What’s behind California’s skyrocketing spending and $68 billion deficit?

Is California on a bender?

The state’s per-capita spending has more than tripled over the past 50 years, even when adjusted for inflation, according to state data (crunched by yours truly).

Its population has doubled over that time — the sort of growth that often comes with increased efficiencies. Which means, you might expect to see fewer state workers for every 1,000 residents. But rather than decreasing, the number of state workers per 1,000 residents has grown.

These rather startling statistics, squatting in plain sight in the state budget, were brought to our attention by David Crane — a registered Democrat, it seems important to point out here.

Crane served as a special advisor to Gov. Arnold Schwarzenegger from 2004-10, has a background in financial services, served on the University of California Board of Regents, and the California High-Speed Rail Authority, and the California Economic Development Commission, and the Society of Actuaries Blue Ribbon Panel on the Causes of Public Pension Underfunding, and the Volcker-Ravitch Task Force on the State Budget Crisis, and as a director of the California State Teachers’ Retirement System.

Which is to say, his bona fides are firm. Crane is now a lecturer in public policy at Stanford University and co-founder and president of Govern For California, a non-profit “seeking to counter special interest influence in the California state legislature.” He writes often about the state of fiscal affairs in Sacramento in a way that can leave folks frothing at the mouth.

“General Fund Expenditures Per Capita have climbed 63.9% since Governor Newsom took office, growing at more than twice the annual rate at which those expenditures grew under Governor Brown (10.4% vs. 4.7%),” Crane wrote earlier this month.

“Of course, Mr. Newsom didn’t approve all that spending on his own,” he continued, noting the Legislature’s eagerness to spend. “Time will tell if they and Mr. Newsom are interested in spending reforms. They should be, not only because California is the rare state to forecast deficits despite economic growth, but also because their General and Special Funds spent $1.3 trillion over the past five years yet residents would be hard-pressed to say how public services have improved and elected officials would be just as hard-pressed to account for the performance of those expenditures.”

It’s fair to note here that Newsom had to deal with a once-every-100-years global pandemic during this stretch. But the numbers still startle: Back in 1971, when Richard Nixon was president and Ronald Reagan was governor, California spent an inflation-adjusted $2,473 for every person who lived here. Today, California is slated to spend $7,977 for every person who lives here.

Back in 1971, there were 9.1 state workers for every 1,000 residents. Today, there are 11 state workers for every 1,000 residents.

So what gives? Fred Smoller, associate professor of political science at Chapman University, had the same initial reaction as we did: Big boosts in public worker pay and pensions over time? Which have certainly played a part. But officials in the California Department of Finance and Legislative Analyst’s Office say it’s more complicated than that.

This all plays out on the backdrop of California’s $68 billion deficit for 2024-25, largely the result of a severe revenue decline in the last fiscal year, according to the Legislative Analyst’s Office.

Revenue growth = spending?

The primary driver of the state’s spending growth, the LAO explained, is revenue growth. (Stay with us here.)

“The state’s tax structure has a propensity to grow faster than total personal income of the state. Notably, this in large part reflects the fortunes of those at the top of the income distribution. Over the past 30-40 years (and until the past year or two), with interest rates having been in been in secular decline, we’ve seen corresponding increases in financial asset prices such as stocks, the gains on which have generated strong revenue growth for the state.

“In addition, California voters have repeatedly approved and emphasized the state’s progressive tax structure. Combined, this has had the effect of amplifying state tax revenues over time, albeit interspersed with periods of pronounced volatility.

“This revenue growth both directly and indirectly results in higher spending. Directly, this occurs through the state’s constitutional spending requirements for Proposition 98 (schools and community colleges) and Proposition 2 (specifically debt repayments, which are scored as spending).”

Prop. 98 is the state’s single largest expenditure area, and the state’s obligations under it are determined by a set of formulas that are primarily driven by revenue growth. A similar dynamic occurs for Proposition 2, the LAO said: “Indirectly, higher revenue growth also results in higher spending growth to the extent the Legislature uses those new revenues to expand programs.”

After these revenue-driven bits, the state’s next largest cost programs are for major health and human services programs like Medi-Cal, In Home Supportive Services and the Department of Social Services, which are driven by caseload. Big factors there: population growth among older adults and cost per case (driven in part by medical inflation).

“So, given the state’s underlying funding mechanisms and cost pressures in its largest programs (Prop. 98, Medi-Cal, and other major HHS programs), we wouldn’t expect these programs to track inflation and population growth over time,” the LAO said. “That said, a part of the state’s spending base growth is likely also being driven by new program expansions, which result from higher revenue growth. The exact ratio of these determining factors is something that would require much, much more exploration and analysis.”

H.D. Palmer, spokesman for the California Department of Finance, thanked the LAO for providing “some sorely needed context to my friend David’s accounting adventures.”

Palmer wanted to underscore the role of Prop. 98, “which increased spending for K-12 schools and community colleges is constitutionally tied to changes in state revenues – which have surged along with growth periods in the financial markets,” and the spending growth for health and human services programs, which gets the second-largest slice of the general fund pie.

