You can tune out Gov. Newsom when he talks about the state’s big budget deficit. Ignore the pleas of Democrats who control the legislature, too. And turn the volume down when Sacramento lobbies complain about the proposed cuts.

California’s ballooning budget deficits, and the cuts to services they cause, are not a crisis. They are not really news. They are, sadly, normal and predictable.

And they are grounded not in budgeting mistakes—lapses of discipline in collecting revenue or controlling spending—but in our state constitution and in a reality so paradoxical it would make Kafka blush:

Our constitution requires the state to balance its budget. But balancing the state budget requires violating the state constitution.

How’s that? Because on fiscal matters, our constitution is effectively a ratchet. The document is full of guarantees and formulas, approved by voters, that ratchet up spending on favored programs, even when revenues drop and the state budget is out of balance.

Meanwhile, the constitution also has plenty of voter-approved limits on taxes and fees. These limits ratchet down revenues in slower economic times and make it harder for the state and local governments to raise revenues to cover budget increases.

Californians may have forgotten about the ratchet. The past decade was an unusual one for the state budget, as stock market growth and federal pandemic relief sent government revenues soaring and created surpluses.

But with those revenue sources gone or declining, California’s Kafkaesque constitution is reasserting itself and producing deficits projected recently to range anywhere from $27 billion to $70 billion.

That leaves Gov. Newsom stuck and left to do with the budget what all California governors must:

Violate the constitution.

First, he’s not offering a balanced budget. The spending delays, draw-downs on reserves, and cuts he’s proposing to state operations eliminate only about half of the deficit.

Second, to close the gap, he’s violating the state’s education funding guarantee, a voter-approved formula called Prop 98.

Prop 98 is, famously, so complicated that no one really understands it. (It involves three complex formulas to determine state funding, and it’s never clear really clear which formula will apply in which year.) The main effect of Prop 98 is to keep pushing education spending up; it’s one of the biggest spending ratchets in our constitutional budget ratchet.

Newsom’s maneuver is a sneaky ploy to reduce Prop 98’s ratchet effect by changing the inputs to the formula. Newsom’s budget proposes to travel back in time and reclassify certain moneys spent on education in previous years as non-education spending.

This maneuver is intended to lower the funding base underneath the formulas—helping him “balance the budget” while allowing the ratchet to do its work.

The problem (besides the inherent ridiculousness of having to bend the law in this manner) is that the lower funding base would mean tens of billions less in school funding in future years.

Yes, my fellow Californians, “screw the kids” remains the real, if unofficial, state motto.

The powerful education lobby is crying foul, as are some Democrats and local governments. Newsom defends himself by saying he’s required to balance the budget.

The problem with this blame game—and demands that Newsom reverse the cuts—is that it defines the discussion as being about the budget. The real problem is California’s broken constitution.

Finding tens of billions of dollars in cuts for anything is hard. Health programs have all kinds of court-ordered, statutory, and, in some cases, constitutional protections. Cuts to prisons and state agencies require concessions from politically powerful labor unions. Tax increases run up against Prop 13 and other state revenue limits.

That doesn’t mean I’m trying to let Newsom, the Democratic supermajority in the legislature, and other powerful Sacramento interests off the hook for the state’s budget problems. It’s the exact opposite. The governor, Democrats, and interest groups are responsible for the budget mess—because they’ve had plenty of time to fix the constitution, and haven’t even tried.

Gavin Newsom has been in statewide office since 2011. California Democrats have had full control of Sacramento since that same year. And powerful unions and other lobbies have held sway for far longer than that.

All of these politicians and lobbies know very well that the California constitution is broken. They have long had the power to come together and give the state the new constitution it needs—without all the fiscal ratchets that drive up spending and limit revenues.

But they haven’t been willing to lead and change the system. They have focused instead on building their own power within this broken system. Jerry Brown and other California leaders have spent the past decades dismissing calls for a constitutional rewrite (including my own, via the book California Crackup) as unrealistic.

But state leaders are the ones who have lost touch with reality. They claim they can fix the budget, but they can’t because the constitution won’t let them.  And they won’t fix the constitution because they say it’s politically impossible. How long can they keep saying this—and keep pretending they are doing their jobs?

When the governor and legislators say they are trying to solve the problem, they aren’t telling the truth. This miserable budget, full of cuts to education, is a product of the budget system, and the constitution, that they themselves have chosen.

The post California’s Budget Deficit Is Not the Problem appeared first on Zócalo Public Square.

Shohei Ohtani is famous for being the world’s best baseball player, the only major leaguer of the past century who can both hit and pitch at an elite level.

Perhaps he should take charge of California’s state budget too.

I say that because of his new contract. This winter, Ohtani signed a deal to play with the Los Angeles Dodgers. It was initially reported as a 10-year, $700 million contract, but baseball writers quickly discovered that its real details were quite different.

Ohtani had agreed to collect just $2 million a year for the next 10 years. The team would defer the rest of the deal, some $680 million—and pay it to Ohtani more than a decade from now, when he is in his 40s and retired. Ohtani essentially leaves the Dodgers more money to sign other top players and build an elite team around him for the rest of his career; the fact that his deferred salary could weaken future Dodgers teams isn’t his problem.

To find a public financial document in California with more deferrals than Ohtani’s contract, you’d have to look at the state budget Gov. Gavin Newsom proposed last month.

Attempting to close a $58 billion budget gap, Newsom is relying to a stunning degree on deferrals and delays. Depending on who is calculating, his budget includes at least $10 billion in deferred money.

Such deferrals can be very complicated—involving multiple shifts of moneys between accounts. For example, the proposed budget would defer payments to the state’s two university systems, obligating them to borrow, using the deferred payments as collateral. The budget also pushes $1.6 billion in transit grants and $700 million in school facilities funds into the future.

