01/12/2011 by Fred Silva

The missing piece of the budget puzzle

The 2011-12 budget plan introduced by Governor Brown on Monday includes major pieces of the fiscal puzzle that at long last will hopefully bring fiscal balance back to California.

Unlike prior budget plans purporting to close the state’s widening deficits, this one actually proposes long-term structural changes to bring California out of its fiscal hole. One big difference is the budget proposed by Governor Brown does not rely on one-time spending reductions or gimmicks. It seeks to permanently change the makeup and extent of state spending to balance revenues and expenditures. It is important to recognize that the plan anticipates extending temporary revenue increases to get important state services - such as education and health and human services - through an economic condition that is improving, but not quickly enough.

Here is the difference between prior attempts to bring fiscal balance and the one proposed by Governor Brown:

  • Most of the spending and program reductions, many coupled with program realignment, are permanent and will bring spending in line with revenues.
  • A long-term realignment of social service and criminal justice programs - which can be more effectively administered at the county level – will for the first time focus on improving outcomes for those who receive assistance.
  • A five-year extension of the temporary taxes will be used to help finance the last two budgets, and a portion will help finance the realignment of state services.

The big unstated gamble is whether the state can get to fiscal balance within a 12-month fiscal year. To make this budget work, a long list of program changes must be ready for implementation on July 1, 2011. This also assumes that voters in June 2011 will approve the necessary tax extensions that are the glue that holds this plan together.

The prior governor tried to get to fiscal balance using onetime reductions, and it did not work, in part because it is difficult to implement major program changes within the year the savings are counted. The major difference now is that spending reductions are long-term and need to be matched with a restructuring that assigns selected state programs to county government. The central problem remains whether all of these changes can be implemented in a single fiscal year. That is the missing piece of the puzzle. It may take a two-year plan that includes the 2012-13 budget and that would bring fiscal balance by June 30, 2013 rather than 2012. Knowing our past experience it is worth raising the caution flag.

In addition to the challenge of bringing the budget into balance in one fiscal year, policymakers should enact the budget process reforms that they have contemplated for more than a year. California needs a process that will prevent lawmakers and governors from making promises they can’t keep and ensure public resources are well spent. Here are some specific ideas that California Forward has advanced over the last year:

  • Performance-based management and budgeting with better oversight. Require the Governor and legislators to establish clear goals and performance measures for all programs. At least once every 10 years, lawmakers must review programs to determine if they should continue or how they can be improved.
  • Pay-As-You-Go for new programs and tax reductions.  Require that major new or expanded programs or tax reductions (created through the legislative or initiative process) have an identified way to be financed, either by additional revenue or spending reductions.
  • Multi-year budget planning. Require the Governor and Legislature to prepare two-year budgets and three and five year fiscal forecasts, publish more frequent updates on the state’s fiscal condition and strengthen requirements for quick action when the budget is out of balance.
  • Manage volatile revenue and strengthen reserves. Capture one-time spikes in revenue, fill the rainy day fund and, after meeting minimum K-14 education funding obligations, limit one-time revenue to one-time uses, starting with paying down budget related debt. A constitutional amendment will be on the February 2012 ballot that will accomplish this task. The governor and legislature should consider moving it to the June 2011 special election, along with our other proposed reforms.

Asking voters to consider continuing temporary tax increases must be accompanied with structural reforms that will maintain fiscal balance and create a budgeting process that provides Californians with value for their money.

Fred Silva is the senior fiscal policy advisor at California Forward.

Categories: Selected Blog Posts, Budget Reform, Rainy Day Fund, Fiscal Reform Plan, State Budget

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