The budget czar rules

Hang onto your wallets.

Unless Gov. Gray Davis comes to work one morning to find that someone has parked a dump truck full of thousand-dollar bills on the Capitol steps, the state’s worst cash crunch ever won’t have a happy ending.

As they were last year, the budget battles will be ugly to watch and produce a result nobody likes. The failure lies in the inherently polarizing process itself as much as in the personalities involved.

But instead of simply complaining, like everyone else, we decided to take a commonsense approach—unburdened by politics—and cook up our own plan.

Participating in the process requires a little suspension of disbelief. Namely, you have to assume that your great ideas and bold moves won’t be killed by the political calculations and petty grudges that always intrude on the sausage making.

So, we created the Office of the Omnipotent Budget Czar or, if you please, “the czar.” Blessed with the total power known only to pharaohs and independent counsels, the czar will cut this program and hike that tax without giving a hoot about what lobbyists, corporations, unions, taxpayers, campaign donors, advocates, local governments, committee chairs, political parties or media pundits have to say. Let them cluck their tongues and vow revenge. The czar would never stoop to running for office and so is immune to criticism.

First, the czar will recap how the situation came to this and why he needed to seize power.

In an uncertain time, this much is certain: The process of putting together this year’s state budget is going to be uglier and more awkward than a platypus on a unicycle—which, come to think of it, is a pretty good metaphor for the process that produced a rather Frankenstein-looking budget last year.

Regarded by just about everyone at the Capitol as a disaster, the budget—finally approved two months behind schedule—mortgaged the future to pay for the present and relied on a Rube Goldberg-like contraption of fiscal chicanery to do so. Even worse, grabbing at easy answers last year compounded the problem this year, which means this year’s budget hole is essentially two years’ worth of shortfalls rolled into one. The governor, trying at the time to get votes for a second term without mentioning such unpleasantness as cuts and taxes, deserves most of the blame for cooking the books, but legislators hardly rode to the rescue.

This year, it’s hard to trust a governor who had lobbyists helping him write the budget and who won’t show the math he used to calculate a $35 billion shortfall. That number, by the way, refers to an 18-month period. For the sake of this exercise, the czar will address only the 2003-04 fiscal year, which is $24.4 billion short.

The governor’s number is higher in part because he’s not optimistic about the pace of recovery in California, where the $1.5 trillion economy is still down for the count after a wave of dotcom failures, precipitous stock-market drops, energy rip-offs, accounting scandals and, of course, 9/11. And, really, economists can’t see more than six months out anyway, especially when a new terror attack or war could flush the fragile recovery in an instant.

That brings us to the 2003-04 budget. The governor kicked off the process Jan. 10 by putting out his plan, but it’s a safe assumption that the final version will bear less resemblance to the original than Michael Jackson’s nose does to its former self.

Now the trench warfare begins. Special-interest groups all say someone else should take a hit. And, with just three of the last 16 budgets signed by the June 30 deadline, the game surely will go into overtime. Democrats have a smaller majority to leverage and need a two-thirds vote to pass a budget, and Republicans are less likely to break ranks.

Republicans also oppose any new taxes, which are a virtual certainty. Even economist Arthur B. Laffer, a Reagan economic adviser and the so-called “father of supply-side economics,” says tax hikes in California are unavoidable. “Trying to solve the fiscal crisis solely by spending cuts would require a 45-percent cut,” Laffer wrote in a Jan. 13 Wall Street Journal op-ed piece. “We all know that ain’t gonna happen.”

Republicans want cuts and, as of this writing, they’re crafting a plan, but they won’t say where those cuts should be. Democrats want to spare education and social-services spending, but that’s a fantasy, too. And they don’t have a plan, either, though the Latino caucus claims it’s writing one.

The same is true for all the groups crying out about some cut or another: They have no concrete plans. “Cuts in classroom spending today spell disaster for our state tomorrow,” the California Teachers Association warns in expensive television advertising spots. The teachers want to spare schools but, when asked, won’t say how.

So, the czar called the other whiny CTA, the California Taxpayers Association. Its response? Generalities. But don’t raise taxes.

The one exception is state Sen. Dean Florez, D-Shafter, who issued his own modestly titled “Realistic Budget Plan” in December. But it’s not that realistic. Florez mostly wants tax hikes.

This stuff isn’t easy. Even $1 billion of the governor’s suggested cuts—grabbing redevelopment money and cutting teachers’ retirement plans—probably aren’t even legal, according to the state’s legislative analyst, Elizabeth Hill.