One might justify such maneuvers as prudence or caution. But some deferrals are just plain gimmicky. Newsom proposes to save $1 billion by pushing the last state payroll of the coming 2024-25 budget year back one day: from June 30, 2025 into the following week, which falls in a new budget year.

These $10 billion-plus in deferrals don’t include education, which Newsom and legislative Democrats have claimed their budget doesn’t cut. But here, the administration is playing a more deceptive game. The state’s non-partisan Legislative Analyst’s Office found that California is actually reducing spending on schools and community colleges by $15.2 billion, relative to the budget enacted in June 2023.

The way the state does this is too long and complicated to fully explain here—it involves the convoluted three-part Prop. 98 funding formula. But the short version is that Newsom is charging $9 billion in reductions to the 2022-23 school year and redefining these cuts as a reset of the funding baseline. There are several more billion in school cuts that appear in the budget without any explanation of how they might be achieved. The legislative analyst suggests these cuts might be enacted via deferrals that extend until 2030. Whatever the details, education gets less.

This shouldn’t surprise Californians. As this column has previously noted, “Screw the Kids” has effectively replaced “Eureka” as the state motto, even if it’s not yet printed on official documents. And playing accounting games with children isn’t limited to schools. The proposed budget uses a change in methodology for calculating childcare budgets to remove another $900 million off the current books.

Meanwhile, the state continues increasing its future obligations to retired workers. The budget makes few meaningful cuts in an expanding state bureaucracy that has seen significant pay raises in recent years. Those staffing increases and pay raises will produce even larger pension obligations in years to come. Payments to workers after they are retired, as Shohei Ohtani understands, are a form of deferred compensation.

Why is the budget so out of whack? For years, I’ve conducted a long-distance argument about this topic with David Crane, a former UC regent and state teachers pension fund board member who has founded a political organization, Govern for California, to elect more state lawmakers willing to make tough, public-spirited decisions. Sometimes our debate takes place through former state legislator Ted Lempert’s UC Berkeley class on California government, where we both have been guest lecturers.

Crane argues that California governance fails because we need people in government who have the courage to take on the state’s powerful labor and corporate lobbies.

I argue the problem is structural—that California’s misbegotten governing system and broken state constitution keep pushing the budget out of balance.

But in this particular budget season, I must concede that Crane has the better side of the argument. California is not in a recession. The governor and the state legislature’s Democratic supermajority have the money and the power to make hard choices now. By deferring so much, they will make it even harder to balance the budget in the future, and push more costs onto the next generation of Californians.

Which is why our leaders should take Crane’s advice, and do the hard work of evaluating programs for effectiveness. They should cut the departments and initiatives that don’t work, or that frustrate Californians’ ability to start businesses or build housing or infrastructure.

State agencies and local governments also need to enact Crane’s best idea: stop spending billions on retiree health care costs and instead have government workers rely on federal programs like Medicare and Obamacare, like other retirees do. Ending these retiree health benefits will free up money to invest in better services and schooling at the state and local levels.

Ironically, when details of Ohtani’s contract were first disclosed, some top state financial officials criticized the deferrals. They complained that Ohtani is likely to dodge California’s income taxes by having retired from the Dodgers and left the state by the time that $680 million is paid to him.

They had a point—which is why the state shouldn’t imitate Ohtani now.

The truth, harder than an Ohtani fastball, is that California doesn’t have time to waste with gimmicks. Tax receipts are already running billions behind the overly optimistic revenue projections in Newsom’s January budget. If the governor were to tear up his proposal and offer a rigorous budget that relies more on rigorous reforms than deferrals, he’d be hitting a fiscal home run.

The post California Is Taking a Page From Shohei Ohtani’s $700 Million Deal appeared first on Zócalo Public Square.

California is spending billions to house its increasing population of unhoused people. But it hasn’t come close to building enough to meet its ambitious goal of ending homelessness. And many Californians have lost hope that it ever will.

California is spending billions to construct a high-speed rail system. But it hasn’t come close to completing what would be the first such line in the nation. And many Californians have lost hope that it ever will.

In the face of these crises, what is to be done? One option would be to sit around and lament two massive failures of government, and conclude that mega-projects are just too challenging for our state.

Or we could steel ourselves and embrace the wisdom of Dwight Eisenhower—who famously said: “If a problem cannot be solved, enlarge it.”

In that spirit, I suggest we solve the big problems of homeless housing and high-speed rail by combining them into something even larger.

So, I hereby propose—very modestly—Homeless High-Speed Rail.

You read that right. Finding permanent lodging for unhoused people, already declared the state’s top priority by Gov. Gavin Newsom, would become the new, urgent mission of our flagging high-speed rail authority.

Under Homeless High-Speed Rail, the state’s unhoused people would no longer have to live in cars or temporary shelters or controversial encampments. Instead, everyone would have the option to take a sleeping-car berth on a brand-new bullet train.

Sure, this fusion of housing and high-speed rail might create some new challenges. But it would solve even more problems.

To pick just one example: advocates and media have long criticized our state government for its confusing mix of competing homelessness initiatives. The state splits up housing funding among different local governments, who complain that the flow of money is not consistent enough to solve the crisis. The state’s official auditor, along with other experts, has called for consolidating state and local programs on homelessness.

My proposal does just that—by consolidating every single state and local program to house homeless people under one single state agency: the California High-Speed Rail Authority.

Now, some cynics might look at that combination and call it crazy—a mere merger of two giant dysfunctional money pits. And they wouldn’t be entirely wrong.

The state has spent more than $20 billion on housing and homelessness since 2019—but the number of unhoused Californians has grown by one-third. Meanwhile, the high-speed rail project has secured $25 billion—but is still as much as $10 billion short of the $35 billion required to complete its first segment, in the Central Valley. Both projects will require tens of billions of dollars in additional funding to achieve their goals.

But what cynics are missing, amid all the red ink, is how these two failing programs, in combination, could save each other money.

