Bringing the Budget Under Control

Senator Ackerman yesterday asked me to offer some thoughts on how California's spending can be brought back under control. As I said to the Senate, this is a systemic and pervasive problem that must be addressed at three levels.

Long term, the Gann Spending Limit, that restrains expenditure growth to the combination of population growth and
inflation, must be restored. If the Gann Spending Limit had been restored at the outset of this administration, the situation faced by this committee would be very different.

This year's budget would still reflect a 20 percent increase over the last four years. Twenty Percent. I think very few families outside of government have seen a 20 percent growth in their income over the last four years. But instead of a $24 billion deficit, we would in fact have a $38 billion cumulative surplus.

I want you to examine that claim very carefully. Ask the legislative analyst to confirm it. It is important. If these numbers are accurate, it means that the discussion we would be having today would be, "how do we rebate an average of $4,500 to every family in California."

Such a measure is now pending before the legislature as SCA 16. It should be a prerequisite to ANY budget decision. Does it help us this year? No. But it does prevent this situation from ever happening again.

The mid-term approach, which must also be launched now, requires a comprehensive management review of every office and agency within the state government. This is the purpose of the Bureaucracy Realignment and Closure Commission that I proposed in 1997 and again in 1999, and that is now pending consideration in the Assembly. It is modeled on the Federal Military Base Realignment and Closure Commission and is designed to remove the evaluation of the state's bureaucracies from special interest influence and to present a comprehensive plan to the legislature.

At the same time, the Grace Commission impaneled by President Reagan in 1981 also offers us a model for the outside management review of the state's service delivery systems.

A line-item by line-item review of expenditures is desperately needed, but it cannot be done on the fly or under the immediate pressures of a rapidly approaching budget deadline. But unless these efforts are initiated now, as part of the budget solution, we'll be facing growing problems in future years.

For example, had the BRAC been commissioned in 1997, its work would be complete and this year's budget problem would be greatly reduced, if it existed at all. That is not an idle boast. That is the practical experience of the federal government using a nearly identical model.

Had a California Grace Commission been impaneled just four years ago, this committee would have a line-item by line-item evaluation of the options available to it without increasing taxes or affecting vital expenditures.

So these long and mid-range solutions are just as much an immediate issue for this committee as any line item in the budget
now before us.

That this brings us to the immediate problem. What can we do to make it more efficient right now?

We must begin by applying the first rule of holes: "When you're in one, stop digging."

All general fund capital projects must be deferred. In the past, construction ceased on this Capitol building for a long period of time for lack of funds. When prosperity returned, work resumed. And by the way, that should also include all furniture acquisitions, vehicle acquisitions, all remodeling. It also means no new hiring. And for heaven's sake, halt all major computer and computer software acquisitions until we establish some sort of competence to our oversight mechanisms.

Meanwhile, an immediate moratorium should be placed on long-term debt instruments. Debt service is rapidly consuming an increasing portion of this and future budgets. When you've just lost your job, you don't take out a home improvement loan.
New programs and program enhancements initiated this year and last year should be immediately deferred.

Next, identify and eliminate state bureaucracies that merely duplicate agencies at the federal or local level - or that merely duplicate private agencies. These are functions that are being performed anyway - perhaps not precisely as we would like, but that are still being performed and will continue to be performed while we take a break to get our house back in order.

For example, Cal-OSHA and Cal-EPA are entirely duplicative of the Federal OSHA and the Federal EPA. We have parallel state and federal banking agencies. There has never been an evaluation, to my knowledge, of the extent that our state agencies simply duplicate federal functions.

Meanwhile, many state agencies needlessly duplicate the functions of local governments. The State Architect's office, duplicates local planning department functions. The State Fire Marshal duplicates local fire department functions. It is human nature to want to have a hand in everything. But we don't have the resources to do that. Removing duplicative jurisdictions and agencies is an important place to start.

And finally, we need to eliminate the duplication of functions that private interests perform anyway. An example: the entire Trade and Commerce Agency simply duplicates what the Chamber of Commerce and other business interests used to do on their own - with their own money.

The liquidation of idle state assets would produce considerable one-time savings. I would begin with acquisitions made over the last two years. When a family sobers up after a spending binge, sometimes it has to return the stuff and say, "we just can't afford this right now until we're back on our feet."

The major area of savings - and increased service - is in the operational changes available to the budget. For example, according to a Legislative Analyst's Office analysis from 1997, a pre-paid, refundable tax credit could replace the entire Healthy Families Program, providing greater coverage to far more people at vastly lower cost. Classroom-based accounting systems could dramatically reduce the enormous amount of education dollars that are absorbed into the bureaucracies.
Conforming state prevailing wage law to the Federal Davis Bacon Act would save several hundred million dollars annually. By the way, those measures have been before the Legislature this year, but have been killed.

I would suggest a special session of the legislature immediately following the budget that does nothing but intensely evaluate every programmatic change available to us. In advance of the work of a BRAC or a Grace Commission, we could also ask some haunting questions like, "Do Californians really need to be protected against a bad haircut by the Board of Barbering and Cosmetology?" or, "to be protected against a mismatched sofa by "the Bureau of Home Furnishings."

But let me make some immediate suggestions for budget savings:

According to the LAO, failure of the state to conform to federal welfare eligibility standards costs the state general fund over $1 billion annually.

Cutting general fund support for the Trade and Commerce Agency would save $60 million.

Cutting general fund support for the California Arts Council would save $30 million.

Consolidating the Board of Equalization and the Franchise Tax Board would save far in excess of $100 million in the first
year. Shifting state income taxes to a straight percentage of federal tax liability would easily save $100 million more.

All vacant staff positions should be de-funded for savings estimated at over $400 million.

There are six simple steps right there, saving nearly $2 billion. That's on top of the general reforms I just outlined that could clearly save several billions of dollars more. That's on top of the LAO's recommendations presented today. That's on top of the Republican Caucus recommendations presented today.

I leave you with this perspective. Across the Colorado River sits the state of Arizona.

Arizona is in the middle of the desert - and yet there's no threat of a water shortage. They have among the highest per capita electricity usage in the nation, and yet there is no electricity shortage. Their population has grown three times faster than California's during the past decade, and yet there is ample housing at every income level. They spend much less for their schools per pupil, but they significantly outperform California in every measure of academic achievement. Their highways are rated among the best in the nation.

They spend $1,800 per person. We spend $3,000 per person.

And don't blame Proposition 13. They have the same one percent property tax cap and their local per capita expenditures are lower than ours.

You needn't even look across the state line. Here in California, under Gov. Pat Brown, we were providing a first-rate level of services. He spent $250 per person his last year in office - that equates to about $1,300 per person in year 2000 inflation-adjusted dollars.