Medi-Cal provides basic health care for roughly 1 in 3 Californians and is the largest spending category within HHS, he said. A number of those programs are “entitlements” that the state has no choice but to fund — folks qualify for these based on age, disability, medical condition and the like.  An example would be the Lanterman Act, which governs services for the developmentally disabled. Saying “no” is not an option.

Looking at just the general fund, state expenditures were $225.9 billion, Palmer said.

Of that, $79.1 billion paid for K-12 education, and $73.9 billion paid for health and human services programs. Those two areas consume more than two-thirds of California’s general fund spending all by themselves.

Toss in higher education — community colleges, UC and CSU, for another $22.7 billion — and you’re talking about 78 cents of every general fund dollar.

Palmer also said that the state refunded $18.1 billion to taxpayers in recent years, and footed “additional and substantial” costs targeting homelessness and housing availability and affordability.

“That’s not to suggest that savings can’t be pursued and achieved … more on that next month in the Governor’s Budget proposal,” Palmer said. “But it does give you some additional context on where the majority of state spending occurs that isn’t evident in David’s Excel exercise.”

(LAO Analyst Ann Hollingshead offered an interesting take on state spending as a share of personal income, which you can see at https://bit.ly/4apb2Hs.)

‘…like a baby’

This doesn’t make critics feel much better.

When we asked Jon Coupal, president of the Howard Jarvis Taxpayers Association, for his thoughts, he directed us to a blistering piece he wrote for this news group’s opinion pages.

“One of Ronald Reagan’s more whimsical quotes is that ‘Government is like a baby; an alimentary canal with a big appetite at one end and no sense of responsibility at the other,’ ” Coupal wrote.

“To the average Californian, it makes no sense that the state went from a nearly $100 billion surplus to a $68 billion ‘deficit’ in just 18 months. How could this possibly happen? The answer is that the government’s definition of a ‘deficit’ bears absolutely no relationship to the commonsense understanding of the term.”

Coupal illustrated what’s happening by referencing a family budget. There are two earners — one who makes, say, $80,000 a year, while the other makes $40,000 — for a total annual income of $120,000.

The lower-paid earner loses his job. But the other gets a raise, doubling her pay. But  rather than live within the new, much higher means, “the family goes crazy and buys a Ferrari, goes out to eat at nice restaurants every night, and takes trips to exotic locations.” Spending exceeds earnings by, say, $100,000.

“The question now is, does this couple really have a $100,000 deficit?” he writes. “To the average common-sense Californian, the answer is of course not. They just lacked the discipline to restrain their spending even when the available revenue went way up. This, in a nutshell, is California’s version of ‘deficit’ … spending is far outstripping the vast year-over-year increases in tax revenue.”

In 2013, then-Lt. Gov. Gavin Newsom published “Citizenville,” a book where he argued for a government that kept pace with changes elsewhere in society, one that injected a more innovative, entrepreneurial mindset into operations and didn’t rely on bureaucracy and maintaining the status quo.

“California’s budget deficit presents an opportunity to jumpstart Mr. Newsom’s vision,” Crane wrote in a new piece.

Even with the LAO’s forecasted revenue drop, the general fund is still poised to haul in revenues some 35% higher than when Newsom took office. The problem, he said, is that general fund expenditures have grown 60%.

“That presents an opportunity to cut bureaucracy and to innovate to deliver high-quality services at lower cost,” Crane wrote. “Since Mr. Newsom took office, the Executive Branch has added 40,000 employees and increased annual spending on salaries and benefits to $42 billion. Mr. Newsom must know from his own experience in business that wage and staffing increases should be correlated with increases in productivity but all too often, wage and staffing increases in California politics have been correlated not with productivity but rather with political support.

“Mr. Newsom and legislative leaders can eradicate that craven practice by reducing staffing and salaries to levels actually needed to provide productive services. The same discipline must be applied to contractors hired by the state and any recipient of state dollars, including local and county governments who direct billions of dollars to politically active non-governmental organizations that aren’t being held accountable.”

The state (and local governments) could follow the city of Glendale’s lead in eliminating unnecessary spending on health care for retired state employees, which takes $3.6 billion per year from the general fund “and is unnecessary because of generous subsidies available through the federal government under Medicare and Obamacare and from new employers in the case of retired employees who take new jobs,” he wrote.

The greatest need for innovation is in the K-12 school system, “a sadly sclerotic system providing poor service to millions of California kids entering a highly competitive world,” Crane wrote. “The governor and legislature should treat K-12 more like Medicare, Obamacare and Medi-Cal, which are government-funded programs that do not limit enrollees to government-run providers….

“I know this won’t be easy,” Crane wrote. “In 2004, I worked for Governor Arnold Schwarzenegger in addressing a large budget deficit inherited from Governor Gray Davis. Instead of cutting bureaucracy and innovating public services as I propose here, we refinanced the deficit. The difference is that Mr. Schwarzenegger is a Republican who had no chance to convince Democrats in the majority to make changes that would draw the ire of government employee unions. Mr. Newsom is in a different position. Like Nixon to China, he does have that chance. Let’s hope he takes it.”

Coupal, of the Howard Jarvis Taxpayers Association, said that other states are pursuing tax-cutting strategies that are resulting in high levels of revenue. “Their leaders know what average American families know: healthy budgets require spending discipline. In other words, don’t be a baby.”

Source: Orange County Register