Building homeless housing is incredibly expensive—Los Angeles is paying more than $800,000 for some one-bedroom units. But much of the cost is in expensive California land, high-cost California labor, and time-wasting California permitting processes. None of which are factors when people are housed on rail cars.

Instead, using housing money to buy rail cars—with private bathrooms—means that the high-speed rail authority could devote more of its funding to building rail and stations (which might also be used for housing).

Talk about a win-win!

Indeed, combining homeless housing and high-speed rail could answer objections that dog both programs.

For example, cities often can’t build homeless housing because of aggressive opposition from neighborhood NIMBYs. But NIMBYs would lose their developer targets, and their backyard objections, when housing is simply zooming past, at 200 miles per hour.

And on the high-speed rail side, hosting homeless Californians answers persistent questions about whether there would be enough riders to support the project. Surveys show little public interest in using high-speed trains, especially because the first segment will run between the smaller cities of Merced and Bakersfield.

But in a Homeless High-Speed Rail project, unhoused individuals would provide a large and steady ridership base.

Strange as my proposal may seem, almost nothing about it is new.

Keeping homeless people constantly on the move sounds cruel, but it is already an established and popular policy across California. After all, cities and police are always tearing down homeless encampments, and forcing unhoused people to keep moving.

In addition, the idea of converting spaces intended for other purposes into housing isn’t new. The state, cities, and counties have already converted dozens of hotels to serve as housing for the unhoused, under Projects Roomkey and Homekey. A Bay Area housing activist even offered a plan to house homeless people in old railcars.

If you board L.A. Metro or the San Diego trolley or other local transit systems in the state, you’ll see that individuals without homes are California’s most dedicated train riders. Thousands of unhoused Californians all but live on these local trains now, because of the low-cost shelter they provide. Indeed, homelessness is so much a part of transit that, earlier this year, BART adopted its first Homeless Action Plan, which includes promises to develop housing itself.

Of course, there will be some Californians, perhaps millions, who object to the whole concept, finding it perverse. These misguided moralists, a few of whom write columns, will say that California is a very rich place that surely can afford to house all its people and to build the same high-speed rail system that two dozen other countries have. And they will claim that California must learn to build and manage giant new housing and infrastructure projects if it’s going to survive the adaptation challenges of climate change.

In theory, these skeptical Californians will probably be right. But California doesn’t operate on theory. It operates on an unmanageable budget process, a volatile tax code, and a broken governing system that both parties refuse to fix. It has a state government that can’t adopt modern technology or manage a payroll, much less translate its people’s democratic preferences into major action. The way California operates now, the state will never have enough housing for the homeless, or a real high-speed spine for its transportation networks.

So, before you dismiss my modest proposal, just ask yourself: In the face of massive failures, when doing big and essential things is nearly impossible, is there any plan too awful to take off the table?

The post A Modest Proposal<span class="colon">:</span> Give High-Speed Rail to Unhoused Californians appeared first on Zócalo Public Square.

Ana Matosantos has announced she is departing the Newsom administration at the end of the summer, telling the L.A. Times that she needs to sleep.

Can state government survive without her?

Unless you follow state politics closely, you’ve probably never heard of Matosantos, who doesn’t appear on television or give many on-the-record interviews. But for more than 15 years she has been an indispensable insider of Sacramento—depended upon by politicians, parties, and agencies of all varieties.

What makes her so important? The answer lies in a paradox.

Because our state is such a kaleidoscopically diverse and complicated place, one might assume it requires a large and diverse set of people and institutions to govern it. In reality, the opposite is true. The machinery of government here is so complex, no mortals—and certain no elected official—can understand it, much less govern it.

So, real governing in California requires that one-in-40-million sort of person. She must be a wizard with a mind peculiar and powerful enough to comprehend the incomprehensible algorithms of state finance, to make sense of rules and regulations that make no sense, to conjure possibilities from our impossible system. And the wizard must do this quietly, so that politicians can pretend to run the place.

Each generation in Sacramento produces its own wizard. In the later 20th century, the wizard was a soulful and profane state educational official named John Mockler, the author of Prop 98, the impossibly complicated school funding formula that makes the state budget so maddeningly complex.  Mockler was so vital to California that I proposed, in the L.A. Times, that the state constitution be changed to require him to live forever. (Alas, he died in 2015.)

In the 21st century, the unicorn keeping California from cracking up has been Matosantos.

You may think of the last three governors—Messrs. Schwarzenegger, Brown, and Newsom—as very different men with very different agendas. But when it came to the most complicated governing and budgeting tasks, they were flashy figureheads, often doing whatever Matosantos advised them to do.

Matosantos has had different jobs and titles. But, relying on her off-the-charts intellect, a Stanford education, and a freakishly good memory, she developed the rarer-than-rare ability to understand the bizarro world of state budgeting.

Originally from Puerto Rico, she first gained notice on the political stage when she helped Schwarzenegger (who often referred to her “the genius”) negotiate complicated and contentious budget fights in the 2000s. In one such conflict, which has become Capitol legend, Matosantos is said to have drafted both the Democratic proposal and Republican counter-proposal that led to a budget agreement.

In the 2010 elections, Jerry Brown replaced Schwarzenegger, but Matosantos stayed on to direct state finances—and ingeniously found ways to turn the curious koans of the philosopher-governor into real policies. One veteran Capitol wag compared her to the Kyra Sedgwick character in the TV series The Closer, a brilliant LAPD investigator who solved the crimes that no one else could crack. Matosantos was considered so essential to the state’s governance that her 2011 arrest for driving under the influence was treated not like a personal scandal but rather like a near-death experience for state government. What would California do without Ana?

She left state service for a time. But Newsom, after winning office, coaxed her back into state government, making her cabinet secretary, which requires coordinating operations and policy across all departments and agencies.

