Thursday, May 21, 2009

California is a fiscal mess: it needs a grand bargain that will never happen

Californians just voted down ballot initiatives whose purpose was to bring fiscal balance to California. While I voted for them, I understand why the electorate (thhe small share that voted anyway) didn't like them. They were poorly worded (as are many initiatives), and still didn't get at the fundamental problems facing California. California ranks fourth in the country in per capita state and local government spending, and yet government services--particularly schools--are disappointing.

But voters themselves are partly responsible for the mess California finds itself in. Proposition 13, passed 31 years ago, leaves California with a property tax system that is inequitable, and a school funding mechanism that decouples funding from performance. Bill Fischel and others have shown that schools funded with local revenues--particularly property tax revenues--perform better than schools that are funded remotely. Because property taxes are so limited in California (one pays property taxes based on the value of a house at the time of purchase, rather than current value), a large share of school funding flows through Sacramento. When people's houses are paying for school, they have a strong incentive to make sure the benefits provided by the schools are larger than the taxes they are paying, lest their property values fall. I have little doubt that one of the reasons California public schools--once among the best in the country--have fallen so far is because of how they are funded (note: using property taxes to fund schools does create a problem for those places where property values are low, so there is a role for some state funding of schools. I will write more about this in another post).

On the other hand, it is also striking how hide-bound and inflexible public employees unions behave in California. When I ask long-term Californians why the state has such large fiscal problems, they almost inevitably list the Prison Guards Union toward the top of the list. When Mayor Villaraigosa suggested that city employees in Los Angeles take pay cuts so that he wouldn't have to lay people off, the unions balked. When I listen to union officials on the radio, it is clear that they place the interests of the median voter in their union above those of the state (this is only natural).

For California ever to return to fiscal stability, it will need to repeal Proposition 13 and reign in its unions. To put it crudely, the right would dislike the first of these ideas, the left would dislike the second. This is why the ingredients of a grand bargain would be to do something about both. Unfortunately, because both have strong constituencies behind them, it is doubtful that anything ever will happen, and California will lurch from crisis to crisis.

Despite this, I like living here...


Anonymous said...

I agree with your post - but I also think Term Limits screwed up the governing process and lost the institutional memory of the legislature. As a 48-year old native Californian and UC graduate living in a great school district, I am deeply concerned over the future of this state.

Unknown said...

What is needed is what won't happen (as you already point out): we need a split roll property tax (with commercial property being gradually raised to current market value) and limits on residential property (including multi-tenant). But of course what most proponents of this policy don't take into consideration is the pass-through effect - when Disneyland's property tax gets up to current value, today's $79 daily pass is most likely tomorrow's $179 daily pass.... Ah well, the conundrum of taxes rears its ugly head yet again... (but don't get me started on the Prison Guards union!!!)

Anonymous said...

Wisconsin is not better fiscally per person and is not a rich state. California is one of the richest countries in the world if it were to stand alone, it is hard to see where its problems are any worse then any other state's. The difference being that California can tap multiple wells of revenue to solve its problems, and that it is one of the only states that can grow its way out of its fiscal problems.

Does your argument about the property tax and schools also implicitly support vouchers or choice because you are giving the parents a vested financial interest in the school they choose?

Anonymous said...

I dunno, Richard, when I say things like this about Prop 13, people look at me like I am crazy and say things like "Prop 13 was the best thing the state ever did." And these aren't ideologues--some are people I usually think have two brain cells to rub together. They go into long, convoluted explanations about it, none of which jive with what little I know about public finance...and in the end from what I can tell, the tortured reasoning boils down to "Prop 13 enabled me to become an instant millionaire by virtue of inheriting my parent's 1,000 sq.ft house in Santa Monica and thus it must have enormous benefits for one and all." I would like to see a behavioral economics study on how people actually perceive fairness in this type of situation, when the payouts can be large and perceived as widely distributed (i.e., "my other three childhood friends are also millionaires by virtue of inheriting their parents' houses in Santa Monica and so we're all living in gravy now!")

So yeah, that law isn't going anywhere.

Lisa from RGL

Evan Ravitz said...

NONE of the 6 CA ballot measures were citizen "ballot initiatives." ALL were referendums put on the ballot by the legislature. But citizens WILL be blamed for what the leg. did, because of this almost-universal misreporting. Politicians who are trying to make the initiative process even harder in the future always claim "too many initiatives."

If you doubt me, go to the National Conference of State Legislatures database of all ballot measures, and search for CA measures of all types in 2009. You'll see:

People interested in BETTER ballot initiatives, see

Unknown said...

This is a good quick summary of the current situation in CA. Having lived in another state for 6 years now, it's interesting (and saddening) to watch the struggles from the outside.

It seems that the flaw in Prop 13 was not providing an alternate means of securing public school funding. WHY creating and funding a world-class education system is not a tip-top priority in our country, I will never know.

Furthermore, while the 6 CA ballot measures may have been initiated by the legislature, they were voted in and legitimized by the citizens. Citizens should indeed be blamed until they demand clearly-written legislature and the behavior/interest expected of public officials.


Anonymous said...

Being a relative newcomer to California I initially was very critical of Prop 13 (and to some extent still am). However, I dont think it is the problem (I read that commercial property comes in another category, AB80?). After all, prop 13 put in a 2% increase ini taxes YOY. So why are expenditures going up WAY over that limit? Because of overpopulation? because of low income people using up school resources? because of overstrict 3 strikes laws? because of grand agreements made with unions that cannot be accomodated in the budget? Why is 2% YOY increase (and actually a lot more because of huge amount of RE transactions) not enough to take care of the state budget? I need a clearer answer than Prop 13.