So, this is how the czar will do it: We’re going to consider everything, we’re going to gore your favorite oxen, and you’re going to like it because you can’t argue with a czar.

This plan will not be a dollar-by-dollar accounting of state spending, however. And it’s not based on a bunch of Arthur Andersen-style accounting tricks or big loans. Most of those solutions were used up last year anyway.

Rather, the czar will demonstrate that doing the impossible isn’t impossible after all, if you have the nerve.

This is a guerrilla effort. Hundreds of Department of Finance number crunchers work on the governor’s budget. The czar is doing this with some budget reports, legislative analyst’s publications, chats with a few friendly state staffers and a nifty Excel spreadsheet.

Speaking of the legislative analyst, she is our Rasputin, and it should be noted that many of the numbers cited here came from her office. The czar got other numbers from the state auditor, the Department of Finance and other sources. All you need to know is that they’re not supposed to be exact numbers. Please don’t flood the newsroom with detailed descriptions of our accounting errors, unless they’re accompanied by your own plan. Czars like letters to the editor filled with crankiness or praise, not nitpicking.

First, the painful cuts. These are deep and gruesome, so squeamish bleeding hearts may want to skip ahead to the tax hikes.

Cuts
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Education
Nothing’s worse than watching students and schools take a hit during tough times. Already, teachers face everyday indignities such as copy-machine rationing. On the bright side, per-pupil spending is up in recent years, giving us the dubious honor of pulling away from states like Mississippi.

But it’s time for the czar to suspend Proposition 98, a voter-approved mandate that, in all of its complexity, basically says that 40 percent of the general fund must go to schools. That only handcuffs us during lean years. So, the czar decrees that K-12 schools and community colleges will have to suck it up and take a 5-percent across-the-board cut. Most of the decision making happens at the local level anyway, so we’ll let school boards decide whether they want to dismiss kids a week early, dock salaries or let someone build apartments on the baseball diamond.

Oh, and one more thing: Class-size reduction is a great program, but at a time like this putting a couple extra kids in a class is also a great way to save money. So, schools will have to lose $1.8 billion they would have used for that.

Total reduction: $4.3 billion

Corrections
It’s not the biggest cut that can be made, but it’s symbolic and, may we say, overdue. Though everyone agrees we should lock up killers, crooks and molesters, many prisoners aren’t in for that stuff, and every one of our 160,000 jailbirds costs taxpayers more than it does to send a kid to Stanford. The total is more than $5.2 billion a year. Davis refuses to cut the Department of Corrections, though it’s probably just a coincidence that the prison guards’ union is one of his biggest donors. So, the czar is sharpening his ax.

A cost-saver for the Department of Corrections would be to drop one year from the sentences of prisoners who aren’t in for serious or violent offenses. Taxpayers won’t be crazy about this, but there are better things to do with the money, and this saves the state $249 million. Next, the czar will subtract some of the money the department spends on what the state auditor called an “exorbitant” amount of overtime every year. The auditor said the department could cut $58 million in this area, so that’s good enough for the czar. The fat raises the governor handed out to his supporters in the prison guards’ union could amount to more than $500 million a year, but that’s not until the 2006-07 budget year.

Oh, and good news for all those undocumented folks from other countries, who make up 13 percent of state prisoners. They’ll be “exported"—presumably to a cell back home. Ordinarily, California would love to pick up those prisoners’ pokey bills. But not this year, when exporting them saves $556 million. This will open a lot of cells around the state, which will let us sell off a facility in the future, such as that crumbling old San Quentin. With czar status, it won’t be hard to turn the facility—located in Marin County, with sweeping views of San Francisco Bay—into condos. Talk about your ultimate gated community.

Total reduction: $863 million

State workers’ pay
This year, the state’s 327,000 employees will take home paychecks totaling about $17 billion, and many employees just got raises. But if the state were one of those big airlines that are constantly hemorrhaging cash, worker bees probably would vote for cuts rather than layoffs. So, in the spirit of pulling through together, everyone from Supreme Court justices to that dude behind the counter at the Department of Motor Vehicles who doesn’t seem to be doing anything will take a 5-percent pay cut for the upcoming fiscal year. The czar needs the $850 million, and workers need to keep their jobs. The czar also needs the $325 million those raises are expected to cost, so those will have to wait a year.

Total reduction: $1.175 billion

Medi-Cal
Cutting Medi-Cal, the state’s $29 billion health-care program for the poor, is the toughest cut of all. No, the czar is no bleeding heart. Cut one state dollar, and one federal dollar disappears with it. Because the bulk of that funding comes from the feds, California’s share is expected to be a slightly less-staggering $10 billion this fiscal year.