It’s an impossible job, and Matosantos had missteps in everything from pandemic response to utility regulation. But she also was the administration’s great resource, able to answer seemingly unanswerable questions about state government. She also kept pulling rabbits out of hats—insiders say she was particularly adept at exploiting the details of Trump administration regulations for California’s benefit. She and her administration colleagues managed to make historic investments in new programs while protecting the giant budget surpluses of recent years.

Indeed, some progressives in California privately complained that Matosantos’ ability to manage our messed-up government machinery was too good—her skill at solving difficult problems in the short term allowed state government to postpone systemic reforms.

This may be an election year, but Matosantos’ departure from the administration is the most significant change in California governance.

Possibly, after some well-deserved rest, Matosantos will find a way to keep playing her essential role in governing California, for instance, as a consultant. But if Matosantos is truly departing, this time of transition raises all kinds of fears about what comes next. Without a government wizard, California could fall apart under the stresses of economic downturn.

But, maybe, just maybe, this absence of sorcery might force Californians to redesign our complicated state constitution. Without Matosantos to keep things going, maybe we will have no choice but to remove the formulas and remake how we budget. Maybe we will create a new governing system simple enough that politicians and even everyday Californians can understand it.

But such changes make too much sense to ever happen in this state. California, and Sacramento, will just have to find a new wizard.

The post What Happens When the ‘Indispensable Insider’ of Sacramento Steps Down? appeared first on Zócalo Public Square.

Maddeningly, many Californians who claim to be defenders of democracy persist in calling this democratic triumph an expensive waste of money. (Some of these thoughtless critics even have the gall to call themselves Democrats.) If they don’t want to look like hypocrites, they should stop complaining, reconsider this election’s math, and reflect more deeply on the price of democracy.

Let’s start with the number: $276 million is almost nothing in a state California’s size. That figure represents less than 1 percent of the current budget surplus, and about one-tenth of 1 percent of the overall state budget. To put it in another context, the election cost $100 million less than baseball’s Los Angeles Dodgers are paying their right fielder.

Media commentators have spent the past two weeks claiming, falsely, that the recall took $300 million away from schools or healthcare or homelessness. The truth is the exact opposite. The recall helped increase funding for those core government services to historic heights—in part because of the pressure the election put on our state’s ruling Democrats as they negotiated a budget this summer.

And let me blunt: If legislators and the governor had had another $300 million, it’s quite possible they would have blown it on a giveaway to their own political backers. In fact, that’s precisely what happened in July, when some of the same Democratic politicians questioning the recall’s cost spent $330 million to double the size of an unnecessary and ineffective tax credit for wealthy Hollywood producers.

Those same politicians could have reduced the cost of the recall by $60 million if they hadn’t insisted on moving the election date up to September 14 to give Newsom a political advantage.

But let’s not get too upset about that bit of hypocrisy, because even with the additional cost, the recall was worth it.

Spending more on elections has never made more sense than it does right now. California’s election system is in the midst of a historic transition to make voting easier. New practices, like opening vote centers for weeks before elections and sending everyone a mail-in ballot, are so far a success, with turnout up. But this progress is fragile because of a rising wave of disinformation attacking elections and democracy. The people who run our elections—county officials and volunteers—are facing harassment and threats because they do their jobs honestly.

More than 80 percent of the $276 million cost of the recall is going to those same county election officials—who, in running the recall election, get to reinforce new election infrastructure, find new ways to bring out voters, and take measures to protect themselves and their elections against threats. The rest of the money (more than $30 million) is used by the state to do things like print and distribute voter guides in the different languages that Californians speak.

Think of the recall’s cost as money spent on infrastructure—democratic infrastructure. And instead of complaining about it, think of how much more we could invest in it. If we’re serious about saving democracy, we should create funding for every California municipality to have a robust office to support public participation and civic engagement, as foreign cities often do. We also should raise and stabilize election funding, hire more public workers to help hard-to-reach people participate and vote, and provide more public financing for campaigns, with an emphasis on supporting greater information and debate on ballot measures.

More people paying more attention to democracy can help reshape history.

Just look at the dramatic transformation of our governor, who was flailing and unfocused—until it became clear the recall would qualify. Then, Newsom made personnel changes in his team, and curbed his bad habit of creating working groups or commissions or task forces to address tricky problems rather than managing them himself. (The nadir of Newsomian delegation was a “task force” to study…pause for a breath…oxygen in late 2020, instead of simply getting more to hospitals.)

Facing recall, Newsom started taking big, direct actions—and never stopped. After keeping kids out of classrooms for too long, he pressured to force schools to reopen. He replaced a miserly offer of loans to struggling businesses with a system of generous grants. He junked the confusing COVID-19 colored-tier system and reopened the state in June.

If this sounds like cheerleading, well, Newsom saved that too, reversing a ban that initially kept cheerleaders off the sidelines after high school sports reopened.

The hip-hip-hoorays didn’t stop there. Newsom reversed himself and moved aggressively to shut down homeless encampments. And his recall year budget made too many historic investments—from health coverage to college affordability—to list here. To pick just one: after 25 years of California politicians promising and failing to deliver universal preschool, Newsom’s recall budget plan actually provides for a full year of transitional kindergarten for all 4-year-olds.

When you understand this context, Newsom’s landslide victory does not mean that the election was unnecessary. To the contrary, his win shows the recall’s value. The election affirmed the governor’s big impactful acts of governance, and set the stage for more aggressive action, especially around the pandemic. Newsom framed the election in part as a choice about pushing hard for more vaccinations—meaning this recall will almost certainly save lives.

Now, we Californians just have to keep Newsom—who is prone to distraction and flights of fancy—disciplined, vulnerable, and on edge. He has been more effective in 2021 as his public personality grows saltier, angrier, and wounded.

And if Newsom gets complacent after being re-elected next year, perhaps some civic-minded Californian can qualify another recall to improve the governor’s focus—and give us another opportunity to spend $300 million on our democracy.

The post California’s Recall Was Worth Every Penny appeared first on Zócalo Public Square.

