California has until Saturday to balance a billion-dollar, dysfunctional budget, and not in a good way. As Gov. Gavin Newsom projects a record surplus in 2022, these ambitious and valuable programs are being paused or rolled back, and state reserves are being drawn from. California is already in the red.
We asked Chris Hoene, executive director of the progressive California Budget and Policy Center, and Joshua Rauh, a Stanford University economist and conservative Hoover Institution scholar, how state governments can avoid future The serious impact of budget surpluses and shortfalls.
Chris Hoene
California leaders are negotiating a severe budget shortfall. They must balance the budget, fund the essential services that keep the state and its infrastructure running, and protect the well-being of Californians through investments in education, health care, child care and more.
Fluctuations in state income are normal. The rapid transition from budget surplus to budget shortfall we face today was predictable and controllable. But structural changes to the tools policymakers use to balance the budget would make the process more manageable.
California’s progressive income tax structure, which taxes higher earners more, is a fair tax approach that has long been supported by voters. However, this structure creates income fluctuations because top earners tend to earn more from capital gains and stock compensation than from wages. When economic conditions tighten and the stock market fluctuates, California’s resources fluctuate with them. That’s why we’re facing huge shortages this year.
California is much better prepared to handle the challenge of shortages than it was during the Great Recession, when the state had no reserves available. Thanks to a decade of prudent budgeting and efforts by former Gov. Jerry Brown, Gov. Gavin Newsom and state legislators to build emergency funds, today’s leaders can take advantage Nearly $30 billion in reserves. These funds will allow them to avoid serious and harmful service cuts and maintain investments in critical programs and infrastructure, especially for low-income Californians and communities of color.
Despite progress in managing changing budget conditions, state leaders need to be more hands-off when it comes to making meaningful investments, raising revenue and bolstering California’s reserves.
For example, the legislature requires a two-thirds supermajority to raise taxes, which prevents reasonable policy changes, e.g. Reduce or eliminate unnecessary and inefficient tax deductions For businesses and wealthy families, the phenomenon persists even in a progressive state like California. Looming Taxpayer Deception ActThe ballot measure, backed by big business and real estate interests, will make it harder for local governments and the state to raise taxes and other revenue, will further weaken the state’s ability to adapt to economic challenges and jeopardize critical community services.
Although state leaders have depleted California’s primary reserves over the past decade, they prefer to save more in good times. However, Ill-structured spending limits imposed by voters in the 1970s Depositing money into a reserve fund is considered the same as spending it. This hampers efforts to further build up the state’s stockpile and, not incidentally, reflects the dangers of short-sighted ballot initiatives.
If we want our leaders to govern and spend in the best interests of Californians—in good times and in bad—we need to approve structural changes that give them the freedom to use all tools at their disposal to protect and fund important projects, Prevent shortages and manage budgets. This includes making the tax system fairer, ending caps that prevent saving more in good times, and refusing to limit the options state and local leaders have to prioritize the well-being of all Californians when managing budget decisions.
Chris Hoene is the company’s executive director California Budget and Policy Center.
Coming budget cuts are just the beginning
Joshua Law
Facing a huge budget deficit next fiscal year, Gov. Gavin Newsom’s revised 2024-2025 state budget addresses a $45 billion shortfall. While the Legislature debates the governor’s proposals, which include deep cuts in priority areas such as homelessness spending, the question remains whether California can get back on a sustainable fiscal path.
Unfortunately, the cuts will do little to shore up the country’s long-term fiscal health.
Newsom’s proposal includes drawing billions of dollars from national reserve accounts. In addition, much of the long-term spending plan put in place two years ago, when the government projected a $97.5 billion surplus in 2022-2023, remains in place, including efforts to tackle homelessness and climate change and establish universal pre-K for children and investments in health care.
California’s budget problems are rooted in a significant increase in spending while relying on fragile revenue assumptions, which is further exacerbated by erratic revenue streams.
Half of California’s personal income tax revenue comes from the top 1 percent, whose income fluctuates with the stock market. In 2021, volatility and federal pandemic funds played a large role in future earnings forecasts. But by 2024, the surplus has disappeared.
To avoid these boom-and-bust problems, the country must change its budget process to ensure that more revenue from sudden and clearly unsustainable growth goes into reserve accounts. But it must also reduce spending permanently.
Public employee pensions remain an expanding source of funding for the state. State contributions to California’s defined benefit pension plan, which guarantees lifetime salaries and benefits to public employees regardless of the state’s ability to pay, will reach $26 billion by 2022. , using reasonable assumptions about state retirees, $26 billion significantly underestimates the true cost to government.
To protect future budgets, new state employees should join defined contribution plans, such as private sector 401k plans, rather than defined benefit plans. Even if these plans were more generous than those in the private sector, they would save the state significant amounts of money, prove desirable for many public employees, and deter defined benefit Ponzi schemes.
Likewise, retiree health benefits for state employees cost the state more than $7 billion annually. In many cases, these benefits duplicate those received by retired public employees through Medicare and the Affordable Care Act exchanges and therefore can be eliminated.
While budget cuts may seem dire to citizens who rely on public services, the bottom line is that state spending is unsustainable. Perhaps no group embodies the nation’s waste more than correctional officers. Their total pay increased by 16% from 2021 to 2022, although the prison population is still 25% lower than in 2018.
Even in K-12 education, do we really think the problem is that spending levels are too low? All-source spending per student in California’s public schools is projected to be $23,878 in fiscal year 2024-2025, despite lower satisfaction with public schools and declining enrollment.
The 2024-2025 California budget will require painful cuts. Taxpayers need to take more responsibility for public spending and make better use of their tax dollars.
Joshua Rauh is a professor of finance at Stanford University’s Graduate School of Business and a senior fellow at the Hoover Institution.
