State Budgets

State of the State: California

Let’s start with the budget.

The drought continues in California, especially in regards to economic opportunity. California ranks 37 out of 50 for economic performance in the eighth edition of the Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index.  Its economic outlook is even more dismal, ranking 44. In Governor Jerry Brown’s recent state of the state address, he shared his vision for the budget and offered up big government-style spending proposals.

Before examining some of the more economically harmful proposals in the address, Governor Brown deserves credit for a good proposal. Frustrated with what he characterized as “a very progressive but volatile income tax,” Brown proposed building up California’s Rainy Day Fund. Brown’s ultimate goal is to “minimize the zigzag of spend-cut-spend,” and investing temporary surpluses into infrastructure and other one–off projects. It is encouraging to see the governor align his address with existing ALEC model policy, at least in one regard.

Despite a good proposal, however, California still stands on shaky economic ground. Governor Brown was forced to recognize the state’s economic uncertainty. “Historically, California budgets have been built around forecasts that assume uninterrupted growth,” Brown said.  Despite claiming that he does not wish to make the same mistake, Brown once again proposed policies that will almost certainly slow California’s economic growth.

Using tired metaphors to convey a message of economic inequality, Brown compared wealth to a pie, essentially saying the rich are taking a larger portion than what is fair. Brown lamented that wages of the top 1% increasing three times the rate of everyone else and how CEO pay is 22-352 times the average worker’s income, but failed to admit that the affluent are bringing in large amounts of revenue for Sacramento.  Under the state tax code, for example, even non-resident professional football player Cam Newton could pay more than 100 percent of his Super Bowl earnings.

Governor Brown’s additional spending proposals included healthcare, education, pensions and infrastructure. Brown also recognized that the cost of Medi-Cal is increasing because of millions of new enrollees. The general fund paid $15 million in 2015 and is expected to contribute $25 million by 2019. California will also be throwing more money at In-Home Supportive Services.  Brown further advocated for federal managed care organization financing reform. This would increase the role of the federal government and would restrict their ability to manage increasing costs.

Under Proposition 30, California will also increase the overall spending on education by 51 percent. Brown realizes that California has not been able to pay for its expensive employee pension plans, which are currently $220 billion in the red. Of course, as State Budget Solutions has shown, California state pension liabilities actually exceed $900 billion, if proper accounting and fair market valuation are applied. Brown acknowledged that against this total, California has saved a mere $72 billion, which is only for future health benefits. He lamented that paying off pensions could take up to 30 years.

Lastly, Brown proposed spending $2 billion of California’s “surplus” to pay for new infrastructure. Ironically, despite spiking the football on creating a surplus, Brown also claimed that at some point, California will have to raise taxes. If the governor wants to actually avoid having to raise taxes, he should propose ways to shrink the scope of government, instead of pursuing the spendthrift polices that have dried up California’s funds.

This is an entry in the ALEC Center for State Fiscal Reform series, “State of the States 2016,” which will perform analysis of tax and budget issues raised in every state of the state address delivered by America’s governors. Check back frequently over the coming weeks to see the results for your state.

In Depth: State Budgets

Smart budgeting is vital to a state’s financial health. The ALEC State Budget Reform Toolkit offers more than 20 policy ideas for addressing today’s shortfalls in a forthright manner, without resorting to budget gimmicks or damaging tax increases. One way to stabilize budgets over time is to embrace…

+ State Budgets In Depth