Commentary

Arnold Must Wield the Knife

This week, Gov. Arnold Schwarzenegger will release a revised budget proposal to rein in spending and set California on firm financial ground. As in the economic slowdown earlier this decade, state revenue growth has slowed. California is once again the poster child for poor fiscal management, and legislators in other states should watch it and learn. With an estimated gap between proposed spending and revenues of up to $20 billion, it’s going to take more than Schwarzenegger’s proposals to tax property insurance and close tax loopholes to fix the state budget.

Each new cut in spending will likely bring a new constituency to picket the governor’s mansion, but Schwarzenegger rode into office on a pledge to reduce waste, and he should push not only for a 10 percent across-the-board cut in general spending, but also to eliminate specific programs and vacant public employee positions. California could start closing the gap by selling an estimated $1 billion in surplus state property, including the Los Angeles Memorial Coliseum.

The governor should return the state government to its core functions by abolishing the Department of Conservation, cutting environmental protection spending, and diverting the special funds from those programs to the general fund ($2.5 billion). He could also eliminate spending for many small projects that litter the budget, such as the California Science Center ($20 million) and the New Deal-style Conservation Corps ($41 million).

Schwarzenegger has repeatedly called for spending restraint, then compromised the second he was prodded by legislators.”

In the last few years, California’s general fund budget has grown by over 30 percent — faster than personal income, and certainly faster than revenue growth. California general fund spending rose 32 percent from the 2004 to 2008 fiscal years, peaking at more than $103 billion. But total state spending, which includes general and special funds, rose even faster. According to the governor’s budget summary, total state spending rose a stunning 39 percent to $145 billion in the 2008 fiscal year from $104 billion in the 2004 fiscal year.

By way of comparison, the National Association of State Budget Officers found that general fund budgets across the 50 states rose on average 7 percent in 2005, 9 percent in 2006, and another 9 percent in 2007.

If there is a budding state fiscal “crisis,” it is being driven by excess spending.

Schwarzenegger has repeatedly called for spending restraint, then compromised the second he was prodded by legislators. This year, he has another chance to push for action.

Some lawmakers claim their hands are tied by mandated spending increases set by various formulas and contracts. The state’s byzantine budget rules favor overspending, but all the supposedly “mandatory” spending increases can and should be canceled with a vote of two-thirds of state legislators — the same magic number required to pass the budget.

Though spending continues to rise, taxpayers have signaled little interest in higher taxes. Even a “sin” tax on smoking failed on a 2006 ballot initiative. But even if tax increases weren’t so unpopular, they would do little to stem slowing revenue growth. Higher taxes would simply encourage even more productive Californians and their businesses to leave the state.

According to U.S. census data, from 2000 to 2007, California saw more than 1.2 million people move to other states, roughly equivalent to losing the entire population of the city of San Diego. Higher taxes will fuel the exodus of Californians to the greener pastures of the low-tax states nearby, including Nevada, which has no income tax at all. The last thing the state can afford is to drive out more of its tax base.

Yet, the new estimates show more must be done to close the gap between lawmakers’ spending desires and the slowing revenue stream. The state has already turned to gimmicks such as postponing debt payments and counterproductive borrowing schemes. While nearly every state uses borrowing to fund capital investments, California is breaking fundamental budgeting rules by borrowing to fund current operating expenses, and is paying the price with hefty interest payments and overhead costs. In the 2007-08 budget, $342 million in bond funds were used to fund state operations and local assistance, but not capital projects, in the Department of Public Health.

One revenue-raising gimmick Schwarzenegger is eyeing is leasing the state’s lottery system. The state would “lease” the lottery to a private company, which would run it, and split the profits. But such schemes do not get at the core problem of a bloated budget. A quick, one-time fix from the lottery lease might help lawmakers feel better in the short run, but it will do nothing to change fundamentals in the long run.

To bring the growth of the state government back under control and meet the fiscal challenges of the future, Schwarzenegger will have to cut spending significantly.

California lawmakers are going to face ugly choices in the coming months. Their troubles should be a lesson to legislators in other states. It’s time to rein in spending.

Elizabeth Karasmeighan is a budget policy analyst at the Cato Institute.