In the midst of this fiscal difficulty, numerous studies have been commissioned and groups formed to examine ways to solve the crisis. These groups range from hired consultants to the legislatively created commission to examine public finance reforms with potential state constitutional changes.
Some analysts involved in this arena have been quick to claim that California suffers from revenue problems that require large tax increases. Almost none of the studies completed has proposed serious restructuring of public spending. Furthermore, most of the discussion to date has focused primarily on the state general fund.
This policy brief outlines Cal-Tax's priorities for government spending reform. This plan recognizes that, before tax increases are discussed, California taxpayers should insist on reforms that enhance the effectiveness of government. Many of these policy changes would benefit local governments, recognizing that over $100 billion is spent by California's local governments. The reforms in this plan represent savings and revenues totalling at least $14 billion.
Each of the elements of the following plan is described in terms of the problem, the proposed solution, the opportunity (potential savings), recent legislation (if any) to serve as a guide for implementing language, and a listing of other information sources.
Many of these proposals take aim at government policies that have substantial costs but result in poor performance and do not produce outcomes that justify large expenditures. Many, if not all, of these proposals will be difficult to enact; however, each would go far toward solving the over-obligation of California state and local government budgets.
| 1. Revitalize the Economy | 400,000 new jobs could create $2.4 billion in revenue |
| 2. Establish Fiscal Discipline | Potential major savings from planning and managing for performance and outcomes |
| 3. Allow Competitive Service Delivery | State: $400 million to $1.6 billion savings. Local: much greater savings possible |
| 4. Realign Public Pay | Potential $5 billion reduced cost, state and local |
| 5. Require Alternative Retirement Plans | $1 billion to $3 billion savings, state and local, long term |
| 6. Reform Industrial Disability Retirement | $1 billion savings, state and local, reduced by improved benefit to truly disabled |
| 7. Adopt Tort Reform | Significant private and public sector savings and improved business climate |
| 8. Adopt Health & Welfare Reform | Potential $840 million state savings |
| 9. Revise Prevailing Wage Calculation | State: up to $340 million a year savings. Local: similar savings |
| 10. Eliminate Unfunded Mandates | About $2.6 billion state savings from federal reimbursement of mandated costs. Additional substantial savings from elimination of state mandates |
1. Revitalize the California Economy
The Problem
Among highest priorities for California policy makers must be restoration of California's economy and job base. A national recession, federal defense cuts, and natural and man-made disasters all played a part in California's recent economic problems. The loss of over 500,000 jobs since 1990 substantially reduced the flow of tax revenue to state and local governments in California. However, job loss has been made much more serious by these self-inflicted wounds, which damage California's competitiveness:
The Solution
Key to resolving California's state and local government fiscal problems is a strategy to foster job growth and economic investment in the state. In addition to important business climate reforms achieved recently, California needs to:
Cal-Tax research on tax burden suggests that state and local tax and fee revenue produced from each new job in California averages about $6,000 per year. This means:
Other Sources
2. Establish Fiscal Discipline
The Problem
Performance: Policy makers do not receive the kind of information they need to determine effectiveness of budgeted dollars. For many years, budgets have simply been prepared using the "current services" approach, in which programs are allotted the same funding as the prior year, plus increases for inflation and caseload growth in order to continue the current level of service.
Planning: Insufficient planning has caused a failure to provide policy makers with projections of future program costs associated with policy and demographic changes.
Other major flaws of current budgeting practices include the following:
The Solution
Performance budgeting is a concept that has been gaining acceptance around the country. The California Legislative Analyst's Office has reported that 23 states were involved to some degree with performance budgeting. Recently, the State of Florida committed to have a performance-based budget by the year 2000.
Performance budgeting can be implemented in various ways, but serious attempts should include the following:
The Opportunity
Potentially major savings would be generated as ineffective spending is eliminated and resources are reallocated to priority programs that achieve positive results.
Legislation
Performance budgeting pilot projects have begun in the state departments of Consumer Affairs, General Services, Parks and Recreation, and the Teale Data Center. All of the departments are still in the planning and early implementation stages.
