January 2005

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Cal-Tax Commentary

Larry McCarthy is president of the California Taxpayers’ Association in Sacramento.

Governor Arnold Schwarzenegger’s proposed budget and spending control strategy can be an “era of reform” that will force government to live within its means and end reckless and mismanaged use of tax dollars.

It is an agenda of priority setting, accountability and performance, and this deserves strong support from Californians who pay the bills.

The no-new-taxes, $111.7-billion state budget proposal, including an $86 billion general fund, is based on a 6 percent increase in state revenues and an overall growth in spending of 4.2 percent, to whittle down an $8.1 billion difference between business-as-usual spending growth and projected revenues for the fiscal year starting July 1.

This governor has decided to take on the powerful spending lobby, with its legions of lobbyists representing public employee unions and other special interests (such as health care, education, other government entities) that zealously guard their parts of the public spending pie while pushing for more and more, and new or higher taxes if they can get them.

The Problem is Spending, Not Lack of Revenue. The governor has consistently stated that California has a spending problem, not a revenue problem, as he maintains opposition to higher taxes. In doing so, he is challenging and attempting to change years of financial mismanagement in Sacramento. The spending lobby repeatedly decries “budget cuts”, when in fact the governor is calling for  more money for the budget year. The overall 4.2 percent growth is  fair and reasonable. Schools actually get substantially more growth.

An End to Unbridled Spending. The governor proposes to enforce balanced budgeting by requiring across-the-board spending reductions when revenues are found to be short of programmed costs and the Legislature fails to act to bring the budget into balance.

Education Funding. The era of reform includes changes to improve the performance of schools and the aspects of financial management that are on automatic pilot. While education gets 7.1 percent more in the governor’s proposal, the education lobby wants more, contending they should have some $2 billion  more in spending based on last year’s budget agreement. The governor proposes that public education (getting $50 billion a year as it is) receive funding needed for projected enrollment growth and inflation.

Public Pensions. The era of reform includes modernization and sensible changes to  public employee retirement programs. Those hired after mid-2007 will have a defined contribution plan, similar to the 401(k) benefit common in the private sector, instead of guaranteed benefits that require the government employers (taxpayers) to underwrite the gold-plated levels of benefits. The cost to the state’s taxpayers for extremely generous state pensions has grown from $200 million in 2000 to $2.6 billion this year. A number of counties and cities around the state are threatened with bankruptcy because governing boards and councils gave the unions retirement deals that enable many long-time employees, especially police and firefighter personnel, close to 100 percent of their salaries in retirement, plus very good health benefits.

Pension deals are forcing state and local policy-makers to reduce spending for critical public safety and safety net programs, or go to the public for higher taxes, or both. These labor contracts cannot be unilaterally altered without violating vested rights, which the courts have consistently protected, but the system can and should be altered for future employees. Pension reform is critical so that communities can afford to maintain safety programs and vital public services.

More Borrowing. There is initial discomfort from the budget’s proposal to continue for one more year the use of Proposition 42 transportation dollars – the sales tax on gasoline – to bail out the general fund. However, this is allowed by a fiscal emergency “safety valve” built into the ballot initiative that probably would not have passed without it.

Call for Change. Californians have stated in the voting booths that they no longer want the status quo that is the desire of powerful special interests. Taxpayers are discouraged by Sacramento’s reckless mismanagement of finances. There is clearly an understanding that something dramatic must happen to put the state back on track.

If the Legislature refuses to act, the governor’s commitment to change will be supported by this state’s voters and taxpayers.