Balancing California’s Budget

Last week California’s incoming Governor Jerry Brown unveiled his proposed state budget for 2011. Despite the fact that Brown’s budget has deep cuts to nearly all state programs, the success of the budget – even if it should be approved by the state legislature – depends on tax rates staying the same. And California’s voters, regardless of whatever else their contrarian behavior may indicate, do not like taxes. If you read the Governor’s Budget Summary, on page 10 you can view the projected state general fund tax revenues – assuming voters approve an extension of the tax increases:

Also on page 10 of the Governor’s Budget Summary is a table showing the projected state general fund expenditures, already reflecting the proposed cuts to expenditures (note that the tables have been altered here for simplicity’s sake, such that only the column of numerical data showing the proposed amounts is retained). From comparing these tables, one will see the general fund according to these projections will enjoy a $5.0 billion surplus in the fiscal year 2011-12. But is Jerry Brown going far enough with his cuts? Because not only is California a state with some of the highest taxes in the U.S., but it is very likely voters will not approve extending the tax increases.

Areas where Brown did not propose cuts include pensions, and because state employee pension funds are not adequately funded, if benefit formulas are not reduced, more money will need to be allocated for pensions. Put another way, if the pension funds adjust downwards their projected investment returns – and they need to do this – necessary annual pension expenditures will stay the same even if benefit formulas are reduced.

And what if California wanted to embark on new infrastructure projects without issuing bonds, or wanted to pay down bond principle, or wanted to lower taxes? Other than pensions, where else could cuts be made? When one looks at California’s $84 billion budget, there are three areas that stand out – health and human services, corrections and rehabilitation, and education.

Health and Human Services:
Without diving into the details of California’s health and human services budget of $21 billion, there are two areas that immediately come to mind where cuts can be made, welfare benefits and benefits to illegal immigrants. With respect to welfare, it is fairly well documented that California has 12% of the U.S. population yet has over 30% of the U.S. welfare recipients. If California simply modeled their welfare policies along the same lines as the rest of the U.S., which complied with the federal reforms enacted by the Clinton administration, it is likely that California’s welfare caseload would begin to settle down to national norms. This could save billions. While the issue of providing benefits to illegal aliens is an issue that attracts a great deal of controversy, and while denying essential services such as emergency health care to illegal immigrants is certainly a humane policy that should be continued, it is not necessary to continue all of California’s generous entitlements for illegal immigrants. Restructuring California’s policies in these two areas would probably save California’s taxpayers several billion dollars each year, and should be considered.

Prisons and Rehabilitation:
California spends nearly twice as much per prisoner as most other states in the U.S. California’s overcrowded prisons should have their populations reduced to normal capacities, not by allowing thousands of inmates to pour back out onto the streets before they’ve served their sentences, but by exporting prisoners to far less expensive private facilities located outside California. Another way to reduce California’s prison expenditures would be through thoughtful revisions to sentencing guidelines. Currently nonviolent offenders are often forced to reside in expensive prison facilities, when more appropriate rehabilitation facilities would not only cost less, but offer programs to better help inmates overcome substance addictions, and learn marketable job skills. These reforms could probably save California’s taxpayers several billion per year.

K-12 and Higher Education:
In Governor Brown’s proposal, California’s budget for K-12 and higher education consumes more money, $46 billion, than all other state programs combined. How can these costs be cut, while maintaining or even improving the quality of education? First of all, instead of putting a measure to maintain tax increases onto California’s ballot, Governor Brown should propose to place a measure on the ballot that will repeal Prop. 98. This citizens initiative, passed in 1988, entitled the “Classroom Instructional Improvement and Accountability Act,” amended the California Constitution to mandate a minimum level of education spending. But how much money is spent on education obscures whether or not California’s public education system is being managed to optimize educational outcomes. Here are some ways to reduce spending on education while improving the quality of public education at the same time:

(1) Increase class sizes. There is no reason classes can’t have 30 or more students per teacher. One way to make it easier to increase class size without compromising education is to stop “mainstreaming” marginal students. Disruptive students, or developmentally disabled students, should not be in the same classrooms with normal students, because they consume a disproportionate amount of the teacher’s efforts. Disruptive students should go to reform schools where they can be controlled efficiently. Developmentally disabled students should attend classes where they receive instruction among their peers at a level calibrated to provide them as much educational opportunities as possible.

