Thursday, March 4, 2010

Don't Give Up On California

At San Diego's Tea Party rally last Saturday, Dawn really jolted me when she said not to give up on California, adding "Remember, this is the Golden State." It made me realize that I had. I figured the state needed to "hit bottom" like a drunk, before it collectively came to its senses. The spread of a vibrant Tea Party movement within the state attests to the truth of what she said.

But how to fix it? Right now the state legislature is unable to cope with a $21 billion budget deficit. It is dominated by Democrats who would rather outlaw cussing or pass a veto-ready universal health insurance scheme, rather than deal with the reality of this crisis. This deficit is 1% of the state's GDP, making it sound small, but the state is already known for having both a high sales tax and a high income tax, so where the hell is the money going?

California Tax Revenue by type, Source Red County, California

My research has shown that overall spending as a percent of personal income has fluctuated up and down for the last decade. Unfortunately, in the good years the legislature spends every nickle of it, saving nothing for a rainy day.

Looking at this graph, things don't LOOK so bad. But notice that spending ramped up from 1997 to 2007 and that despite a recent downturn, we are still way up. Also, these figures are adjusted for inflation. There is no reason to believe that per capita spending, adjusted for inflation should vary from year to year. Here is the scarier unadjusted picture:

But it still doesn't answer where all that swag is going.

But here is a clue:

Approximately 85% of the state's 235,000 employees (not including higher education employees) are unionized. As the governor noted during his $83 billion budget roll-out, over the past decade pension costs for public employees increased 2,000%. State revenues increased only 24% over the same period. A Schwarzenegger adviser wrote in the San Jose Mercury News in the past few days that, "This year alone, $3 billion was diverted to pension costs from other programs." There are now more than 15,000 government retirees statewide who receive pensions that exceed $100,000 a year, according to the California Foundation for Fiscal Responsibility.
Amazingly, even Willie Brown, seems to agree there is a problem. From the same article:

My hope is that these and other reforms find support in unlikely places. Former Assembly Speaker Willie Brown, a well-known liberal voice, recently wrote this in the San Francisco Chronicle: "The deal used to be that civil servants were paid less than private sector workers in exchange for an understanding that they had job security for life. But we politicians—pushed by our friends in labor—gradually expanded pay and benefits . . . while keeping the job protections and layering on incredibly generous retirement packages. . . . [A]t some point, someone is going to have to get honest about the fact."
So what's to be done? Amazingly I found this Deloitte Research Study that had some good ideas. (I usually have a low opinion of consultants.) Here are a few that I like:
  • Curtail abuses of policy primarily in pay raises and sick leave that allow inflation of benefits.
  • Raise employee contribution requirements. After all these are generous pensions, state employees should contribute, the way I do for my federal pension.
  • Develop a plan and stick to it. Stop shifting the burden to future generations.
  • Put newly hired workers into lower cost programs.
  • Limit cost of living raises to actual inflation.
  • Scale back generous early retirement programs.
But the one thing they don't say that would give short term relief is: REDUCE THE NUMBER OF STATE EMPLOYEES. (Sorry for shouting).

By shifting work to contractors, who usually have a defined contribution plan and away from the defined benefits plan the state provides, it will immediately start reducing the burden of future pensions on the state. Further, there are many areas where the state could contract for services and save money, because, as Willie Brown points out, state workers are paid above the private sector average.

These are things that could be done without cutting state "services." Cutting actual programs is a blog for another day. But I just want to point out one quick win. About 25% of the state budget is for "health and human services," much of which is for welfare. From the Fox & Hounds blog:

In 1996, Congress took much-needed action to reform the federal welfare program. The reforms tore down the old federal entitlement program and empowered states to implement genuine welfare-to-work programs. Caseloads across the country, including California’s, began to decline.

But we didn’t go far enough. While other states tightened their time limits and sanctions, California’s program remained lax, with extended time limits and weak sanction policies. The direct consequence of the state’s failure to clean up the system is the disproportionately high welfare rate we face today.

And we’ve tolerated these bloated welfare rolls despite the fact that most CalWORKs recipients aren’t following the rules. The law requires welfare recipients to meet a minimum level of work participation, but only 22 percent of work-eligible welfare recipients in California actually do so. Incredibly, of California recipients required to work in 2007, 64 percent didn’t work at all—not a single hour. This must change.

My link to that article is not an endorsement of Steve Poizner for Governor. I am still sorting out my options.

Summary of my overly long blog post. Fix spending by reforming pensions, reducing the number of state workers and running our welfare system like the rest of the country.


  1. All of the problems are solvable, both here and in the nation in general. It's just going to take government spending below the levels that you think are necessary to accomplish the things you want while the debt is paid down.

    That is, if it's your family and you've run up $50,000 of credit card debt, you will have a lower standard of living while you knock out that debt than you would have had you never run it up in the first place.

    It's not a matter of can it happen. One way or another, this will happen. Greece is going through that right now.

  2. re: California recipients required to work in 2007, 64 percent didn’t work at all—not a single hour.

    This is not correct. The problem is on the reporting side. If a person on CalWORKs works 34 hours per week they are categorized as not meeting the requirement and the perception is that they are not working at all. In CDSS reports they are categorized as not participating in required activities. Counties have proposed legislation to ammend the law and allow them to receive partial credit for meeting the 35 hour per week goal. It would also provide a more transparent view to the public of the amount of effort people on CalWORKs are exerting in exchange for benefits.

  3. KT,
    Totally agree that this will happen, but how will the pain be distributed? It seems that certain groups who caused the problem, public employees unions, will be shielded from the pain, unless we take action. This is why I highlighted their contribution to the mess.

    Thanks for pointing out the issue with reporting. I agree that the devil is often in the details and fully support more transparency. But it doesn't change my basic point that California's more generous benefits (30% of welfare spending in the U.S., with 12% of the population) are one of the causes of our budget crisis.
    Also, thanks for contributing to the discussion.

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