CA budget tops sensible limits

TC-00065-D~Bloated-Pig-Posters

MAY 27, 2010

By JOHN SEILER

Budget time. So I thought I would revisit an analytical tool I devised a few years ago to help better understand the California state budget.

Back in the early 2000s, I was pouring over state government budget documents and noticed something peculiar: whenever state general-fund spending rose above 6.2 percent of personal income, the state budget went into deficit. But so long as the general-fund spending stayed below 6.2 percent, things were OK.

It was sort of like a speed limit: Go beyond it and you get in trouble.

I wrote some articles on it for the Orange County Register, where I was an editorial writer. I then called it “the 6.2 percent solution” (to California’s budget problem). The name was a play on Sherlock Holmes’ 7 percent solution of cocaine he was addicted to, and for which he was cured by Sigmund Freud in the 1976 movie, “The Seven Percent Solution.”

In early 2005, Tom Campbell, then the budget director for Gov. Schwarzenegger (and now running for U.S. Senate), visited us for an editorial board meeting. I showed him the graph.

“That’s Seiler’s Law,” Campbell said. “Like Moore’s Law in computing.” And I’ve kept the name ever since. The only earlier version of this analysis still online I did for for Jon Fleischman’s Flashreport three years ago, before the economy fell apart and the deficits soared.

Here’s the graphic I showed Campbell, updated to the 2010-11 budget, as proposed by Gov. Schwarzenegger:

Seiler's Law Chart_29309_image001

The data through fiscal 2009-10, ending this June 30, come from the governor’s January budget proposal, Section 6, Appendix Page 13, second column from the right.

And the revenue numbers for the next fiscal year come from the governor’s May Revise: A projected $91.5 billion in general-fund spending (p. 9) and personal income of $1,608.8 billion (p. 54).

It should be noted that the governor’s proposed numbers likely will be changed in the actual budget adopted later this year. But this estimate is good enough for now.

A little budget history

To understand where we are today with that 5.7 percent number for the proposed fiscal 2010-2011 budget, which currently is below Seiler’s Law, let’s first go through the budget history of the past 40 years. Look again at the graph above.

The first time the budget went over the 6.2 percent limit was in the early 1980s, as the Gann Limit, passed by voters in November 1979, was kicking in, limiting spending increases to the increases in inflation plus population growth. Spending then leveled off through the rest of the 1980s, only a little above the 6.2 percent limit.

The budget was so tamed that in 1987 the state government refunded $1.1 billion to taxpayers.

Then, in 1990, voters passed Proposition 111, which was sold as a way to build more roads. In fact, it effectively gutted the Gann Limit.

The recession of the early 1990s forced budget cuts that kept the budget below the 6.2 percent limit. But the dot-com boom of the late 1990s brought incredible growth in tax receipts, leading Gov. Gray Davis — and the Legislatures of those days — to go on a spending binge.

In his first two budgets, for fiscal years 1999-2000 and 2000-2001, Davis jacked up spending an incredible 15 percent per year — each year.

In fiscal year 2000-01, the budget ratio shot up to 6.88 percent, way above the 6.2 percent limit.

It couldn’t last. It didn’t last. Davis quickly was running deficits of $40 billion a year, a major factor in his recall in 2003.

Schwarzenegger promised to do better, and for his first couple of years, he did. The ratio dropped below 6.2 percent by fiscal year 2005-06, even though this was a time of prosperity and rising tax receipts. Then, after losing getting wiped out with slate of four reform initiatives in November 2005, Schwarzenegger changed.

In his January 5, 2006 State of the State address, he announced:

I have absorbed my defeat and I have learned my lesson. And the people, who always have the last word, sent a clear message – cut the warfare, cool the rhetoric, find common ground and fix the problems together. So to my fellow Californians, I say, “Message received.”

The “message” Democratic Legislature received was: “I surrender.”

Soon, he was going on a Davis-style spending binge. The budget ratio raced up above the 6.2 percent limit. In Fiscal Year 2006-07, it soared to 6.78 percent. At the time, I predicted massive deficits would return once the economy turned sour.

The ongoing Great Recession hit in 20o8, producing the predictable deficits. To his credit, the governor cut spending last year (along with counterproductive tax cuts) to bring the ratio down below 6.2 percent.

Where we are now

As the budget battle ensues, it’s well to see why the 6.2 percent limit exists. It’s not numerology. It’s just the natural limit of spending the people of California will bear.

It’s like piling straw on a camel’s back. Stay below the 990 pounds most camels can carry, and you can cross a desert. But add the proverbial “final straw” to the camel’s back and it collapses, leaving you to die of thirst far from an oasis. For California, the “straw that broke the camel’s back” is anything above the 6.2 percent limit.

That’s why tax increases, such as the record $13 billion last year, are so futile. The problem is that spending is so high.

Why the dip in the ratio?

A final methodological question remains: During a recession, as tax receipts drop, why is it necessary for the ratio to drop below the 6.2 percent ratio for a few years to bring the budget into balance? Why not just settle for cutting the budget to exactly the 6.2 percent ratio?

I puzzled over this for a while, and recently came up with the reason: It’s like blowing too much money in your family budget, say on an expensive vacation, by maxing out your credit cards. Afterward, you have to cut back for months, even years, to get your family budget back in the black.

Next time, if you’re smart, you’ll skip the trip to Paris and instead take the family to the Grand Canyon. If you don’t, your credit rating drops and you face bankruptcy — just like the state does today.

