel Johnson once said that there is nothing like the sight of the gallows to focus the mind. Let’s hope that when the revised budget is released in May, Sacramento policy makers get serious about coming up with a long term plan to balance the state’s books.