California has up there for a billion dollar budget balance out of whack, and not in a good way. The ambitious and well-deserved program runs into 2022, when Governor Gavin Newsom projects record surpluses, halted or rolled back, and the state’s reserves are drawn down. California is awash in red ink.
We asked Chris Hoene, executive director of the progressive California Budget and Policy Center, and Joshua Rauh, an economist and Stanford scholar at the conservative Hoover Institution, how the state can avoid future budget surpluses and shortfalls.
By Chris Hoene
California leaders are negotiating a serious budget shortfall. They need to balance the budget, fund essential services that keep the state and infrastructure going and protect the well-being of Californians through investments in education, health, child care and more.
Volatility in the country’s revenue is normal. The rapid shift from budget surpluses to deficits that we face today is predictable and manageable. But structural reforms to the tools policymakers can use to balance the budget would make the process more manageable.
California’s progressive income tax structure, in which higher taxpayers pay, is a fair approach to taxation that voters have long supported. However, this structure produces income volatility because high earners tend to receive more income from capital gains and stock-based compensation than from wages. When economic conditions are tight and the stock market fluctuates, so do California’s resources. That is why we are facing a considerable shortage this year.
Compared to what happened during the Great Recession, when the state had no reserves available, California is better prepared to handle the shortfall challenge. Thanks to a decade of prudent budgeting and efforts by former Gov. Jerry Brown, Gov. Gavin Newsom and state lawmakers to build a rainy day fund, leaders can now use almost $30 billion in reserves. The funds will allow them to avoid devastating service cuts and preserve investments in critical programs and infrastructure, especially for low-income Californians and communities of color.
Despite the progress made in managing the changes in the budget situation, state leaders should have a freer hand when it comes to making meaningful investments, raising revenues and increasing California’s reserves.
For example, a two-thirds supermajority in the Legislature is required to raise taxes, preventing reasonable policy changes such as reduce or eliminate unnecessary and inefficient tax breaks for corporations and wealthy households, which remain in developed states like California. The looming Taxpayer Fraud Actballot measures supported by big business and real estate interests that will make it more difficult for local and state governments to raise taxes and other revenues, will further hamper the country’s ability to adapt to economic challenges, jeopardizing critical public services.
Although state leaders have expanded California’s primary reserves over the past decade, they preferred to store more during the prosperous years. But, unstructured spending restrictions mandated by voters in the 1970s consider the money for the reserve fund equal to the expenditure. That hinders efforts to further build the country’s reserves and, incidentally, reflects the dangers of short-term electoral initiatives.
If we want our leaders to govern and spend in the best interest of Californians – in good times and in bad – we must pass structural reforms that empower us to use all the tools available to protect and fund important programs, arrest. shortages and managing the budget. This includes making the tax system fairer, ending the cap that prevents saving more during prosperous times and resisting efforts to limit the options state and local leaders need to manage budget decisions to prioritize the well-being of all Californians.
Chris Hoene is the executive director of California Budget & Policy Center.
The upcoming budget cuts are just the beginning
By Joshua Rauh
Facing a large budget deficit for the upcoming fiscal year, Governor Gavin Newsom’s revised state budget for 2024-2025 addresses a $45 billion gap. Even when the Legislature debates the governor’s proposals, which include significant cuts to priority areas such as spending on homelessness, the question remains whether California can reset itself on a sustainable fiscal path.
Unfortunately, these cuts will not be enough to preserve the country’s long-term fiscal health.
Newsom’s proposal includes drawing billions from the state’s reserve account. Furthermore, most of the long-term spending plans put in place two years ago, when the government projected a $97.5 billion surplus for 2022-2023, remain in place, including investments intended to tackle homelessness and climate change and create kindergartens universal and health care. undocumented immigrants
California’s budget problem at its root stems from significantly increasing expenditures while relying on thin revenue assumptions, exacerbated by volatile revenue streams.
Half of the personal income tax revenue in California comes from the top 1% of earners, whose income fluctuates along with the gyrations of the stock market. In 2021, fluctuations and federal pandemic funding play a strong role in future surplus forecasts. But by 2024, the surplus is gone.
To avoid this boom-and-bust problem, the state needs to change its budgeting process to ensure that more of the revenue from sudden and obviously unsustainable increases goes into the reserve account. But it also has to reduce spending permanently.
Public employee pensions remain a money sink for the state. The state’s contribution to California’s defined benefit pension plan – which guarantees lifetime salary and benefits to public employees, regardless of the state’s ability to actually pay – is about $26 billion in 2022. That’s 9% of the governor’s revised budget of $288 billion, and uses assumptions enough about the country’s pensioners, $26 billion significantly underestimates the real government costs.
To protect future budgets, new state employees should be brought into defined contribution plans, like private sector 401k plans, rather than defined benefit plans. Even if these plans are more generous than the private sector, they will save the country change money, prove desirable for many public employees and end the defined-benefit Ponzi scheme.
In addition, retiree health benefits for state employees cost the state more than $7 billion annually. In many cases, this duplicates benefits available to public employee retirees through the Medicare exchanges and the Affordable Care Act, and thus could be eliminated.
While budget cuts may seem scary to citizens who depend on public services, the bottom line is that state spending is unsustainable. Perhaps no group epitomizes the state’s wasteful approach more than correctional officers. The amount of compensation increased by 16% from 2021 to 2022, although the prison population remained 25% lower than in 2018.
Even when it comes to K-12 education, do we really think the problem is very low levels of spending? All sources per student spending in California public schools is projected to be $23,878 for the 2024-2025 fiscal year, despite low satisfaction with public schools and declining enrollment.
California’s 2024-2025 budget calls for painful cuts. Taxpayers need more accountability in public spending and a better deal for their tax dollars.
Joshua Rauh is a professor of finance at the Stanford Graduate School of Business and a senior fellow at the Hoover Institution.