I, the California budget, am bigger than ever right now—more than $267 billion, according to Governor Newsom’s recent revision of me. And please don’t think I don’t appreciate being more swole than Schwarzenegger—I remember how lean and gaunt I got in the Great Recession. When the pandemic first hit, everyone, including me, thought I’d be much smaller by now.

Instead, I’m projected to have a $38 billion surplus. You might think that this would make me feel all safe and proud, since I’m able to fund a bunch of new programs, from small business incentives to transitional kindergarten, and Medi-Cal coverage for more undocumented Californians.

But actually, I’m worried. And you should be too.

The phony conventional wisdom, oft repeated by politicians and the media, is that if I’m doing well, the state is doing well. Just look at the victory lap around California that Newsom, who is facing a recall, is taking to tout all the new things he put in me. But the reality is that focusing on me, when I appear to be in good shape, is a way to cover up our state’s failures to fix our many broken systems.

Right now, money is being poured into me to fund a number of programs that aren’t being properly managed. Look at the state’s unemployment system, and its failures to prevent fraud and deliver services. Or consider all the money that the latest revision of me spreads among homelessness programs that, as a recent audit found, don’t work well by themselves, or together. Or scrutinize the billions being added to housing funds and programs that produce very little affordable housing.

You could also take note of the billions being thrown in to cover pension debt—without any accompanying effort to bring pension and other retirement benefits under control. Or take a gander at the record amounts of money going to schools, which are not yet fully reopened, and which have yet to assess fully all the academic and social-emotional damage done to students by more than a year of closures.

Of course, managing California and its programs is hard. By comparison, I’m easy to handle—I’m just a spending plan. And my numbers are based on predictions about state revenues that are almost always wrong. Why? Because state budget officials make me by guessing how the stock market and the incomes of the wealthy will look in the following year.

Indeed, my dependence on capital gains makes me so volatile that even Kanye probably thinks I’m nuts. And all the formulas that govern me—many of them imposed via ballot initiative by those crazy people known as California voters—make me extremely complicated and even antiquated.

This year, the big reason why the governor is cutting taxes and giving schools extra bucks is because of a little-known 42-year-old, voter-approved formula that limits spending growth, based on population and personal income. That’s right—how California budgets out of the pandemic is being determined not by the needs of today’s Californians but by a ballot measure written in 1979 by an anti-tax activist named Paul Gann, who died in 1989.

Even though I’m governed by the dead, I do include some good new proposals this year, like my new payments to low-income and middle-income Californians, with $500 additional checks to families with children. Harvard economists have shown that such payments worked wonders in California this past year, with poorer counties like Imperial having higher levels of consumer spending during the pandemic than before it. For Fresno and some other parts of the Central Valley, COVID proved to be an economic stimulus.

But beyond such ideas, I wonder if I’m growing too big too fast. Making the new me—the 2021-22 budget—such a giant historic document could bring risks, especially if the stock market and economy turn, and my revenue picture goes upside down again.

While the conventional wisdom is that a big budget is good for the state and the governor, history says that it is at times when I’m most flush that California makes its dumbest mistakes. State voters passed Prop 13 and its tax-cutting formulas when I had a surplus so big it was dubbed “The Obscene Surplus.” The state gave unsustainable boosts to its pensioners when it was running big surpluses in the late 1990s tech bubble.

So, let me suggest making me less bulky. Let’s put aside most of this giant windfall of tax revenues into a reserve, and focus on improving management and developing smarter pandemic recovery plans right now.

Let’s make sure transitional kindergarten works better before enrolling all 4-year-olds in it. Let’s not throw money into pensions and retirements without reforming that system, too.

Then, in the years to come, we can devote this extra money to building up these better systems for the state, so that as I get bigger, I have a longer-lasting impact.

The post I, the California Budget, Am Worried I Might Be Too Big appeared first on Zócalo Public Square.

Budgetism is the false and conventional wisdom—promoted relentlessly by our state’s media and by elected officials of both parties—that the real measure of California’s success is the condition of the state budget.

For decades, if the budget was balanced or in surplus, California was supposedly on the move, a superpower, or even a national model of success. If the budget was in deficit, California was supposedly in crisis, a failed state, or a cautionary tale of excessive ambition.

But now the budget and everyday reality have diverged with tragic force. When Gov. Gavin Newsom earlier in January introduced a new budget with a $15 billion surplus, it occasioned little of the usual celebration and declarations of governance success. Instead, some wondered why the money hadn’t been already spent responding to the greatest emergency of many Californians’ lives.

The COVID-19 death toll is growing by hundreds per day, and has surpassed 30,000. Schools are closed at great cost to children’s development and mental health. Businesses have been shut, many forever, and thousands of people are abandoning the state altogether. Public fury is mounting against the pandemic response decisions of local and state officials, including Newsom, the target of a recall.

In the wake of this massive tragedy, we’ve managed to put aside our obsession with black and red ink, at least for now. But if this shift were to become a permanent thing, it would be a surprise—and a historic passing. That it has taken a once-in-a-century cataclysm to threaten our budget-centric thinking shows just how deeply ingrained budgetism has become in California, and just how divorced from reality our conversations about state governance have been.

Budgetism endured because it provided an easy, one-number scorecard to judge governance in a highly complicated state. Gov. Gray Davis might have reversed two decades of Republican dominance and achieved important education reforms, but he was a failure worthy of recall because he produced a massive budget deficit after the dot-com bust. Gov. Arnold Schwarzenegger might have brought historic political reform and climate change legislation, but he was a failure because he presided over a big budget deficit after the Great Recession. (“Schwarzenegger legacy is crippled by budget deficit,” the Mercury News editorialized in a typical assessment.)

The Jedi master of California budgetism was Gov. Jerry Brown, who—despite neglecting mounting problems in everything from housing to unemployment insurance—left office as a media darling because he produced big budget surpluses. The Luke Skywalker of budgetism was the young and brilliant finance director and gubernatorial aide Ana Matosantos, a wizard at conjuring surpluses from California’s impenetrable budget rules.

