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Why the budget never adds up

California needs to introduce honest accounting and accountability into the equation.

June 29, 2008|Mark Paul | Mark Paul, senior scholar at the New America Foundation, was formerly deputy treasurer of California and deputy editorial page editor of the Sacramento Bee.

Gov. Arnold Schwarzenegger says he wants more than a balanced budget this year. He wants budget reform too.

For a state that has already laced itself into straitjackets of spending mandates and formulas, Schwarzenegger proposes new constitutional chains: a combined rainy-day fund and spending limit, to be added on top of the rainy-day fund and spending limit that voters have already approved separately. His implicit message: The Legislature and I have chosen badly, so please restrict our ability to choose again.

As any parent knows, you can't instill individual responsibility in children by depriving them of the opportunity to choose. The same goes for fiscal responsibility in government. Real budget reform in California shouldn't require more spending straitjackets and, except in one case, shouldn't require a constitutional change. It's simpler than that. Here's what we need to do:

* Adopt transparent and honest accounting. The first step in fixing the budget mess is to understand the size of the problem. That's not easy for Californians. The way the administration and the Legislature talk about the state's finances defies common sense and the rules of accounting.

Most people understand that their household budget is balanced when they spend no more than they earn each year. If they must dip into savings to pay rent, or run up a credit card balance to buy groceries, they know the budget is out of whack and they're headed for trouble.

Not so in California. Budget documents routinely fail to provide the number most useful in making budget choices -- the discrepancy between annual general fund spending and tax revenue. Instead, budget officials and politicians speak of what they call a "shortfall" -- the state's cash reserve at the beginning of the current year, plus the deficit or surplus in the current year, plus the projected deficit or surplus in the next year for which the budget is being written, plus the desired reserve at the end of that budget year. For instance, when Schwarzenegger announced in January that California faced a $14.5-billion shortfall, what he actually meant was that the state was running a deficit of about $7 billion for the current 2007-08 fiscal year and would have a deficit of about $8 billion next fiscal year unless corrective action was taken.

In this decade, California has run a budget deficit -- spent more than it has collected in taxes, fees and interest on cash reserves -- nearly every year. But that has been largely hidden from the public. From 2000 to 2003, the deficits were concealed by cash reserves carried over from the Internet boom. In 2005 and 2006, they were also masked by more than $20 billion of borrowing treated as "revenue."

Getting the accounting right isn't just a cosmetic nicety. It's essential to letting policymakers and the public see the real problem. If the public understood today that California's core problem is an ongoing structural deficit of about $5 billion a year, currently exacerbated by the housing bust, it would be easier to come up with a solution.

Real budget reform starts with transparency. Budget documents should lay out spending, revenue and whether the balance between the two produces a surplus or a deficit, as federal budgets do. Only taxes, fees, interest and transfers from other government funds that don't have to be paid back should count as revenue. Money borrowed in financial markets or from other government funds should be listed as borrowing. Any cash surplus in a budget year should be assigned to the existing rainy-day fund created by Proposition 58 in 2004, and the budget should clearly say when those funds are being tapped to cover a deficit.

None of this requires a constitutional amendment such as Schwarzenegger is seeking. It only takes an agreement between the governor and the Legislature to set up a clear and honest accounting of the state's finances.

* Adopt pay-as-you-go budgeting. California's current budget crisis has its roots in the Internet boom of the late 1990s, when the state, its coffers overflowing with tax revenue from capital gains and stock options, raised spending for such programs as children's health and Cal Grants for college students and cut the vehicle license fee and other taxes. Then the boom went bust, leaving California with the structural deficit that continues to plague us. Ever since, the budget reform debate has centered on creating some constitutional contraption to prevent the state from again enacting programs or tax cuts that cannot be sustained over the long run.

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