California: The Canary in the Fiscal Coalmine

California is the canary in the fiscal coalmine. If Sacramento can reform the welfare state in a sustainable direction, then so can the rest of the country. For a while things looked good: when Governor Brown took office almost a year ago, he seemed to be ushering in a new era of fiscal sanity. He whipped his own  party out of its spending-as-usual habits and put the state on a track of spending control. However, so far his approach to spending control has been fragmented and reactive. Instead of tackling the structural spending problems in the state budget, Governor Brown is using the cheese slicer method: he is taking a few percent from every share of the budget, not realizing that some spending programs drive costs more than others – and that some programs are more important than others. By using this reactive method, Governor Brown risks putting California on the same austerity train that most of Europe is on today. A story in the Sacramento Bee illustrates just how fragmented Brown’s approach is:

The state’s nonpartisan budget analyst on Wednesday [November 16] said California will fall $3.7 billion short this fiscal year, likely resulting in fewer public school days, cuts to libraries and further reductions in developmentally disabled services. Gov. Jerry Brown and Democratic lawmakers counted on that money – to be generated by projected tax revenues – in a fit of summer optimism when they drafted the state budget. But Legislative Analyst Mac Taylor now predicts California will land 4 percent shy of the $88.5 billion in revenues they banked on in their plan. Unlike previous years, when the analyst’s forecast was advisory, his report this time could trigger automatic cuts. Brown and lawmakers designated $2.5 billion in midyear reductions dependent on the strength of revenues as determined by the analyst and the Department of Finance.

The state, of course, has no one but itself to blame for its fiscal problems. Education spending is an excellent example of this. The state government is paying for 54 cents of every dollar spent in California schools, up from 46 cents in the mid-’90s. California has also been very eager to accept federal education dollars, which now pay for 16 percent of all elementary and secondary education in the state. (In 1994 that share was 7.6 percent.) With the federal funds come mandates that force the state to even higher levels of spending.

If the state government had not taken on responsibilities for education spending, but left that responsibility in the hands of local governments, it would have avoided creating one of its major sources of fiscal problems. In a sense, California voters created this situation: first they turned Proposition 13 into a constitutional amendment, thus putting strict limits on property taxes; then they avoided putting the same tabs on education spending, thus creating a cash flow problems in their school districts. They then solved this by giving the state more and more responsibilities for funding schools.

With this in mind, it would be a lot more reasonable if Governor Brown initiated reforms that changed the permanent funding model of California’s education system. Instead of keeping the state’s share where it is today, it would make a lot more sense to re-direct funding responsibility back to the school districts. Coupled with genuine school choice, such a reform could very well result in new, innovative models for educating California’s children that would fit the budgets that middle-class families in California can afford.

Structural reforms like this one require long-term thinking and a visionary mindset. Governor Brown has a chance to show the rest of America that such reforms can work. He has given away hints that he has the right mindset. It remains to be seen if he has the fortitude to deliver.

California badly needs those reforms. The state is out of time already. And America is not far behind. If California sets a good example, with good, stable, structural reforms to government spending, then America will have a good example to follow. But if no one takes the lead – well, we are in very big trouble.