In these lousy economic times, caseloads are way up to around 6 million, and so are costs. That’s why the czar needs to take a 21-percent cut from state Medi-Cal spending, which will save $2.1 billion, or about 14 percent of the $29 billion in total spending.

Also, the Department of Health Services agreed in December to clean up its act after a state audit showed the department wasn’t keeping track of what it paid for or what it got for the money. Perhaps our cuts will spur additional efficiency there and will cut down on the fraud the program allows.

Total reduction: $2.1 billion

Suspend optional health services
Under their health-care programs, most states don’t cover services such as acupuncture, dental diagnoses, chiropractic and psychological services. These days, California’s program shouldn’t either. The legislative analyst says we can save $263 million this way. Consider it done.

Total reduction: $263 million

Supplemental Security Income and State Supplementary Program grants for couples
The 220,000 married couples who receive Supplemental Security Income and State Supplementary Program benefits for the poor and disabled take home a far higher amount per person than do individuals who receive these grants. As the legislative analyst suggests, chopping $119 from the $1,332 monthly allocation for couples would keep them still relatively far above the federal poverty guideline, reduce the disparity between couples and individuals and, of course, save $133 million.

Total reduction: $133 million

Roadway preservation
Caltrans spent $2 billion on road preservation in 2002. The czar will take half of that and, to help close the budget hole, lend it to the general fund indefinitely. Taking these special funds, which come mostly from gas taxes, and dumping them into the general fund is unconstitutional, and the czar tries to follow the state constitution, even if he doesn’t have to.

But it seems fair to ask the agency to ease up on the pothole filling for a bit and use the remaining funding to make sure our bridges don’t fall down. This kind of a cut will ripple throughout the state’s economy by, first, idling contractors and suppliers; second, making it harder to move commuters and goods around; and, third, costing more in the long run when we need to catch up. That said, it’s still preferable to stalling capital projects that help move traffic.

Total reduction: $1 billion

Natural resources
Even though divisions of California’s Resources Agency—Fish and Game, Parks and Recreation, and Water Resources—spend $6.5 billion a year, most of their money comes from special revenue sources. That means very little, just 2 percent, comes from the general fund. Still, even though the Resources Agency doesn’t use much of the general fund, that doesn’t mean it can’t help by giving back, say, 10 percent across the board, for a total cut of about $650 million.

Total reduction: $650 million

Government waste
When the czar first looked at one of the suggestions by Senator Florez—"Trimming Waste from Government Operations” to save $1.9 billion—it didn’t make much sense, and Florez didn’t back up the number. Why $1.9 billion instead of $2 billion or $19 billion? Then, the czar remembered that czar status is all-powerful, so he reconsidered what Florez said. If Florez is a state senator proposing this with a straight face, why not take his word for it?

Being omnipotent, The Czar will create a czar of his own and put fiscal pit bull Tom McClintock in charge of finding and eliminating waste. He will have sweeping powers and total authority. The Republican senator and failed controller candidate long has been a critic of state spending, so now it’s time for us to put our money where his mouth is.

How do you fund a whole new arm of state bureaucracy? The same way you get whistleblowers to come forward: Give them a cut of the action. So, McClintock and his band of roving auditors will get, say, 5 percent of every wasted dollar they find.

Total reduction: $1.9 billion

Courts
Don’t bang that gavel so hard, your honor; it’s going to have to last you a long time. The czar has ruled in this case, and $506 million will be cut from state courts. That’s one-third of what courts get from the general fund, but it amounts to an 18-percent hit overall. Getting out of this kind of a mess shouldn’t be too hard for the court system. Doubling criminal fines and civil filing fees, for example, would recoup almost half of this cut and might discourage a few lawbreakers and lawyers from filing frivolous lawsuits. Slimming down expenditures could take care of the rest. In any case, judges with gavels can’t overrule czars with axes.

Total reduction: $506 million

New revenue
And now for the really painful part. Reagan did it. Wilson did it. Now the czar is doing it, and history shows that czars aren’t commies. Taxes are going up.
see sidebar for another look

Restore the vehicle license fee
In one episode of The Simpsons, Lisa becomes president in a Jetsons-like future, and she must soften the blow of a tax hike by labeling it a “temporary refund adjustment.” This year in California, that kind of doublespeak is just what we need when addressing the vehicle license fee. That’s the annual registration fee every car owner shells out to the DMV.

