5 Reforms to Save California

California's finances are a fiasco. The current budget, passed months after the start of the fiscal year, was over $6 billion upside down within two months...
by | January 4, 2010

California's finances are a fiasco. The current budget, passed months after the start of the fiscal year, was over $6 billion upside down within two months of passing. The state's budget analyst predicts the coming year's budget will be over $14 billion in deficit. Sadly, these may be optimistic projections.

It took years of bad budget decisions and spending beyond revenue to achieve the condition the state's finances are currently in. Any true, lasting reform must fundamentally change the way in which this state conducts its affairs. The set of needed reforms is considerable, but a few stand out as crucial initial moves.

Reform #1 -- California should implement performance-based budgeting, sometimes known as budgeting for outcomes. The current budget process drives a budget discussion based on changes from previous year's spending and programs, inherently assuming that most things are working as planned. Resources are too scarce to continue funding programs that don't work, and we do not have a systematic process for determining what works and what does not. Performance-based budgeting would systematize performance reporting by agencies on programs they administer, giving the governor and legislature hard information on which to evaluate spending priorities and budget tradeoffs.

Reform #2 -- In order to balance its budget, California must curtail its spending. Since spending could not be restrained in the absence of an effective spending and/or revenue limit (California's Gann spending limit having been gutted and rendered impotent since the 1990s), such a limit is needed to prevent significant budget imbalances in the future and foster economic growth in a state plagued with a poor business climate. To this end, Colorado's Taxpayer Bill of Rights (TABOR) revenue limit should serve as a good model for California, incorporating lessons learned from Colorado's experience.

Reform #3 -- The state must control its debt. That requires amending the state Constitution to limit the percentage of the general fund budget that can be used for debt service. This would force prioritization of debt by the legislature and by voters at the ballot box and prevent debt payments from consuming an ever larger amount of each year's general fund budget. California currently spends 6.7 percent of its budget servicing debt, exceeding the fiscal management rule of thumb maximum of 6 percent, and the state budget office projects debt service will near 10 percent by 2014, a disastrously unsustainable level.

Reform #4 -- California should create a state competitive government commission whose purpose is to ensure that each state agency focuses on its core mission and delivers goods and services effectively and efficiently by contracting with private sector vendors whenever possible to procure commercial goods and services and reduce the cost of government. This would in essence extend the cutting-edge model of the Public Infrastructure Advisory Commission (PIAC) to a broader set of state services. The proposed council would evaluate (and provide technical assistance to state agencies in developing) business cases for potential outsourcing projects before a state agency proceeds with any outsourcing of goods or services, helping to overcome traditional political obstacles to privatization and increasing the transparency and accountability of outsourcing decisions. Florida used a similar commission to save over $500 million, and Louisiana has recently adopted this approach.

Reform #5 - Last but not finally, as more reforms than we can discuss here are needed, California needs serious fixes to its unsustainable pension system. Rising pension and retiree health-care benefit costs and significant pension fund investment losses are imposing a financial burden that cannot be addressed with minor changes to pension benefit formulas. At a minimum California needs to create a defined contribution pension system for all new hires, reform how current pension benefits are determined to prevent spiking and other abuses, and start treating pension obligations as debt and implementing a public vote for major changes in pension obligations.

California needs to stem the hemorrhaging of its budget, but also assure that the budget does not get out of control in the future. Just as millions of Californian's struggle daily to live within their means, without just "getting more money," so the state must determine its means and constrain itself through legislation to live within them. For state legislators and executive officers it is the hard thing to do, but for the state as a whole it is the right thing to do. As all Californians are learning the hard way, nobody wins when government goes broke.

Adrian Moore is Vice President and Adam Summers is Policy Analyst at the Reason Foundation www.reason.org

Adrian Moore | Reason Foundation | bfc@hks.harvard.edu