But this particular force has a very dark side. Budgetism—by focusing so much attention on annual accounting—obscures deeper troubles.

Our state’s leaders like budgetism because it offers cover for their inaction and their failures to manage agencies, to reform the state’s many broken systems, and to execute the progressive policies voters say they want. Sure, major educational studies may conclude that California needs universal child care and more and better instruction for K-12 students, but that would require tens of billions in additional spending that could put the budget into deficit. Yes, the state’s faltering infrastructure, from waterways to health facilities, needs hundreds of billions of dollars in new investments, but we only can address a fraction of that need for risk of throwing the budget out of whack. And of course, it’s a matter of life and death that we accelerate management of our forests and wildlands to reduce fire risks, but can we really afford the cost?

Why hasn’t the dark side of budgeting been more aggressively and publicly challenged? Because politicians punish those who do. Democratic legislators who dare challenge legislative budgets and demand stronger investments lose committee assignments and offices, and get beaten up by interest groups and even their own party.

Over the past decade, when I’ve taken on budgetism in public forums, and suggested we need broader constitutional reform to produce better governing systems and management, I’m often dismissed by politicians and fellow pundits as “unrealistic.” (One Democratic consultant even dismissed me, a rather boring father of three living in a Southern California suburb, as “a revolutionary.”) And when I suggested in this space that then-Gov. Jerry Brown stop summing up the state’s prospects along budget lines and instead see more of California’s lived realities and broken systems in its different regions, he referred to me as a “declinist” in his state of the state address.

I pray that now, after this terrible year, politicians will stop the name-calling and the budgetism, and think more broadly about bigger changes in California, and broader measures to evaluate those changes. Good metrics would shift the focus from funding to management—a vital shift, in a state where bigger spending on homelessness hasn’t produced sufficient housing for the unhoused, and more money for unemployment hasn’t always reached the truly unemployed.

It shouldn’t be that hard to come up with broader measures of whether California is succeeding. So far, the most serious effort at quantifying that is the California Dream Index from the reform powerhouse California Forward.

The index tracks progress toward a more equitable California statewide and across 11 regions, on 10 indicators—air quality, short commutes, broadband access, early childhood education, college and career technical education, income above cost of living, affordable rent, homeownership, prosperous neighborhoods, and clean drinking water.

You can quibble with whether those are the 10 best indicators to follow, but the index offers the smartest measurement we have so far of whether California’s performance is meeting its people’s needs. And it’s a much more accurate picture of the state’s health than whether the budget is in balance.

The post How California (Might Have) Learned to Stop Worrying and Love a Big, Unbalanced Budget appeared first on Zócalo Public Square.

Of course, California’s nearly 80,000 sworn officers don’t bother with the small-time grift of stealing electronics during civil unrest. Instead, they prefer to sack the treasuries of the governments that employ them, in both good times and bad.

In communities across our state, the escalating salaries, benefits, and pensions of police are swallowing up municipal budgets—and crowding out the other services, from libraries to summer programs, that poorer Californians depend on most. Over the past 40 years, police spending more than doubled, while parks, recreation, and maintenance budgets remained flat or declined. Police departments are by far the largest piece of any local budget, often consuming at least one-third of the general fund (as in my San Gabriel Valley hometown) and more than half of discretionary revenues.

As policing costs have come to dominate city finances, the police have gained nearly unchecked political power. Police unions, enriched by higher dues from well-paid officers, make the campaign contributions that determine who wins local races. So city council members rarely move to curb the pay or power of police officers who installed them in office. The result is that in many places in California, the city government does not run the police department; the police department runs the city.

This flawed local government structure deserves more attention in our current crisis—because it provides part of the answer to the question Americans are asking: Why does abusive, racist, and deadly police behavior keep happening? The deeper response to that question starts not with Twitter-fueled conspiracy theories about the protestors who have taken over our streets, but rather in recognizing just how thoroughly our police have taken over our city halls.

Police dominance of municipal budgets is a problem all over the country, but it’s most extreme in California. Our 120,000 full-time law enforcement officers—that includes police, sheriffs, and prison guards—are the highest paid in America. California consistently ranks, along with New York and Alaska, among the national leaders in spending on police ($414 per resident, compared to a national average of $354).

The peculiarities of California governance have long accentuated police power, as well as its costs. While local budgets were limited by the Prop 13-tax system, the “maintenance of effort” provisions in the state constitution—via Proposition 172, approved by voters in 1993—required local governments to maintain their spending on police and other public safety personnel. So police budgets, constitutionally, were programmed to gobble up ever higher shares of a limited local tax base.

Then things got worse. The full-scale police looting of municipal budgets began 20 years ago, when unions forced changes in pension rules that made it possible for officers to retire as early as age 50, with pensions that would be nearly as high as their salaries. These pension changes were both retroactive and permanent, and included easily-abused rules that allowed cops to maneuver to spike their pensions astronomically. A Los Angeles program allowed police officers to “retire” briefly and pocket part of their pension and salaries in a lump sum; the current LAPD Chief Michel Moore used it to take home $1.27 million.

With cops also receiving generous disability benefits and costly retiree health coverage, cities have experienced a crushing increase in their retirement costs. In effect, California cities are paying for two police forces—the current one and the retired one. And the last decade of recovery did not produce enough new revenues to keep up with these increases in police salaries and retirement benefits. (Firefighter pay and benefits also have taken big bites out of cities).

These escalating police costs add an irony to the current crisis on our streets. Today’s young protestors will get less in local services because they are paying for the unaffordable retirements of the cops who are using tear gas and rubber bullets against them. The police really should be kinder to their benefactors.

