Governor’s budget is good news not because it’s bigger–but because it’s better

150 150 Lenny Mendonca and Pete Weber

(Photo Credit: Violeta Vaqueiro)

For almost 20 years, California’s state budget has been locked in the same cycle: In bad times, governors divide the pain. When dollars are flowing again, they divide the spoils—often at the cost of the state’s long-term fiscal stability.

As it was, so it shall be, say the cynics. It’s just politics, right?

Maybe not. In a remarkably refreshing budget proposal released last week, Governor Jerry Brown has demonstrated another way to build a state spending plan—using billions of dollars in unexpected revenue this year to make the budget not just bigger, but better.

In Boom, Bust, Repeat?, CA Fwd urged budget-makers to remember the times the state has been in this same situation—with the economy expanding and the state’s volatile revenue system overflowing—only to build budgets that crumbled in the face of the next recession. The five-part series highlighted ideas for spending this year’s spike in revenues (now over $6 billion higher than expected in January) on one-time investments—paying down debt, improving performance, and avoiding spending on major new programs that can’t be sustained.

The governor’s budget doesn’t just embrace this approach—it takes it further than any California budget we can remember. As budget season begins in earnest, we encourage the Legislature to do the same.

One-time spending

“One thing we know,” the governor said last week, “is that when governors leave town with big deficits, they’re more scorned than praised. People expect the chief executive to manage, and the only way to manage the roller coaster we have is to one, build up a rainy day fund, and two, avoid embarking on new programs.”

The proposal would build a reserve of at least $3.5 billion by year’s end and adopt a spending philosophy that breaks from California’s history of fiscal booms and busts. “Too often in the past, state government has made ongoing commitments based upon what turned out be temporary spikes in revenues—a mistake this budget attempts to avoid,” the budget says in its introduction.

Instead, the budget outlines a collection of prudent ideas for spending new revenues to reduce long-term liabilities, lower operating costs, and improve program results. The phrase “one-time” appears in two dozen different places—from “one-time” resources to support K-12 schools and special education programs to “one-time” money to combat the drought.

This isn’t just lip service to fiscal sustainability. The fine print reveals case after case of innovative ideas, at least for government, for building a budget that will last—even if the economic boom does not. Three of the boldest examples:

1. Higher education

The governor’s deal with the University of California system has made headlines for holding tuition flat in exchange for more funding. But the details are more telling: While ongoing funding will increase only slightly (by $119.5 million), nearly half of these revenues will be spent on one-time expenditures such as deferred maintenance and energy efficiency projects. Other new state expenditures ($96 million this year and another $340 million in the next two years) will come from the portion of the budget reserve that can be used to pay down debt—and will pay down UC’s unfunded pension liabilities. In return, UC will modify its pension system, including a cap on pensions for new hires.

This alone could stand as an impressive example of smart budgeting—especially since a similar approach has been applied to the California State University system’s growing pension obligations. But the deal also ties funding to innovations that will improve performance and increase access:

  • Transfers: UC has agreed to improve its process for students transferring from CSUs and community colleges, committing to admit one transfer for every two freshmen.
  • Time-to-degree: Both the CSU and UC systems committed to shortening the time it takes students to get a degree, with every UC campus agreeing to a “comprehensive review” of the courses needed to graduate—part of an effort to move more students through the system more quickly. Of the 37,000 students who entered a UC as freshmen in 2008, only 62 percent graduated in four years, while another 21 percent graduated in six years. As the budget puts it: “Improving four-year completion even modestly would open up admission for hundreds to thousands of new freshmen and transfer students.”
  • Other new approaches: The budget deal also requires UC to pilot new technology that will make administration more efficient, test alternative pricing models on several campuses starting next year, and expand the use of hybrid online courses in “strategic areas where high demand exists.” Finally, it sets aside additional funding to do a follow-up round of last year’s $50 million innovation awards—a competitive grant program that brings community colleges, CSUs, and UCs together to improve higher education outcomes.

2. Taking on poverty

Faced with lingering poverty in many parts of California, the governor has been pressured to put more money into safety net programs—which the state spent nearly $50 billion on last year. Instead, he proposed a different approach: an Earned Income Tax Credit for working families. The credit applies to households earning less than $13,870, providing a cash benefit of $460 a year (or as much as $2,600, depending on circumstances). At a cost of $380 million this year, the credit will support an estimated 825,000 families—or about 2 million people—allowing recipients to use the cash benefits for child care, transportation, or any other purpose that best serves their needs. Unlike most tax credits that operate as entitlements, this credit will be set annually in the Budget Act.