Senate Bill 500 (Hill), enacted in 1993, embodied some of Governor Wilson's proposals and called for the Department of Finance to report to the Legislature by January 1, 1996 on the results of the pilot projects.
Assembly Bill 2711 (Valerie Brown), enacted in 1994, would originally have required performance audits of state agencies, but was eventually reduced to simply promote strategic planning by state agencies.
Other Sources
3. Allow Competitive Service Delivery
The Problem
"The issue is not public versus private. It is competition versus monopoly," - John Moffitt, chief secretary to Massachusetts Governor William Weld. Services delivered exclusively by government produce higher costs and lower quality than those delivered under a competitive system. Requiring the public sector to compete for the right to deliver services supplies a missing ingredient -- cost comparisons -- that is otherwise absent in service delivery that is restricted to government monopolies.
The Solution
Restrictive local charters and state laws must be amended to permit competition in service delivery.
Whatever potential this approach offers, it is important to also recognize that failure to adequately monitor service delivery by private vendors will doom the effort. The absence of proper monitoring is, according to privatization experts, the main reason for failure in contracting efforts.
The Opportunity
The presence of a competitive environment in the Phoenix (Arizona) Public Works Department caused management and labor to rethink the operation of this function. Result: Solid waste costs in that city went down by 4.5 percent a year over a 10-year period in real, inflation-adjusted dollars, while other city program costs were going up. Similarly, contract cities in California, generally cities incorporated in the last 20 years, regularly deliver services at less than half the cost of more established, older jurisdictions.
In addition, privatization studies indicate private sector service delivery results in savings ranging from 10 to 40 percent. Statistics maintained by the California State Personnel Board confirm this finding; 68 state contracts in 1989-90, involving $27 million of work, were completed at an average saving to taxpayers of 44 percent.
California's budget includes about $16 billion in spending on state operations. If competition were to affect only 25% of state operations spending, and savings of 10% to 40% were realized, taxpayers would save $400 million to $1.6 billion in ongoing state cost reductions. Those savings could either be returned to the taxpayers through tax reductions or be reallocated to high-priority needs, such as upgrading education and public infrastructure.
Legislation
Three bills from the 1993 session, SB 84 (Bergeson), SB 289 (Russell), and SB 1200 (Hurtt), addressed alternative service delivery. Senate Bill 84 would have given all counties the contracting authority which 12 counties and all cities enjoy (unless they have restricted themselves by local charter amendments). Senate Bill 289 would have allowed specified state departments to compete with private vendors to service state agencies. Lastly, SB 1200 would have created tax credits for private vendors who hire state employees displaced by privatizing.
Other Sources
4. Realign Public Pay
The Problem
Various recent compensation comparisons reveal that public employees are better compensated than their private sector counterparts. For example, a study by the federal Bureau of Labor Statistics found that wages of many state and local government workers in the Sacramento area are as much as 20 percent higher than for the same jobs in private industry. The survey showed that government jobs paid more than those in the business sector in 62 of 66 comparisons.
Findings from the American Legislative Exchange Council paint a similar picture. In a 1992 study, ALEC determined that public employees were better compensated than their private sector counterparts by 23.8 percent, a figure that grows to 32.3 percent if fringe benefits are included in the comparisons.
One reason for the high salaries is the public sector practice of giving virtually automatic "merit salary adjustments;" many public employees receive two pay increases a year.
The Solution
Existing compensation practices should be revised in favor of a system linking compensation to performance. Additionally, total compensation comparisons should be the rule; that is, total salaries and benefits should be compared in establishing compensation levels in the public sector.
The Opportunity
According to ALEC, excessive compensation (salaries and benefits) cost taxpayers an extra $47 billion in 1990, nationwide. In California, excessive costs were estimated at about $5.4 billion in 1990. The ALEC report contrasts that cost with the $5.7 billion state tax increase enacted in 1991.
Legislation
AB 3254 (Haynes) would have enacted the Public Pay Equity Act of 1994, limiting annual percentage increases in public sector compensation to no more than average compensation increases in the private sector. Legislation requiring total equivalent compensation comparisons for state employees was passed in the mid-1970s, but has since been pre-empted by collective bargaining obligations.