In another irony, police response to today’s protests will only add to another rising municipal cost: legal settlements. In recent years, cities have seen multimillion-dollar increases in amounts paid to settle lawsuits over police shootings, use-of-force, and in-custody deaths. Look for the current police-community clashes to produce hundreds of millions of dollars in new settlements, ultimately paid for by the taxpayers suffering under COVID and curfews.

Maddeningly, all the massive increases in police budgets haven’t given us more policing. Most cities have fewer sworn officers than they did in 2008. The lack of personnel was apparent in recent days, as police departments struggled to muster enough officers to protect property from vandalism, arson, and looting.

To be fair, California police are neither irredeemable nor unaware. Police collaborated with their critics to negotiate pioneering state legislation last year that limits police use of force. Some cities, notably Richmond, have transformed police-community relations.

And the LAPD, once a paramilitary citadel, is now a national model of community responsiveness and diversity, with two-thirds of officers now hailing from ethnic or racial minorities. Watching police and protestors up close recently in L.A.’s Fairfax district, I was struck by how the protestors were more male and white than the cops facing them.

But police departments have faced little pressure to surrender any of their local fiscal and political power—until now. Researchers at Black Lives Matter are building a strong case for rolling back local police budgets. They successfully targeted Los Angeles Mayor Eric Garcetti’s initial budget proposal, which offered deep cuts in virtually every city program except the LAPD, which got a 7 percent increase. After activists launched a “People’s Budget” to replace police spending with money for the homeless and renters, the mayor announced he would trim the police budget instead. Nationally, some activists even want to end police departments altogether.

That’s unlikely to happen, but California’s system of local government must change so that police no longer dominate our cities. This means empowering citizens to challenge police power in city hall, and perhaps forcing police to work under neighborhood service departments with a broader sense of community needs.

But first, let’s stop the looting.

The post To Rein in California’s Cops, Reclaim City Hall appeared first on Zócalo Public Square.

They are preaching nonsense. California’s real problem is underspending.

Go ahead and dismiss my claim as blasphemy. After so many years of budget crises and big deficits, Californians have adopted a budget theology grounded in self-flagellation, even though our recent budgets contain small surpluses. You can probably recite the catechism yourself: We’re still sinners who spend too much on state services! Far more than we take in! So save us, Non-Denominational Higher Power, from our profligate selves! Punish us with budget cuts or spending limits or a rainy day fund!

I’m sorry, but what our spending religion really needs is reformation.

And that requires genuine revelation. Our state’s tendency to produce big deficits is not caused by big spending. We have had big deficits because our state budget is based on volatile formulas that tend to expand deficits in unpredictable ways. In fact, California has long been on par with other states in expenditures per capita and in spending as a percentage of state GDP. Still, we cling to our budget religion and, fearing overspending, we take the cheaper path—which often costs the state more money in the long run.

The problems of underspending are most obvious when it comes to pension obligations. California governments and employees have long spent too little money on contributions to pension funds, which are underfunded. So, to try to catch up to our pension obligations, California taxpayers are having to make much bigger contributions now. And those catch-up contributions are leading to even more underspending on critical services, as money that should go to schools or health care or infrastructure is used to cover pensions.

The costliness of underspending is also the story behind rising public higher education costs in California. Over generations, the state has cut back its relative contribution to the University of California and California State University systems. This underspending has been made up for in part with ever-higher tuition fees for students. And, despite what you may read, the latest UC scandal is also about underspending; a state audit’s central allegation is that UC’s office of the president accumulated more than $100 million in funds that it wasn’t spending.

That scandal reveals a hypocrisy in our budget religion; overspending may be the stated enemy, but underspending gets you into far more trouble. The state parks department kept a secret reserve of unspent funds that became a major scandal in 2012. In California’s prisons, underspending led to an intervention by the federal courts, which ordered the state to spend more on its unconstitutionally overcrowded prisons and reduce its prison population.

Underspending also explains problems with our basic services. Studies have found that the state spends tens of billions less on schools than would be necessary to provide all Californians with an adequate education. And that underspending has real costs: California is not producing enough college graduates and skilled workers.

The state has made bold promises on child care and early childhood education that it hasn’t adequately funded, leaving citizens to pay for the rest. Child care now costs more than college tuition here. And housing costs more than just about anything, in part because we’ve spent so little on housing that we have a massive shortage, which forces Californians to pay housing prices more than twice the national average.

That the state has failed for generations to spend enough to build and maintain infrastructure is obvious in the degraded condition of roads, bridges, and waterways. The state’s failure to create strong enough spillways at Oroville Dam is forcing California to make hundreds of millions of dollars’ worth of repairs and upgrades before the next rainy season.

Our state’s leaders understand the problem with underspending, but they haven’t been successful at explaining the problem, credibly, to the public. It also hasn’t helped that when state officials do need to spend big, they haven’t been very good at it. Examples include the new Bay Bridge, with its delays, cost overruns, and questions about the integrity of its steel rods, and the high-speed rail project, where spending and construction has been so slow that many people think the project will die.

In recent budgets, Gov. Jerry Brown and the legislature have sought to counter the state’s tendency to underspend now and pay later. They’ve made a great show of efforts to pay down debt. In his current budget proposal, Brown suggests making a large advance contribution to pensions now, in order to reduce liabilities later.

But that payment, unfortunately, is achieved in a questionable manner: by borrowing billions from a state special fund. As Stanford lecturer and former Schwarzenegger advisor David Crane wrote recently, since pension contributions get invested, that payment amounts to a “leveraged bet” on a stock market that Governor Brown himself has warned is overdue for a correction.

Brown has grown popular as a proselytizer of the credo that California can be managed on the cheap. That’s appealing dogma for a state whose people struggle with a very high cost of living.

But the realities of our state should remind us that successfully running California on the cheap is a fantasy that has curdled into a costly article of faith. And we parishioners are being stuck with the tab.

The post California’s Real Budgetary Sin—We Spend Too Little, Not Too Much appeared first on Zócalo Public Square.

