How did we get here?

There is no question that the state is faced with one of the most dire financial situations in its history. But that seems to be about where the agreement ends.

There are numerous theories, scapegoats and explanations offered for how it is the state finds itself $40 billion in the hole. And there are just as many differing ideas about how the state should work its way out of this mess.

Gov. Arnold Schwarzenegger has proposed a collection of tax increases and spending cuts to bring the state back toward fiscal solvency. But along with the short-term problem, the governor and legislative leaders are locked in discussions about structural reform and ways to change the state’s budgeting system to keep us from ever winding up here again.

So, how did we get here? And what are the factors that led to this budget situation? Capitol Weekly talked to some of the state’s foremost state budget experts to try to get some answers.

We also wanted to get to the heart of some of the common accusations and explanations surrounding the budget: Was it Proposition 13? Formula-driven spending initiatives like Proposition 98? Was it a rapid expansion of the state’s safety net? Or the use of  “one-time-money” for ongoing state expenditures? Do we have a revenue problem or just a spending problem?

The answer, of course, is that all of these things play a part in the state’s budget problems. But underlying all of these discussions is a more fundamental argument about the role of state government.

“It’s really a matter of what you want government to do,” says Diane Cummins, who served in Gov. Pete Wilson’s Department of Finance and as budget director to Sens. John Burton, D-San Francisco, and Don Perata, D-Oakland.

Cummins says there has been some expansion of the social safety net over the last two decades, with new programs like the state’s Healthy Families program coming online in the mid-1990s.

“I don’t think that Republicans are wrong to say that there are some fast-growing programs,” she said. “A big one is corrections. In-home social services has grown. Other areas have too, like the services for developmentally disabled.

“People talk about high growth, but if all of the people who get help from regional centers were in developmental centers, it would be at a much higher cost.”

A major shift in the role and funding of state government came with the passage of Proposition 13 in 1978. By locking in property tax rates, voters essentially froze the major source of local government funding.

As a result, services that had been provided by local governments shifted to the state. As a result, state spending on its citizens skyrocketed.

According to records from the Department of Finance, the state spent $626 for every Californian in the 1977-8 fiscal year. The next year, after the passage of Proposition 13, that jumped to $821 per capita.

In today’s dollars, that’s the equivalent of going from $1,969 for every Californian to $2,582 in one year.

“When Prop. 13 passed, the state took over obligations that were previously local obligations,” said Fred Silva, senior fiscal policy adviser at California Forward. “Before that, schools, and many services like Medi-Cal were funded, at least in part, by local property taxes.”

Today, the state government’s per capita spending is $3,500. Increases were gradual throughout the 1980s and 1990s, but spiked sharply after Gov. Gray Davis took office in 1999.

On the revenue side, volatility in the state’s income has been blamed for huge budget spikes and declines. The majority of the state’s revenues come from personal income taxes, which Silva says are more volatile than other forms of revenue.

“We used to have a much broader tax base that was a combination of property and personal income taxes. Throughout the 1980s, we increased our reliance on the personal income tax. Our problem is we don’t have a good way to handle volatility.”

Silva says a dependence on personal income taxes makes the state overly dependent on the incomes of the richest Californians. And when the state’s millionaires have a bad year, our economy takes a beating.

Silva and his comrades at California Forward have proposed a way to end some of the rollercoaster budgeting that has marked the last 15 years. If the state can identify money as “non-recurring,” or one-time windfall, they argue, it should be placed in a budget reserve to help smooth over the next income tax drop.

Cummins agrees, but says identifying one-time money is more easily said than done.

“We never really talked about it in the past,” she said. “But I think now, there is more awareness, and more of an effort to identify what is one-time money, and to try not to spend it on programs that will require funding long-term.”

Even then, the myriad budget formulas passed by voters do not make exceptions for one-time windfalls. A large spike in tax revenues, for example, would lead to an increase in the base for Proposition 98, the 1988 formula that directs at least 40 percent of the state’s budget to public schools. While there are contingencies in Proposition 98 about what to do in an economic downturn, a large windfall followed by a spike still leaves the state on the hook to pay more money to schools.

“I think it’s a flaw with the entire system. It’s based on formulas,” said Cummins. “For 30 years we’ve been moving money from one pot to another and given the economic crisis, and all of these spending formulas like Proposition 1A, and Proposition 98, and Proposition 42, you can’t do that anymore.”

Cummins says another hole in the state budget was caused by the cut in the vehicle license fee. The VLF is a property tax on the value of a vehicle. The money is used by local governments. When the state cut the tax rate from 2 percent to 0.67 percent, the state agreed to backfill the money the locals were losing on the reduced car taxes.

“When we passed the VLF, the backfill was about $4 billion,” Cummins says. “Now, the backfill is about $6 billion. That’s an additional $2 billion hole in the state general fund, money that we owe local governments.”

While Cummins and Silva both say no one thing is to blame for the state’s budget woes, it is the unintended consequences in policies like the VLF reduction that take their collective toll. And the state, in expanding the scope of the services it provides, may have to focus its spending priorities.

“I think you have to have that discussion about what government provides, and what services it should provide,” says Cummins. “When times are good, people don’t pay as much attention. It’s not at the top of their agenda. It’s times like this where they say we spend too much, or try to do too much.

“We need to prioritize and ask ourselves — are these things still a priority, and are there ways to control the costs? Because I suspect you would find an awful lot of our programs are still under-funded.”

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