(2) Reduce administrative overhead. Currently nearly 40% of the employees in public education in California do not teach in the classroom. This top-heavy system should be restructured, with at least half of these administrative positions getting eliminated. This can be accomplished through returning control of schools to local school districts, by consolidating school districts where appropriate, and by contracting to the most competitive private sector bidders for many services.

(3) Restore teacher accountability. One way to greatly improve California’s public education system is to streamline the process of firing incompetent teachers. Currently this is a nearly impossible process. But simply by restoring merit as the criteria for keeping and advancing in a teaching career in California, educational outcomes would improve even while overall expenditures decline.

Governor Brown’s budget, as it is, reflects a realistic assessment of California’s budget challenges, and offers a great deal to displease special interests. But it doesn’t go far enough. By tackling the additional categories of spending in pensions and benefits, health and human services, corrections and rehabilitation, and public education, California can not only balance its budget and lower taxes, but implement rational policies that will improve societal outcomes and improve overall economic prosperity.

18 replies
  1. Rex The Wonder Dog! says:

    JB’s chances are getting voter approval for permanent “temporay taxes” is DOA.

    No tax hikes or extensions are going to fly in this depression while gov employees milk the system into bankruptcy.

  2. SkippingDog says:

    So, Rex, when the people who elected JB Governor vote to pass an extension of existing tax rates, are you going to deny all of your posts claiming that any tax vote is DOA like you do your old posts about Meg?

    Extending the current tax levels is the best method currently on the table, unless you’d support removing commercial properties from the Prop 13 provisions. Just cutting salaries, benefits, and future pensions won’t come close to generating enough money to close the budget gap.

  3. Editor says:

    SkippingDog – you are probably correct that cuts to current compensation and lowering future benefit formulas (to enable cuts to current year funding for them) may not be enough to balance California’s budget. But by making reasonable cuts to overall compensation packages, combined with modifying our welfare and other entitlement programs, contracting many state-run services to the private sector, and slashing headcount in our top-heavy education bureaucracy, I think we could balance California’s budget.

  4. SkippingDog says:

    Editor – I don’t disagree with you at all. All of the items you’ve mentioned will have to be cut, and taxes will have to be increased for some period of time, if we are at all serious about the deficit. When I finally read comments from posters like Rex and yourself that recognize the need to balance cuts with tax increases, I’ll believe we might have the ability to reach some common ground.

    Until then, the pension bashing is nothing more than political posturing.

  5. Rex The Wonder Dog! says:

    So, Rex, when the people who elected JB Governor vote to pass an extension of existing tax rates, are you going to deny all of your posts claiming that any tax vote is DOA like you do your old posts about Meg?

    There you go again! You know i did not support Whitman after she refused to fix public safety pensions, nor did I voite for her or JB.

    If you cut and froze pay, froze the DB pension prgram, and put ALL employees into a DC pension, you would not nbed any tax increase at all.

    The fact remains JB has not proposed a single pension reform, despite having MONTHS to do so. JB has not even proposed even modest pension changes.

    That being said-his “temporary tax” increases are DOE. And there is not such thing as a “temporary tax” anyway. In 5 years he, or whoever is in the office, will dream up new, honorable, “must have” reasons for keeping them-like education, police, fire…yada…yadda…yada.

    The tax extensions of ONLY 2 years were rejected by a 2-1 margin in 2009. It didn’t work then, nothing has changed (in fact things are worse) and it won’t work now.

    I have a C-note backing that up big boy.

  6. california budget scam says:

