CA tax increases fund unaccountable spending machine

Nov. 20, 2012

By Mark Landsbaum

On Nov. 6, Californians voted to raise taxes, but weren’t told the whole story. They repeatedly were told their state government was frugal to the point of pain, yet still in dire need of more tax money.

They were not told nearly as often that California state government spending has swollen like an infected boil, even as those doing the spending plead poverty.

If voters had been more aware of the full scope of the state’s spending spree, would the tax increases have had a chance? Or did they give the government the benefit of the doubt and swallow the line about trusted public servants with barely enough cash to scrape by?

The $6 billion a year tax from Gov. Jerry Brown’s Proposition 30 will increase income taxes substantially for people earning more than $250,000 a year, and increase the nation’s highest state sales tax by another quarter cent.

The entire justification for tax increases was that the state government has in good faith made deep spending cuts, reducing general fund expenditures from a high of $102 billion in fiscal 2007-08 to a mere $91.3 billion in 2012-13. Frugality, the reasoning goes, deserves to be rewarded by giving Sacramento more money to spend.

But how frugal is state government, really? And how aware of that is the public?

The $91.3 billion spent in the general fund is only part of the story. There is another $39.4 billion spent on “special funds,” ostensibly for dedicated purposes such as harbors and watercraft and beverage container recycling. Special fund spending has more than doubled in 10 years. It increased 116 percent during that period, while general fund spending increased 18 percent. That is hardly a picture of frugality. How much did voters hear about that before casting ballots?

Special funds receive far less scrutiny than the general fund, so much so that nearly $54 million in two Department of Parks and Recreation special funds was discovered after having “been deliberately hidden from the governor’s budget office,” AP reported. On top of that, the state controller’s office and the Department of Finance separately tallied the special funds and came up with totals $2.3 billion apart. Who is watching the store?

Had the press devoted as many column inches and televised minutes to Sacramento’s profligate spending and untrustworthy accounting, would voters have been as willing to increase their taxes? How different might it have been if campaign advertising had stressed the imprudence of turning over more money to a state government that purposely hides millions in secret accounts, and apparently can’t even accurately add up billions in special funds in a way that balances the books?

We are assured, of course, that the state has top people sorting all this out and the 570 special funds that are set apart from the general fund will be more accountable and transparent in the future. But the balloting is over and the higher taxes are approved.

No system

“The Department of Finance presently has no system in place to track how approximately $3.7 billion in special funds are spent by various state departments and agencies,” the California Budget
Fact Check reported over the summer.  The California Legislative Analyst also complained that Legislators “must be able to rely on the accuracy” of budget documents, the implication being they could not.

Former Republican state Sen. Ray Haynes described the special funds as “basically slush funds for the bureaucracy to play with. “Elected and appointed politicians are too lazy, too stupid, or too busy to look into these funds, and the permanent bureaucracy counts on this to avoid scrutiny of how they spend the money in these funds. State government doesn’t need more money, it needs political leaders who will do their job of controlling the bureaucracy, rather than being an apologist for it.”

Spending problem

This is an echo of former Gov. Arnold Schwarzenegger’s laudable proclamation that California doesn’t have a revenue problem, it has a spending problem. That was before Schwarzenegger flip-flopped on that concept and dipped into special funds to “borrow” $350 million to create a one-time spending benefit for the general fund in 2009. He took cash from five special funds supposedly restricted to dedicated purposes, which demonstrated how fungible cash is once it’s deposited in any government account.

The Sacramento Bee shed light on how deceptive it can be to limit the state’s budget discussion to the general fund. “The best example of why the general fund total can be misleading,” the Bee reported earlier this year, “is Brown’s ‘realignment’ of nearly $6 billion in former state general fund programs to local governments. To shift those responsibilities, the state last year created new special fund accounts.”

In short, general fund spending was disguised as special fund spending, and the governor claimed to have cut general fund expenditures. This shell game wasn’t explained in the  ballot language for Prop. 30.

The Bee noted, “[B]udget writers also have relied on creative revenue streams and accounting maneuvers to move programs off the general fund books rather than cut them.” If voters have difficulty following the fiscal shell game, they are in good company. “Frankly, it’s so complex that it defies easy description,” commented a deputy at the LAO.

Prop. 30 proponents pleaded for higher taxes to restore spending that had been cut from education. But it’s worth noting that, under the convoluted formula used to calculate how much schools receive, the shifting of general fund responsibilities to special funds effectively “reduced the amount the state owed K-12 schools and community colleges by $2.1 billion,” the Bee reported.

Perspective

Now for some perspective, also largely absent in November’s tax campaign. Combined general fund and special fund spending increased from $95.7 billion in 2002-03 to $130.7 billion in 2012-13. That’s a 36 percent increase in overall spending.

But that’s not all. After adding in spending for bonds and money channeled to Sacramento from Washington D.C., total state spending soared from $161.5 billion 10 years ago, to $225.3 billion in the current fiscal year. That’s a 39.5 percent jump.

The boasts of spending cuts and cries of poverty seem hollow when total state government expenditures have grown by 39.5 percent. Does this meet anyone’s standard for frugality?

The state’s dire fiscal woes haven’t prevented elected officials from pushing ahead with an unneeded high-speed rail project that has variously been estimated to cost anywhere from $68 billion to $100 billion-plus, and which will drain the general fund of hundreds of millions a year to pay off its bonds.

Then there is this: the current budget “increased spending by 6 percent this year over last year — a remarkable feat in this sour economy,” as the Howard Jarvis Taxpayers Association’s Jon Coupal put it. And despite threats to drastically cut education if Prop. 30 had been defeated, Coupal noted the proposition contains no language requiring such cuts, and “the governor and the Legislature can immediately go back in and fully fund education.”

Next time voters are asked to raise taxes, they ought to factor in not just the bullying threats to cut schools funding, but also the deceitful claims of poverty and deceptive manipulation of finances.

That kind of disingenuous behavior also throws a different light on Sacramento’s age-old problem of rosy revenue forecasts that always seem to fall short. At best that’s ineptitude. At worst…?

How much should voters trust politicians who repeatedly approve budgets based on inflated revenue estimates that don’t materialize? Shouldn’t Sacramento err on the conservative side, rather than imprudently expect money that year after year doesn’t show up?

Brown had difficulty branding Prop. 30, which alternately was advanced to balance the budget, to restore education cuts, to create jobs (government jobs, of course) and even to boost businesses (after all, school children grow up to be adult employees).

Was all of this incompetence? Or something worse? Is there anything about this scenario that should have persuaded voters to tax themselves more to send Sacramento more money to shuffle among its myriad funds? Will voters get the full story next time?

Mark Landsbaum is an editorial writer at the Orange County Register.