The recent history of the VLF is too boring and complicated to talk about, but basically it’s something that the Legislature has been tinkering with for years and has cut by two-thirds since 1998. And, though Joe Motorist is surely grateful for the $124 he saves on registering an average-priced car worth $10,000 every year, the state cash crunch makes it hard not to revisit the fee. Especially when reversing the reduction—you know, the temporary refund adjustment—would recover $3.9 billion.

Total increase: $3.9 billion

Cigarette tax
Last year, during what was then considered a bad crunch, Assembly Speaker Herb Wesson, D-Culver City, pushed a new $2.13 tax on a pack of smokes. In the confusion, the idea came and went without serious consideration. But the czar is willing to give it a try, even if it gives the powerful tobacco lobby a hacking cough and especially if it’s worth, as Wesson said, $1.7 billion. Maybe we can use some of that money to go after the smokes-smugglers that will be everywhere.

Plus, now that Davis and the lawmakers have pissed away the billions we’re supposed to get from the tobacco settlement in coming years for a momentary boost during last year’s crunch, it will be nice to see some tobacco money again.

Total increase: $1.7 billion

Soda tax
Last year, Sen. Deborah Ortiz, D-Sacramento, enraged plenty of folks, including Rush Limbaugh, by pitching a tax of 2 cents on a can of soda. She dropped the idea mid-year and later amended the bill to push soft-drink machines out of schools instead. Still, the soda tax would have raised a cool $342 million to help fight childhood obesity. The czar will resurrect her bill, double it to raise $684 million and dump the proceeds into the general fund.

Once the state is back to fiscal sanity, we’ll put that cash where Ortiz wanted it to go: toward slimming down kids. When all the chubby kids are thin again, we’ll abolish the tax. Meanwhile, drink a lot of water.

Total increase: $684 million

Oil tax
During these dark economic times, a budget solution shouldn’t chase businesses out of the state. That said, the czar will tax something that goes untaxed in the Golden State: black gold. After all, oil companies can’t flee the state if the oil’s buried here, right? Even though California is the third-largest oil-producing state, it’s one of the only states that don’t tax what’s pumped out of the ground (on private land, anyway). The biggest oil states, Alaska and Texas, get rich by taxing oil. Instead of paying income taxes, all Alaskans get a $1,850 check from the state every year. In that spirit, the czar decrees a $1-per-barrel tax on the 300 million barrels pumped here each year. Next, it’s a 57-cents-per-barrel tax on the 700 million barrels we refine, for $400 million.

Total increase: $700 million

Homeland-security reimbursement
The federal government owes us this money, and we’re taking it back. The czar is heading to Washington to make a very persuasive case to George W. to get back what we’re owed for all those terrorism bills the California Highway Patrol ran up with increased patrols, inspections and overtime.

Total increase: $350 million

Hike University of California and California State University fees
Even if California doubled tuition at state universities, attending them would still be a great deal for in-state students. Some University of California campuses are among the best schools in the world, and they’re a hell of a bargain. So, the czar doesn’t feel so bad hiking fees systemwide by 10 percent starting this fall, especially if it gets us $151 million.

After big fee hikes in the early 1990s, it’s been getting cheaper and cheaper to attend state universities, and tuition remains well below average. Resident undergrads at UC schools pay less than $4,000 a year, and California State University students pay less than $2,000. And, though student fees have stayed low, state funding for the UC and CSU systems has remained flat for three years. So, instead of giving these schools a big chop in funding, it’s probably fair to ask students to pony up a little more.

Total increase: $151 million

Firefighting fees
One natural place to fill in budget holes is to get some state services to pay for themselves. For example, the legislative analyst recommends passing on some of what the California Department of Forestry and Fire Protection spends on fighting wildfires, by getting some of the money from the property owners who benefit most from fire protection, as several other big Western states do. The czar will copycat methods from other states: a logging fee, per-acre assessment and development surcharge.

The state department handles fires in one-third of the state, which is mostly private land, and firefighting costs have jumped in recent years. Passing on half the cost gets the czar $176 million. Next, it’s time to add a fee to cover the cost of issuing logging permits and keeping an eye on loggers. That nets $22 million.

Total increase: $198 million

Half-soak the rich
Taxing the wealthy is as unpredictable as it is potentially lucrative, so the czar thinks taxing them more isn’t wise. This also isn’t a good time to spook the herd and send Mr. and Mrs. Moneybags—or their mailing addresses, anyway—off to Nevada. Some of those bazillionaires pay more taxes than a factory full of workers.