With nearly 9 million Californians living in poverty, the EITC is a fiscally responsible step. “It’s not trivial,” the governor said last week. “And for families who get it, it means a lot.” As a tax credit, the Administration says the program will also reduce the amount of money the state owes to schools through Proposition 98—essentially using this year’s one-time revenues to support those struggling the most.

The same principle applies to another provision intended to help low-income Californians: an amnesty program for court-ordered debt. The program would reduce the amount owed on fees associated with, for example, unpaid parking tickets, by as much as 50 percent. An estimated 4.2 million Californians currently have suspended licenses because they can’t afford to pay fines. “If you get someone making $10,000 a year, and you saddle them with $400…I think this amnesty could be a good thing,” said the governor. The Administration projects the program will generate as much as $150 million, eliminating structural deficits in several budget funds, while also providing financial relief to thousands of Californians.                          

3. K-12 education

While the constitution requires much of this year’s revenue windfall to go to schools, the proposal finds ways to balance local control with the strong likelihood that some of these funds will disappear in the next recession. Over a two-year period, the budget sets aside an additional $6.1 billion in funding for schools, but only $2.7 billion is ongoing spending—meaning it can be used however schools see fit, on classrooms, teacher salaries, or administration. The rest ($3.5 billion) will go into one-time implementation of the state’s new academic standards for English and math—discretionary funds districts can use for professional development, to support beginning teachers, and to purchase instruction materials and technology.

This is similar to the approach we championed in Boom, Bust, Repeat?: If these funds disappear in a year or two—which has happened in the past—their absence won’t result in waves of life-disrupting pink slips.

The budget includes a variety of other one-time school spending innovations, including:

  • Paying down debts: After years of deferred payments during the Great Recession that totaled nearly $11 billion in 2011, the governor’s budget has reduced the lingering debt the state owes to schools to $772 million. (To describe paying down debts as “innovative” may seem ludicrous to some, but the fact is that it is novel in California’s recent fiscal history.)
  • Special education: More than $60 million is set aside for implementing the just-released recommendations of the California Special Education Taskforce, which will support early learning, evidence-based school and classroom practices, educator preparation and professional learning, assessments and accountability structures, family and student engagement, and special education financing.
  • Grant programs: The budget expands a successful career technical education grant program, setting aside $400 million this year and an additional $300 million over the next two years. It also creates a $500 million block grant for adult education, designed to help schools, community colleges, universities, and local workforce investment boards work with social services, public safety agencies, and employers to support workforce training programs for adults.

Where to go from here?

While it is refreshing to see California break out of the boom-and-bust cycle, state government will need to innovate on an even grander scale to meet the economic, environmental, and social challenges ahead.

As the state learns from this first wave of innovative investment, the budget must be reoriented to more aggressively to fund what is working—and expand this approach across the rest of the budget—while reducing spending on things that aren’t. The governor’s proposals will do this in some key areas—tying higher education funding, in particular, to expanding access and shortening time to degree. The state should explore similar opportunities in its health care, poverty reduction, and corrections programs—looking for ways to deliver better health outcomes, put citizens on a path to self-sufficiency, and reduce recidivism. The governor’s bold climate change efforts will also require continually aligning incentives to efficiently reduce emissions—without hurting job creation.

The budget wisely proposes to use this year’s unexpected revenues to begin this process. Now we must take the lessons learned and apply it elsewhere in the budget.

The same is true of many of the state’s other long-term needs—such as unfunded pension and health care liabilities and deferred infrastructure investment—which cannot be resolved with one-time spending. In the Financing the Future series, CA Fwd estimates that $853 billion is needed for transportation, water and K-12 school facilities over the next decade. That level of investment will require a combination of public funding and private capital structured through a variety of partnerships that accelerate the governor’s commitment to tying funding to improved results.

Looking ahead, we can see that much more needs to be done to build a fiscal foundation for lasting prosperity. The governor’s May budget proposal is a good place to start.

Lenny Mendonca is Co-Chair of the California Forward Leadership Council and former director of McKinsey & Company. Pete Weber is Co-Chair of the California Forward Leadership Council and former Executive Committee Chair of the California Partnership for the San Joaquin Valley.


Lenny Mendonca and Pete Weber

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