Other Sources
5. Require Alternative Retirement Plans
The Problem
Failure to integrate Social Security and public employee pension plans after the extension of Social Security to the public sector in the late 1950s has resulted in retirement benefits that can provide employees more in retirement than compensation while working.
More recently, generous retirement enrichments have been approved by elected officials who, having limited funds for salary enhancements, have found the deferral of pension costs to the future an acceptable compensation alternative.
Failure to address these costs imposes billions of dollars in unnecessary expense on taxpayers and further squeezes tight government budgets.
The Solution
Future non-safety employees should be placed in a retirement program that together with Social Security provides career employees a benefit sufficient to replace their pre-retirement disposable income. Alternatively, public agencies should provide portable "defined contribution" plans that allow the potential of generous benefits at less cost to taxpayers.
Also, a new, overly generous retirement formula enacted in 1990 (full benefits at age 55) should be repealed.
The Opportunity
A mandatory second tier of benefits for new employees could cost one-half the rate required for the original set of benefits. Savings from mandatory two-tier for local governments are estimated at $1 billion, long-term. Similar savings would occur from mandating the benefit for future employees of UC and CSUS, as well as for classified school employees.
As an example of savings, the state's two-tier benefit has saved about $100 million, cumulatively, since 1991.
Legislation
Assembly Bill 2031 (1993), supported by Cal-Tax, the League of California Cities and California State Association of Counties (CSAC), established a two-tier option at PERS and under the County Retirement Act of 1937.
Senate Bill 65, enacted in 1994, offers a model of a hybrid defined contribution/defined benefit retirement plan that will save the judges' retirement system $1.5 billion by the year 2000.
Other Sources
6. Reform Industrial Disability Retirement
The Problem
"Industrial disability retirement" (IDR) benefits, available to state and local safety employees (police, fire, highway patrol, correctional officers) and general employees in 20 California counties (under the County Retirement Act of 1937) constitute a drain on human resources and finances of state and local governments.
Under current law, employees can claim disability retirement benefits even though subsequently beginning a second career. To qualify for disability, employees need not show they are incapable of working -- just that they are incapable of performing their current job assignment. The disability retirement benefit is a minimum of 50 percent of salary. It is tax free, and is paid for life. There are no limitations on subsequent earnings.
Evidence is mounting that these retirements are being abused. A 1992 examination by the San Jose Mercury News found that many safety employees plan for their eventual disability retirement. Some agencies have incredible rates of disability among their retirees. San Jose tops the list with 81% of all safety retirees receiving a disability retirement. The Mercury News found that 68% of California Highway Patrol retirees go out on disability. An earlier study, by the Legislative Analyst, showed 73% of CHP officers retiring with disabilities.
The Solution
Benefit eligibility should be restricted to those unable to work (same definition as used in Social Security disability determinations).
For those who are truly disabled, the lifetime benefit should be increased to replace net income prior to injury, i.e., two-thirds of pre-injury income.
Retired safety employees who take on a second career should have their disability retirement benefit reduced. A recent Bureau of State Audits report recommended that PERS be allowed to reduce disability retirement benefits to safety retirees who subsequently obtain employment that pays significantly more than their pre-retirement income. Income limits do apply to non-safety retirees, but safety employees were exempted in the 1960s.
The Opportunity
According to a 1986 study by the California State Association of Counties, each industrial disability retirement saddles a local jurisdiction with $400,000 in unfunded liability. This is the amount the jurisdiction must finance, in addition to contributions already made to the retirement system. Annual savings to state and local governments for a disability benefit restricted to the truly disabled are estimated at $1 billion. This amount would be offset by an enriched benefit to the truly disabled, who, under the Cal-Tax proposal, would receive 66 percent of salary, not the current 50 percent benefit.
Legislation
Unsuccessful 1992 legislation (Senate Bill 1599), supported by Cal-Tax, the League of California Cities and California State Association of Counties, contained language establishing a more generous disability benefit for the truly disabled, while limiting benefits for employable personnel.