Now it looks like Prop 30 might have an even longer life. Last month, the California Teacher’s Association—the union representing more than 300,000 teachers—filed an initiative to extend Prop 30’s temporary income tax surcharges until the year 2030. The rationale according to Gale Kaufman, strategist for the initiative, is to “keep our state budget balanced, and prevent devastating cuts to programs affecting students, seniors, working families, and health care.”

Unfortunately, economics and the available empirical evidence suggest there is a very large risk that Prop 30 will produce the exact opposite outcome from that suggested by Kaufman.

There are two issues that voters must consider before deciding whether to accept this risk. The first is the difference in incentives between a temporary and a permanent increase in income taxes. The second is the different impact a tax may have at different points in the business cycle.

When Prop 30 was proposed, it was billed as a temporary tax increase to bail the state and its schools out of a recession-induced financial crisis. In the political campaign, Gov. Jerry Brown said: “It’s about putting money into California’s schools or taking money out of it … there is no third way.”

At the time, opponents warned of a mass exodus of high-income earners from the state were Prop 30 to be enacted, since the income tax hikes were restricted to those who earned at least $250,000 a year. California has become increasingly dependent on such high-income earners for tax revenues. Income taxes paid by the top 1 percent of income earners grew from 33 percent of the total in 1994 to over 50 percent in 2012, the first year of the Prop 30 tax surcharges. But the exodus did not happen. Most high-earners stayed, more came, and they and the Golden State have prospered.

Why were the doomsayers wrong? It’s not easy to say. There are no data on this; nor are there data on the difference between a temporary Prop 30-like tax increase and a permanent one.

However, we do know that people react differently when presented with the same policy if they think there is a crisis (let’s all pitch in and solve this) or if they think it is business as usual (why am I contributing this amount?). These questions of context and timing must inform how we think about extending Prop 30.

For example, will there be a significant move of Californians to Seattle—where there are no income taxes—if Prop 30 income tax surcharges are made effectively permanent? If the answer is yes, then it could well be the case that state tax revenues would decline as high-income earners and their employees depart, offsetting gains from the higher taxes on those who stay put. This is a difficult but essential forecasting problem facing the voters as they consider the extension of Prop 30.

Another forecasting problem involves the fact that income taxes apply to earned income, and in a recession income declines. A recession is coming. When? We do not know, but it is coming and tax revenues will necessarily decline when that occurs. Importantly, when it does, California’s high-income earners will once again take a greater hit to their income than the balance of the state. The heavier the reliance on them to fund state government, the greater the cuts will be to the same programs that Kaufman cited.

But then shouldn’t the state extend Prop 30 income taxes to cover this impending shortfall? The unfortunate answer is no. Income that does not exist because of a recession yields the same revenue regardless of the marginal tax rate—zero.

In fact, an extension of Prop 30 could make the situation worse than it was during the Schwarzenegger and Davis budget crises. Our current greater dependence on high-income earners to balance the state budget makes us more not less vulnerable. It is one key reason why the three bond rating agencies, Fitch, S&P, and Moody’s, rate California bonds as relatively high-risk investments compared to those of other states.

The close and deleterious relationship between the unstable incomes of high-income earners and California’s public finances dates back to Governor Ronald Reagan’s progressive tax law, which itself was supposed to be temporary. Ever since then, when rich people have done badly, so has the state. The impact was not pronounced in the early years (1967 through 1990) because the California economy was dominated by large manufacturing firms, which paid middle-class wages to their workers. As innovation, technology, and their concomitant entrepreneurial activity replaced large-scale manufacturing, the importance of high-income earners soared.

The income of the new entrepreneurial class is quite different than their high-income predecessors. In good times, these entrepreneurs and their team rake in profits. Their companies issue IPOs, they exercise stock options, and they receive generous bonuses. But when the economy tanks, so do their incomes. It is just not the same as, for example, a 15 percent reduction in the workforce at the GM plant in Van Nuys hitting revenues. It is a virtual wipeout of a major source of revenue.

And so actual deficits—that is, an excess of general fund spending over general fund revenues (not counting savings from previous years)—have, even adjusting for inflation, grown dramatically. There is nothing in the revenue structure to suggest today is any different from the recent past.

*Data from California Department of Finance, BEA.gov, UCLA Anderson Forecast

One counterargument is that the state now has a “rainy day” fund thanks to Prop 2, approved by voters in 2014. The current budget projects between $3 billion and $4 billion in the rainy day fund at the end of the fiscal year. It cannot be more because of Prop 98’s education-funding requirements and because of budgets that dedicate some of the increased income to restoring expenditures cut at the time of the previous recession.

The important question then becomes: When compared to previous deficits, is this rainy day fund sufficient? A dispassionate reading would suggest it is not even close. Do we remember the $26 billion deficit of 2009? One estimate, using data from the 1991 recession, found that states need rainy day funds equal to about one-third of their budgets. For California, that would mean a rainy day fund of roughly $40 billion—10 times as large as today’s rainy day fund. A much milder recession than the last one, with heavier reliance on high-income earners, wipes the rainy day fund out and then some.

There are two questions any discussion of an extension to Prop 30 must address. First, will permanent increases in taxes on entrepreneurs, the source of California’s rapid recovery from the last recession, leave the state bereft of many of them for the next recovery? Second, will increasing volatility in state tax revenues over the business cycle be a harbinger of what will happen in the next recession?

I would suggest that the answer to both questions is yes and the initiative to extend Prop 30 taxes, rather than solving a problem, creates a worse one.

A better alternative would be to change the tax system such that it generates a smoother revenue stream available to the general fund over the business cycle and prevents the kinds of drastic cuts we have become accustomed to. There are many ways of doing this that preserve progressivity in the tax structure, but the extension of Prop 30 is not one of them.

The post The Unintended Consequences of Extending Proposition 30 appeared first on Zócalo Public Square.