April 23, 2007 - From the April, 2007 issue

New California Network Campaigns to Promote Fiscal Responsibility Throughout California

California's budgetary process is so vast and opaque that most citizens have long given up on following it or trying to figure it out. That leaves the process to the legislators and the special interests who care enough to navigate the system. The New California Network, however, is trying to combat this trend. MIR was pleased to speak with NCN Fiscal Advisor Fred Silva, who has been studying the budgetary process and leading some of NCN's statewide conversations on fiscal reform.


Fred Silva

When MIR interviewed you last year about your new work with the New California Network, you addressed the complexities of a $100-billion-plus state budget. Your central message was that expenditures should equal revenues, but they often don't in state government. What has the New California Network been doing since then to help both legislators and the public to appreciate the challenges such fiscal imprudence presents?

The New California Network (NCN) was put together by the leadership at the Joint-Venture Silicon Valley Network and Bay Area Economic Forum to facilitate a discussion on the fiscal affairs of the state. NCN initiated a series of sessions with local civic leaders in an effort to explore ideas related to reforms of the state and local finance system. An introductory report can be found on our web site at www.newcalnet.org. NCN's primary concern is the process that is used to make decisions at the state level and how those decisions affect the delivery of public services at the local level.

NCN has identified three primary issues in the first phase of state budget making reform. They include increasing program performance review in the state budgeting process, expanding the state's fiscal horizon by implementing a multi-year expenditure plan, and revising the way the legislature considers spending and revenue decisions. A second set of broader fiscal reforms to be addressed later include a review of the state/local fiscal relationship and a review of the state and local tax structure to better align it with the 21st century economy.

We're sponsoring a series of sessions to talk with local leaders about the state budgeting system in order to gather more ideas about how the state could better spend the $130 billion it allocates each year. We've had sessions in Sacramento, San Diego, Fresno, and the San Francisco Bay Area. We will be in Los Angeles at the Judith and John Bedrosian Center on Governance and the Public Enterprise at USC on May 22.

Some in city and state government, as well as those who follow California public finance, believe that the state is headed toward a total fiscal breakdown, because of the gap between revenues and expenditures and the lack of will to fix the problem. Are those fears justified?

Yes. The State Department of Finance, the Legislative Analyst Office and just about everyone who follows the subject is well aware of the numbers: Unless California does something different, over time the growth in expenditures will continually exceed the growth in the revenue base. The state's spending obligations, whether produced through the legislative or initiative process, will outstrip the state's ability to finance them under the current tax structure even in a moderately growing economy. That isn't to say that we ought to go out and raise taxes or eliminate programs that are part of the fabric of California communities. What NCN is concerned about is that in order to maintain fiscal balance we need to change the way in which these decisions are made, update the tax system and improve the state/local fiscal relationship, particularly the state's relationship with counties which administer the state' health and human service programs.

If the state policy makers continue to avoid our fiscal reality we will continue to face annual spending reductions that have little connection with program performance. In time, the erosion of the public sector will be felt in communities across the state.

Props 13, 98, term limits, and other initiative measures that have been approved over the years tie the hands of our elected representatives. With state government held hostage to structural deficits and an absence of consistent press coverage, are the conditions for fiscal discipline apparent?

I think so. Each year program advocates in education, health and human services, and the environment are forced to confront program reductions with the single purpose of reducing spending to match revenues. Annual incremental reductions in major state programs find their way every year to a communities door step. Each year we put off facing our structural fiscal problem with these annual program changes which are insufficient to solve the problem. The back drop to all this is that the state continues to grow. We do not do what the legislative analyst and the Department of Finance would like to do, which is to step back and look at all expenditure priorities as a whole. The formal policy-making apparatus in California doesn't allow us to do that anymore, unfortunately.

A change in the policy-making apparatus would provide policy makers with a new template for making these decisions. The reason for my optimism is that policy makers are unhappy with the current process but do not have a road map out of it. NCN hopes that a dialogue about that road map will produce a consensus on how to proceed.

Should we sound the alarm because our public institutions now have little capacity to right the ship of state?

We have to get away from the small, incremental devices the state uses to enact budgets and solve the larger problem that over time the expenditures outstrip revenues. Although much has been said by this administration about putting limits on borrowing to close budget gaps, they remain convinced that it is ok to borrow money to meet their obligations for the employer contribution to the state's public employee retirement system. Go figure...

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Let's turn to some of the reforms that the New California Network is advancing. What issues have you raised among civic leaders around the state?

