Behind the budget numbers, there is real pain

As our Budget Conference Committee attends to the daunting task of dealing with a $24 billion hole in our 2009-10 budget, we are facing the fact that our revenues have evaporated by 25% due to the global financial crisis. Committee members have requested that the Department of Finance and Legislative Analyst’s Office identify spending programs which have been created in the last ten years. By reviewing recent programmatic growth the hope is that we can more judiciously approach our budget balancing job.

In its most recent revision, the administration has suggested a number of bold cuts which include the elimination of general fund support for CalWORKs, Healthy Families, Cal Grants, child care, adult day care and our state parks system. If we were to ratify these proposals, millions of Californians would be affected in a direct and dramatic fashion. Billions of dollars would no longer find their way to our local economies and many more Californians would lose their jobs. Clearly, the legislature would be wise to take action fully informed of the many ramifications and consequences of doing so.

It seems sensible that before we disassemble state governmental operations we review how state spending has increased in the past decade. Here are some facts: between 1998 and 2008, General Fund annual spending in California increased by about $46 billion. $31 billion of this amount is due to inflation and population growth. How did we spend the remaining approximately $15 billion? The largest and fastest growing programmatic component of these expenditures is the Vehicle License Fee (VLF) reduction for car owners. VLF funds benefit local governments. So when car owners were spared on average $200 when Governorhad to, and continues to, make up the difference. This was voter approved and costs us between $4 and $6 billion each year.

The next largest increase in spending is in our Department of Corrections and Rehabilitation. Beyond population and inflation growth rates, that amount is $3.5 billion. Again with voter support, California has the only Three Strikes law in the country which does not require that a third strike, which will incarcerate an offender for life, be a violent or serious felony. As a result, the population of our inmates is quickly aging. Whereas the cost of housing a prisoner is around $49,000 annually, the price nearly doubles for those over the age of 50 and triples for those over age 60. Consequently, the state faces a federal court mandate to improve medical care in its prisons, which will cost billions of dollars.

That leaves about $5.5 billion of annual spending increases over the past 10 years yet to be accounted for. About $2 billion is payments on past budget-related debt, represented mostly by debt service on the Economic Recovery Bonds approved at the ballot in 2004. Another $2 billion is related to debt service on infrastructure bonds approved by voters in 2006 and prior years to rebuild our dilapidated transportation systems, hospitals and schools. Finally, in 2002, Californians overwhelmingly supported Proposition 42, which requires that about $1.5 billion of gasoline sales tax revenue be spent on state and local transportation projects.

Add to this spending the uncapped and growing cost of health care, California’s aging population and epidemics of childhood obesity, type 2 diabetes and ever increasing rates of autism, one can easily see how state spending has grown this past decade. Due to climate change, we now live with a 12-month fire season which is costing us hundreds of millions of dollars to confront.

Given these facts, our job would be incomplete if we were not to also review recent spending programs initiated as tax cuts. As referred to above, reduction of the VLF has cost our General Fund over $30 billion in the past five years. According to the California Budget Project, tax cuts enacted since 1993 will cost us close to $12 billion in the current year. The 2008-09 budget provisions allowed companies to trade tax credits among their affiliated businesses, permitted a two-year carry back of business losses and expanded the net operating loss carryforward period from 10 to 20 years. The 2009-10 budget allowed multi-state companies to elect annually whether to use “single sales” for apportioning income for tax purposes. The cost of these measures is estimated to be about $1.5 billion and will impact the 2011-12 and future budgets.

With our extremely reduced revenues and need for equally reduced spending, can we continue to afford these ongoing costs? An honest debate in answering this question should be comprehensive and inclusive of all spending programs. These are just some of the challenging options before us as we approach a cash crisis next month, which our Controller informs us demands immediate action.

It will take a reasoned and collaborative effort on the part of the Legislature and Governor if we are to best manage these stormy times to ensure a brighter future for our great state.

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