Other Sources
7. Adopt Tort Reform
The Problem
Excessive litigation has a negative impact on state and local governments. The need to defend against frivolous lawsuits requires government to spend millions on attorneys and court actions. Although not as visible as the big awards often resulting from such actions (such as the $1.3 million award to the would-be burglar injured in a fall through a school skylight), legal defense costs are a huge and growing imposition on taxpayers.
The Solution
Proposition 51, the Fair Responsibility Act of 1986, limited taxpayer liability exposure by providing that governments were liable for non-economic damages (pain and suffering) only in accordance with their degree of fault. Reduced "deep pocket" (joint and several) liability needs to be extended to economic issues as well. Likewise, requiring the loser to pay attorneys' fees and costs would reduce the filing of frivolous lawsuits, encourage litigants to resolve their disputes more reasonably, and promote the use of alternative dispute resolution such as arbitration and mediation. Double recovery should also be prohibited; currently the collateral source rule prohibits the introduction of evidence that an injured party has already collected benefits for the same damages. Lastly, public entities, and thus taxpayers, need to be protected from civil lawsuits for damages arising during the commission of, or flight from, a felony.
The Opportunity
Polls show an awareness on the part of the public of the need to restore fairness to our civil justice system. Action in the private sector, to reform punitive damages and discourage unwarranted litigation, should lend assistance to efforts to reform taxpayer exposure to frivolous liability lawsuits.
Legislation
Senate Bill 2080 (Campbell) of 1994 would have established a modified version of the English rule requiring the loser to pay attorneys' fees and costs in non-contingency fee litigation. Senate Bill 44X (Presley) of 1994 would have prohibited convicted felons from filing civil lawsuits for damages arising during the commission of, or flight from, a felony. Language to reduce the "deep pocket" liability taxpayers have for economic damages can be modeled on Proposition 51, the Fair Responsibility Act of 1986. Senate Bill 1738 (Leonard) of 1994 would have abolished the double recovery rule.
Other Sources
8. Adopt Health & Welfare Reform
The Problem
Welfare and health costs are the second and third highest spending categories for California state and local governments. The primary welfare program, Aid to Families with Dependent Children (AFDC), grew dramatically in the 1980s, rising 49 percent while the state's population increased 24 percent. Even though unemployment rates declined in this period, welfare dependency increased. By June 1994, over 20% of all children in California under 17 were receiving AFDC.
Health and welfare programs now represent more than one-quarter of state and local public spending. Even after recent AFDC benefit roll-backs, California still has one of the highest benefit levels in the nation and spends well above the national average in health and welfare categories. By contrast, the state spends well below the national average for K-12 public schools, higher education and infrastructure. In effect, health and welfare programs pull important resources away from education, public safety and other higher priority considerations.
There is at least some evidence that the welfare program encourages cycles of dependency. For example, more than half the mothers on AFDC had their first child as a teen. One-third of AFDC mothers have additional children while receiving aid. Although the average duration of benefits is three years, 20 percent receive benefits for eight years or more. Even these statistics may be understated. According to the Heritage Foundation, factoring for intermittent benefit patterns reveals that nationally 72 percent of AFDC recipients receive assistance for more than seven years.
Medi-Cal, the state's health care system for the poor, has grown even faster than AFDC. It provides health care for one of nine Californians. The program provides optional benefits over and above those mandated by the federal government, and hospitals and counties claim that Medi-Cal reimbursements saddle them with over $1 billion annually in uncompensated care.
The Solution
The goal for health and welfare programs should be to establish safety nets for the truly needy. This means programs should be geared to provide transitional benefits for individuals at a cost that is sustainable and affordable over time. Beyond that, they should not be permitted to encroach on essential education, public safety and transportation commitments.
To ensure that safety-net spending is better targeted, the following objectives should be considered:
The 1995-96 governor's budget proposal includes many of these items. Reducing welfare grant levels 10%, limiting able-bodied adults to two years on aid, reducing grants to able-bodied adults after six months, and expanding fraud detection activities are estimated to save about $700 million annually. Elimination of several optional Medi-Cal services, as proposed in the budget, would save about $140 million.