Still, federal taxes are dropping like Bush administration economic advisers, and the czar already hit the poor and middle class. So, the czar dug up a failed proposal that Senate President John Burton, who occasionally acts like a czar, put out last year. Now, the top bracket, paying 9.3 percent in taxes, starts at around the $38,000 income level. Burton wanted a 10-percent bracket for individuals who earn $130,000 or more and an 11-percent bracket for those who earn $260,000 or more. The Czar will compromise, hitting those earners for 9.65 percent and 10.15 percent, respectively, for $1.15 billion. And, as Burton wanted, this ends when fiscal sanity returns.

Also, country clubbers who want an exemption may get one. All they need to do is stand up in front of a room full of sick people who are about to lose their Medi-Cal benefits and explain why they need the money more. Any takers?

Total increase: $1.15 billion

Amusement park tax
Tourism is an essential component of the California economy. And even though this sector took a big hit after the terror attacks, it’s finally getting back on its feet. So, now that it’s healthier, the czar thinks it’s time to capitalize on the state’s many, ahem, Goofy offerings by turning them into a new revenue stream. Expanding the sales tax to amusement and recreation services would bring in about $2 billion.

And who knows—maybe there are a few extra bucks to spice up Disney’s lame new California Adventure by adding a roller coaster mimicking the unpredictable gyrations of a state tax structure that fluctuates wildly during different economic climes. Perhaps the czar will call it The Platypus.

Total increase: $2 billion

Eliminate the teacher tax credit
Just thinking about revoking the teacher tax credit for a second year in a row is contemptible. But teachers surely would agree that it’s either them or students and would gladly give the czar their $180 million.

Total increase: $180 million

Eliminate the manufacturers’ investment credit
This tax break was supposed to create more manufacturing jobs. It didn’t, which makes it a giveaway. Its sunset is in 2004, but the czar can’t wait that long for the half-billion it would mean. Also, though the czar’s plan is relatively kind to businesses, they still have to take their lumps like everyone else. No complaining.

Total increase: $500 million

There you have it: a plan with which everyone can agree to disagree. If both sides of the ideological divide complain, the czar has done a good job, even if he lost a little sleep.

As the czar put this plan together, he still hadn’t seen any other complete plans. And neither had the governor, who dared critics to come up with their own budgets.

“Give me a proposal that eliminates a $35 billion shortfall and the structural deficit,” Davis told a gathering of newspaper publishers last week, “and I’ll sign it.”

The czar’s plan addresses the 2003-04 fiscal year and doesn’t address structural issues, but we sent it to the governor anyway. Spokesman Steve Maviglio responded by e-mail. “You need to define ‘cut government waste,’ “ Maviglio wrote. “It would have to pass the Legislature. The Republicans have said no to about two-thirds of your budget; hence, it would never make it to his desk to sign.”

So, Davis and the Republicans don’t like it. Perfect. A few brainiacs who took a sneak peak at the plan generally conceded that it’s a compromise. That’s good enough for the czar.

The czar isn’t happy about hiking taxes in a struggling economy. The czar tried to mitigate this by not taxing people too heavily or hitting businesses too hard.

The same goes for slashing health and welfare spending. Nobody can stomach it; these cuts are both ill-advised and insensitive. But it’s the second-largest slice of the budget pie, so the czar has to take a bite—even if the aftertaste of predictable consequences lingers.

Sen. John Vasconcellos, D-San Jose, the state’s longest-serving legislator, enumerated in a recent media briefing the reasons why it’s a bad idea to cut things like Medi-Cal. Cuts to the program, Vasconcellos said, push providers to stop accepting Medi-Cal patients, which pushes them into far more expensive emergency rooms. In general, cutting off medical supplies in the short term leads to big expenses in the long term. Cutting money for an older person, he added, may save $750 a month, but it becomes more likely that the person will become institutionalized, thereby costing the state $3,300 a month.

There’s nothing pleasant about doing stuff like this, but there’s no way around it, even for the czar.

The czar’s next task will be to make reforms that ensure this never happens again. The czar is considering a lot of things, from generally broadening the tax base to reduce reliance on top earners (even though the czar went after them this time) to one of those spending-cap proposals that are floating around. What would be really nice would be to set rules for handling a surplus. Perhaps we could set up a special overflow fund for surpluses from volatile sources; it would be directed only toward building cash reserves or capital improvements. We’ll see.

But in the meantime, as the czar warned earlier, hang onto your wallets.