    Here we go again. More lies. More “Forced to consider cuts” slogans, as if poor government officials, backs against the wall, have no choice. Oh, but they do. And like hardened bullies, they target the weak. After all, not many wheelchair- using-oxygen tank-toting 90-year olds, are known to overturn cars and torch a neighborhood. Slash funds for Adult Day Care Centers, advice the appointed anointed, as they sip costly coffee, around custom, dark cherry stained, hand rubbed oil finished conference tables. Partially funded by tear stained citizens they now want to rub out. No worries. “He who oppresses the poor to increase his wealth and he who gives gifts to the rich — both come to poverty.” Proverbs 22:16. So live it up ladies and gents who casually cut funds to elderly, poor and disabled citizens, because partying on the pennies of the poor won’t last forever. Cut. Cut. Cut away. Off you go to another 5 star getaway. Close your eyes now. Don’t think about the autistic adult whose having another seizure and needs nursing care. Or the once coveted physician who was struck by a train and needs help changing his diapers. And never ever think about those poor families. Fathers and mothers. Daughters and sons. Firefighters. Police officers. Marines. Teachers. Yes, they are up, crack of dawn, sometimes all night, running this rat race, to care for aging, sick or severely disabled relatives. But don’t think about now you important, important people who have your slush funds and secret agendas. Oh no, don’t think about those things, because it’s too “painful” just like it must be when you tell the public about these “painful cuts.” Cut. Cut. Cut away, for as you do, you cut your heart out with each slashing. “He who gives to the poor will lack nothing, but he who closes his eyes to them receives many curses.” Proverbs 28:27. Good luck with that.

  7. Charles says:

    “If you cut and froze pay, froze the DB pension prgram, and put ALL employees into a DC pension, you would not nbed any tax increase at all.”

    Since employ salaries, benefits and pensions do not even add up to 10% of the budget and the deficit appears to be more than 20% how can this be? New math?

  8. Editor says:

    Charles: I see you have posed this question to Rex, but California’s budget definitely includes more than 20% for personnel costs. You have to look at the distributions to the localities and analyze how those funds are used – most of them are to pay personnel. I would guess over 50% of California’s state budget goes into compensation and pensions.

  9. Yakman says:

    The Gov’s proposed budget is not a dream come true for anyone. No one escapes painlessly, but we California voters have been sticking our heads in the sand, pointing our fingers at Sacramento inaction and blaming politicians for our woes for far too long. It’s high time we voters stepped up to turn this state around. Nobody loves this budget, but it’s a good start. If we don’t get on-board and let our reps know we want this thing passed, we’ll have nobody but ourselves to blame for business as usual in Sacramento.

  10. Charles says:

    I am only speaking about State employees. I know full well what goes on at the local level. Go after them. State employees can’t spike their salaries or any of the other things you see locally.

    I don’t think there are any Caltrans employees who make even $200,000/year including the Director and I know there are none who make more than $135K in retirement and there are only about fifty of those, mostly attorneys. I know several of them and they are all 40 year+ lifers like myself.

    State employees salaries, benefits and retirements are less than 10% of the budget, so if you fired and cut off every State employee and retiree you would still have less than half the budget deficit corralled.

    And then, who would do the work? Private consultants at twice the price? Or you could just fold up State government altogether. I think most would discover within days that we don’t “do nothing, or produce anything.”

  11. Charles says:

    Repeating myself, these cases of excess occur at the local level. You could make a case for CHP and CDF on retirement, but not on wages. Overtime is not free money. I have worked large amounts of overtime when necessary but it has its toll. It is certainly not a gift.

    In any event, State employees do not have the stratospheric salaries and pensions mentioned in the media. Basic salaries are moderate and so are pensions. No spiking allowed and never has been. Based on your salary alone, no OT, vacation, sick leave, none of that.

  12. Editor says:

    Charles: Ah where’s Rex & TL when we need them? Are you seriously claiming that “State employees salaries, benefits and retirements are less than 10% of the budget”? If you take into account transfer payments by the state to local school districts (such as $36 billion to K-12 education; that’s 40% of projected revenues and is mostly for personnel) and other local agencies, I’m certain you get a much higher number than 10%. For that matter, if you do some rough math – assuming the total average compensation to a state employee is $100,000 per year (and my calculations indicate it is actually about $108,000 per year or more, ref., and multiply that number by the at least 350,000 state employees (it’s actually more than that), you get to $35 billion per year. Projected state revenues (see above) are $89 billion. Charles, this means NOT including transfer payments (which I contend also primarily go to pay compensation to local government employees or government contractors under prevailing wage agreements), state personnel costs in California are around 40% of revenues.

  13. Charles says:

    I said STATE EMPLOYEES, not teachers and local employees. The general fund is around $85B. If you want to include everyone you can think of who gets paid by the State, that budget is nearly $250B

    It is no surprise that labor takes up a large amount of the education budget. It takes people in classrooms to teach children.

    If labor intensive parts of government use intensive labor it should be no surprise.

    Also, there are 234,000 State employees, not 350,000. That includes part time and intermittent employees. There are 28,000 of them and obviously they don’t work full time and are not getting even median wages per hour.

