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ORANGE COUNTY COMMENTARY

Budget Remedies Could Hurt O.C.

April 14, 2002|STEVEN B. FRATES | Steven B. Frates is a fellow at the Rose Institute of State and Local Government at Claremont McKenna College.

The looming state budget deficit does not augur well for Orange County residents or the local governments that serve them. Preliminary estimates indicate that the state's budget shortfall will be at least $17 billion.

Some observers, including the highly respected Legislative Analyst's Office, indicate the budget deficit could even be in the $24- to $25-billion range. Incredibly enough, the state has gone from a budget surplus to a budget deficit in a few short years.

There are many reasons for this looming budget crisis, but the primary cause has been a Legislature that could not restrain itself from spending the money that gushed into the state coffers during the strong economy of the late 1990s. Examples of fiscal imprudence in Sacramento abound.

The huge increase in salary and benefits for state prison guards is only the most recent example. Taxpayers writing checks to the California Franchise Tax Board this evening might want to reflect on the fact that state prison guards now make as much, or more than, police officers or credentialed teachers.

Prison guards need only have a high school education and minimal training. Police officers must undergo rigorous training and of course face criminals when they are not behind bars. Teachers need a college degree, a credential and experience to pursue their profession.

No matter how you slice it, the governor and the Legislature are in financial trouble. Clearly, they do not want to raise taxes until after the election. So Californians can expect to see some financial sleight of hand to conceal the budget shortfall until, say, the second Wednesday in November.

The last time the state was in a budget crisis, the Legislature and then-governor gleefully gouged local governments. They took local property tax revenues from cities and counties and gave some of it to the schools, thereby reducing the amount of state revenue that went to local education.

Expect more of the same. Cities and counties are most vulnerable to this tactic, but maybe this time the Legislature will be unable to resist taking money from the cash-flush special districts. The Little Hoover Commission report of May 2000 gave some idea of just how many billions of dollars these special districts have sloshing around.

But special districts in California, and especially water districts, have jealously guarded their financial assets over the years. They have successfully turned back attempts by the state Legislature to get its hands on their money.

Now, special districts, especially water districts, are furiously designating dollars for capital improvement projects, thereby hiding behind the fig leaf that such funds are "already committed." Their tactic is encouraged by recent changes in government accounting standards (the arcane but significant GASB 34 standard), which sanctions local governments to develop cash reserves for capital projects.

What will the swirling political currents in Sacramento mean for Orange County? The short answer is Orange County taxpayers had better get a tight hold on their wallets.

There are many things the Legislature might do to sidestep the budget deficit problem that would potentially hurt Orange County. For starters, the Legislature might change formulas for state funds going to local governments. Orange County school districts, cities and the county itself are already shortchanged by the state.

Orange County's legislative delegation has been spectacularly ineffective in looking out for the interests of county schools and cities. Orange County was getting less than other counties before the huge increase in the state budget that occurred in the late 1990s. The local legislative delegation couldn't even improve the financial circumstances of Orange County schools and cities when times were fat in Sacramento. Given their mediocre record, it doesn't seem likely they will do any better in the current downturn.

Another tactic the state Legislature is likely to employ is to shift money to the general fund from various restricted funds, some of which fund freeways, roads and capital projects. What this means to Orange County residents is less state money for infrastructure improvement, or higher taxes. There are more subtle but no less painful ways in which the Legislature is hurting the Orange County economy. For example, recent state legislative actions have resulted in skyrocketing unemployment insurance costs.

This sop to the trial lawyers and unions will directly suppress the entrepreneurial activity and, hence, job creation, which is the font of Orange County's comparatively healthy economy. The Legislature is also on the verge of putting a series of multibillion-dollar bond issues on future ballots. Orange County taxpayers will surely pay a larger share of the taxes to finance these bonds, and just as surely will get a smaller share of the proceeds.

The Legislature's response to the state budget deficit is going to hurt some Californians much more than others. Unfortunately, the citizens of Orange County are probably going to bear a disproportionate share of the pain.

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