Of the five issues noted earlier we have been discussing three of them in detail. First is our view that the state government is well behind other states and our own local governments in managing fiscal conditions. Central to that is using performance measures for management of fiscal decisions. For the last forty years the state has had a budgeting system that relies on the amount of money that was spent in the prior year. The historical model is: "You get what you got in the prior year, plus growth." We are suggesting that California initiate a fiscal management system that will, in effect, allow the state to make better choices. So the question for the Legislature and the question that the governor always answers in his budget: here is what I spent last year, and here is what I am going to spend next year. That's the debate that goes on the legislature's budget committees often to the frustration of the legislators and those who want to see public dollars better spent.

The second element is that our fiscal structure is based on an annual debate about how much revenue comes in during the year compared to our expenditure obligations. Every year there are marginal changes made to the budget that the administration produces and the Legislature considers, and often adopts, based on annual fiscal balance. We're suggesting that they ought to go into a multi-year system of planning that looks ahead for two or three years that will address the question of where the state ought to be with respect to fiscal structure. When the governor came into office in 2003, he faced a major fiscal imbalance. He felt that he could right the ship in a year. So he gave a budget that he thought was balanced. If it had included a multi-year time requirement, then he could have done what fiscal responsibility would required, which was to extend the fiscal planning period long enough that program changes could be made and that revenue growth could match the expenditure growth. Instead, the state simply borrowed money to avoid tough choices. So, we're suggesting that the state enter into a multi-year fiscal planning program.

The third area that we are focusing on is better transparency in the legislative process and a better consensus-building process in the adoption of the budget. For the last 40 years the Legislature has had a process that when considering the governor's budget, each house will review it and then, in effect, speak on it by enacting its version of the budget. Then each version goes to a conference committee to resolve differences between the two houses. About ten years ago, the Legislature stopped doing that, and it simply has the subcommittees of its budget committee make these major decisions and then sends them to a two-house conference committee.

Transparency and the need to build consensus are the victims in this process. We are suggesting that the Legislature devise its process for hearing the budget so that it gets delivered earlier and so there be some greater transparency so a given item would be heard jointly by the Senate and Assembly so a decision could be made and everyone could see how that decision was made and participate in it.

Is the New California Network's focus premised on a reverence for the existing institutions of state government and an assumption that civic constituencies and the broader public of California will engage with these issues of fiscal prudence? Might these two premises be false?

Getting body politic focused on this is one of our objectives. As we have gone around the state we always hear the local officials say, "Well, why can't they improve decision making? We've been doing these things for years." Our response has been, "Can you help us bring this message to state leaders?" One of the side benefits of term limits-and I am not commenting here about the number of terms that can be served-is that there are many state legislators who used to be local officials, who now sit on budget committees, who sit on policy committees, and are aware that the state still doesn't use performance measures, still has an annual fiscal process that is used, and they came out of local governments that used a multi-year system. So the constituency for a process change is clearly there. The tough part is to get those who influence those decisions, such as the education coalition, the public employee sector at all levels and other advocates for public spending interested in changing a decision making system they are use to. Galvanizing the public interest has to be a priority for both state leaders and local community leaders.

What are the consequences of just doing nothing about fiscal reform?

There are two consequences: First, the state will continue to run operating deficits, and every year we are going to have cuts to the service levels of state and local programs. Those cuts to service are usually relatively small. This year is a classic example. The governor is moving money that would otherwise go to transit agencies over to other activities. So each year somebody is a loser. Not that anybody is a winner, but somebody loses something. Because of this process the public finance system is unlikely to collapse all at once, no doubt to the disappointment of those who would like a doomsday prediction, I'm not sure that it will collapse all at once since we are very good as governments to adjust to small incremental changes. That may be our collective down fall. What would have happened if the state had not revised the local finance structure following Proposition 13 and simply allowed a 60% property tax reduction to run its course? At root, our governance system will fix whatever problem it faces through incremental steps.

You mentioned that the New California Network will be hosting listening sessions around the state and that there is one coming to Los Angeles. Why don't you share more regarding your plans for Southern California?

We are spending this year listening to local civic leaders in order to connect them with the often boring but important crisis in state and local finance. The sessions in San Diego was co-sponsored by the regional chamber of commerce. We expect to be in Southern California on several occasions. As I noted earlier we will be at USC on May 22, 2007. We have been getting a positive response so far from people who are frustrated about the decision-making system in Sacramento-particularly from those who participated in it.

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