    If you laid off all State employees and cut the benefits of all State employees you would not cut half the entire State deficit. You can’t take the costs of all employees and look at them as a percentage of only the General Fund to prove any point when obviously many of them are paid by special funds.

    Also, the average State employee makes more like 40 to 50K and with benefits makes 60 to 75K. You can take the $500B Stanford guess or any other guess and apply it to future bills if you want. I am talking about actual payroll, including pensions, healthcare, etc. Any guess about the future is exactly that, only a guess.

    Don’t forget, Calpers was over 100% funded ten years ago and may be again. Also, % of payroll was 18% for State Miscellaneous employees in 1969 and 1980 and is about 19% this year. Also, don’t forget the State took a pension holiday for several years in the early 2000’s which obviously had an adverse effect.

    Cutting salaries and benefits for State miscellaneous employees will not cure the far worse problems of welfare, bullet trains, stem cell research, illegal aliens, pork projects, green jobs which remove two jobs for every one they create, strangulating rules and regulations on business, the lack of proper taxes on the upper 3% of wage owners, no oil royalty tax, and other things I could think of.

    In 2008 California’s gross domestic product was $1.85 trillion. Our current deficit is at latest guess $28B over the next year and a half. The deficit for one year is 1% of GDP. We are not going broke in a hand basket here.

  14. Editor says:

    Charles: There are 393,989 “full time equivalent” state employees. Your lower number is probably because you aren’t including higher-education employees. At $108K per year in estimated total compensation, that equals $43 billion per year. If you only estimate that 50% of the $36 billion going to K-12 education is for personnel compensation (and I guarantee you it’s more than that), then you have $61 billion, which is 68% of California’s projected revenues of $89 billion. Here is the source for the headcount:

    That’s all for now. Any idea why the spam comments are hitting CIV FI so hard lately? I am constantly weeding them out and blacklisting the websites and the IP addresses, but they are coming in at an accelerating rate. Who knows, may have to require registration to comment if it continues to worsen.

  15. Charles says:

    Let’s redo your numbers.

    Assume there are in fact 393,989 “full time equivalent” State employees including part time and intermittent who obviously don’t earn full scale or work full time. Supposedly the “equivalent” works that out. I didn’t say that was a fact, I am only supposing.

    According to DPA they earn $65,000 “equivalent” per year. Whatever that means.
    That amounts to $25,609,285,000 compared to a budget which is really $203B, perhaps twelve percent. If total payroll taxes and benefits is about 50%, a figure that has been around since 1984 (that I used to use for billing) that I know of is updated annually because the state does charge for work for outside entities and includes SS, workman’s comp. retirement health and everything else etc, etc that is taken out of anyones check the total is $100,000 per year. So maybe we are looking at 18% of the budget and that is I think less than 40%. How many manufacturing or building companies or grocery stores do you know of that pay only 18% of their total expenses for labor?

    And you still return tghat you would have to fire every state employee and still not get rid of the deficit.

  16. Charles says:

    How is this for an idea:

    The proposed budget is a “false dilemma”. It is made to infer there are only two choices here, increase taxes or make draconian slashes to necessary state services. Actually there are other choices which are not mentioned.

    Welfare costs and lost taxes caused by illegal immigration cost California $21.6B per years. Cutting those costs by 15% would save $3B. That should be doable with minimum effort, it only requires that existing laws be followed.

    Bullet trains are set to cost $70B to $90B over the next ten years. Drop or defer this program and save $8B this year.

    Having 24 student per class K-12 vs 21 students costs $6.8B per year. When I was in school I don’t remember ever being in a class with less than 30 students.

    $18B in water bonds that have produced no water. There is $4.2B unspent. Divert this money to necessary programs before it is wasted also.

    There is $22B in potential savings that is not even being considered or even mentioned. Now why is that, if we have an ongoing apparently permanent “fiscal emergency”?

  17. Editor says:

    Charles: No argument with any of that. Remember, however, that the state AND local government spending in California is nearly $500B per year. And these local governments which comprise about 80% of total state/local spending in California are facing deficits just as severe as the state government.

    By the way, if they could come up with a water bond, or a highway bond for that matter, that actually involved pouring concrete and building something – more water storage, wider freeways – I’d vote for it.

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