Legislation
The 1995-96 Governor's Budget proposal embodies many of these reforms, including grant reduction and other work incentives, elimination of some Medi-Cal options, and better fraud detection. Proposition 165, defeated by voters in 1992, also proposed many of these reforms.
Other Sources
9. Revise Prevailing Wage Calculation
The Problem
Since the 1930s, the federal government and many states have obligated themselves to pay "prevailing wage" on public construction projects.
California, unlike most other jurisdictions, ties its prevailing wage to the statistical "mode" of all surveyed salaries. Because California's prevailing wage is the wage that occurs most frequently in a survey (the mode), state and local governments pay union scale on virtually all public works jobs. To define union pay as the "average" on all public projects is excessive, especially when statistics show that 85 percent of residential housing and 50 percent of commercial and industrial construction projects are built by non-union labor.
The methodology used in most other states and by the federal government produces a weighted average of union and non-union wages.
The Solution
In states across the country, prevailing wage requirements have either been repealed or limited. For example, 18 states have no prevailing wage laws -- nine states have repealed their laws since 1979. Of the 32 states with prevailing wage obligations, seven have provisions for excluding local governments; six exclude highway construction, and three limit the obligation to projects of at least $250,000.
Assuming California is not prepared to repeal its prevailing wage law, it should at least follow the pattern set by other states and the federal government, and use the average (mean) of union and non-union wages, not the mode. The change would additionally advantage minority-owned construction firms which are generally non-union and, therefore, tend not to bid on public works contracts.
The Opportunity
Industry representatives estimate that taxpayers would save between $170 million and $340 million a year at the state level if prevailing wages were determined by a methodology relying on the weighted average of union and non-union pay scales. Local government savings are estimated at a like amount, for a maximum total of $700 million annually. Savings would also inure to the federal government because lower state rates would be used in wage determinations on federal jobs in California.
Legislation
Assembly Bills 192 and 193 (Goldsmith, 1993-94 session) proposed to change the current methodology for determining prevailing wage and also give all local governments (not just charter cities) the ability to decide local policies on prevailing wage. Senate Bill 1204 (Hurtt) was similar to AB 192.
Other Sources
10. Eliminate Unfunded Mandates
The Problem
When faced with limited resources and expansive goals, there has been a tendency for policy makers to find solutions to public problems at others' expense. Many government agencies have resorted to mandating spending on other levels of government or on the private sector as surrogates for spending by the agency that imposes the mandate.
Among the most egregious examples of this type of behavior are federal mandates requiring California to provide social services to illegal immigrants. According the Department of Finance, these mandates cost California about $3 billion a year. The requirements to provide services are dictated at the national level, but the state is required to shoulder nearly all of the costs on its own.
This kind of fiscal relationship can also exist between local agencies. For example, in Sacramento County, the courts were previously required to pay sheriff's deputies for time spent in court. The courts are no longer responsible for that cost, and as a result, deputies are often required to wait in the courthouse for longer periods, their idle time paid from the sheriff's budget. Observers claim that the courts were more thrifty with deputies' time when the courts were required to pay.
In addition to mandates on other government agencies, many policies mandate significant costs onto the private sector. These include requirements that companies fund facilities and activities that provide general public benefits, such as local governments requiring developers to build parks or infrastructure, or requirements that expanding businesses give up some of their land for open space in exchange for a building permit.
The Solution
Compliance with unfunded mandates should become voluntary. If an activity is important enough to require, it should be important enough to fund.
The state should actively pursue federal reimbursement for mandated costs, including mandates to provide services to illegal immigrants.
The Opportunity
Immediate savings of $2.6 billion could be achieved if the state were successful in obtaining federal reimbursement for illegal immigration costs.
Other long-term savings could be realized by restructuring funding responsibilities for governmental activities that are impacted by unaccountable agencies.
Legislation
The governor's budget proposed for 1995-96 and the final budget approved for 1994-95 called upon the federal government for reimbursement of illegal immigration costs.
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