For the state, the binges of wild spending must be followed by the purges of cutting spending below the 6.2 percent limit.

But there’s good news. In the future, if the state makes sure it never goes above the 6.2 percent limit, then it won’t have massive budget deficits followed by painful cuts.

If it did so, surpluses again would happen. But instead of splurging on them, as Davis and Schwarzenegger did, some of the surplus tax receipts should be put in a “rainy day fund,” the rest refunded to taxpayers, who, after all, pay for everything.

If the extra money is used for more spending, then we would just repeat the budget roller coaster — and the pain of periodic cuts — of the past 20 years.

Seiler’s Law: It’s a limit we can live with.

John Seiler, an editorial writer with The Orange County Register for 19 years, is a reporter and analyst for CalWatchDog.com. His email: [email protected].

6 comments

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  1. StevefromSacto
    StevefromSacto 27 May, 2010, 18:34

    “Then, in 1990, voters passed Proposition 111, which was sold as a way to build more roads. In fact, it effectively gutted the Gann Limit.”

    But it also built needed roads, John. State budgets are not just numbers; they are about meeting the needs of the people of our state.

    I would be thrilled if Californians and their political leaders would sit down and decide the following:

    What public services do we need? How do we pay for them?
    What services can we do without? How do we get rid of them?

    But we can’t have that conversation as long as one side refuses to pay for the programs we need. We can’t make rational decisions when one side declares that health and human services programs are unnecessary but that unlimited spending on prisons is essential.

    I’m sure the elderly Alzheimer’s patient who is deprived of home care or the low-income worker who loses child care will feel better because they are helping us get closer to your magic 6.2 percent.

    Reply this comment
  2. John Seiler
    John Seiler 29 May, 2010, 08:41

    Steve, you are right when you write, “I would be thrilled if Californians and their political leaders would sit down and decide the following: What public services do we need? How do we pay for them? What services can we do without? How do we get rid of them?”

    I would be thrilled, too. And that’s what’s going to happen now that the state is broke.

    You mention my “magic 6.2 percent.” But it isn’t magic. It’s an empirical observation. As I mentioned, it’s like Moore’s Law in physics.

    It’s not cut in stone. So, if you wish, refute it. Find some flaw with it, and I will print it here on CalWatchDog.com, including any graphs you may come up with. I like graphs.

    What’s curious is that my theory now has been tested and validated. I first noticed it back in 2002-03. Since then, we’ve had a major boom-bust cycle with the economy, yet the 6.2% limit has held up well. Spending, for example, has not risen to 8% and stayed there with no budget deficits.

    You write, “I’m sure the elderly Alzheimer’s patient who is deprived of home care or the low-income worker who loses child care will feel better because they are helping us get closer to your magic 6.2 percent.” Well, I’m sure the Alzheimer’s patient doesn’t like it when he falls and breaks a hip. Or the low-income worker doesn’t like it when his child falls down and breaks an arm. Yet the law of gravity is not changed because of their likes and dislikes.

    One of my points was that Seiler’s Law works even if taxes are increased, as they were last year. So, your call to increase taxes again, if heeded, will not bring higher budget revenuess. The budget general-fund spending, whatever you raise in taxes, will not rise for long above the 6.2% of personal income earned by Californians.

    Supposed you quadrupled the income tax rates in California, so that the middle-class tax rate of 9.55% would go to 38.2 percent. Would you get quadruple the tax revenues? Obviously not. The state soon would be hit with 50% unemployment. People would flee even faster than they already are.

    If you want to spend more tax money, you have to expand the tax base. One way would be the revenue-neutral (let me emphasize: it would raise the same amount of money) flat-tax idea of Art Laffer that I wrote about several months ago: http://www.calwatchdog.com/2010/01/15/new-flat-tax-idea-revived/

    But that is highly unlikely to happen, even though Jerry Brown proposed a national flat tax in his 1992 presidential bid.

    The main point of my article is this: There are limits in life. Seiler’s Law is one of them.

    Reply this comment
  3. DavidfromLosGatos
    DavidfromLosGatos 29 May, 2010, 19:43

    John,

    I appreciate your post (and I wish that I only paid 6.2% of my income to California!). But, there’s no point in your trying to explain this to Steve. It’s like trying to teach a pig to read. It wastes your time and bugs the pig.

    I suspect at least half of Californians (probaly at least half of all Americans, for that matter) actually believe that if you quadruple the income tax rate you will quadruple the income taxes collected, or at least double the amount collected. Probably the same half that pays little or no income taxes.

    So, forget quadrupling; get it over with and go to 100%. The feds can do the same thing, so we Californians will owe 200%.

    Imagine all the money that will come in to pay for all the broken hips, arms, hearts, pensions, and so forth. All of our problems will be solved.

    Reply this comment
  4. CalWatchdog
    CalWatchdog Author 14 June, 2010, 21:48

    David,

    Just saw your post. Good points. Thanks.

    — John Seiler

    Reply this comment
  5. AlfromCottonwood
    AlfromCottonwood 15 September, 2010, 04:57

    John, Just found your post and the info in the chart seems exactly what our leaders need to use as a guideline going foward. The budget in CA and the federal budget need two things to be set in stone, a minimum emergency fund to be used only in times of disaster and manditory cuts when revenue falls. We simply cannot spend what we do not have any longer.

    Reply this comment

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