June 17, 2003

LOS ANGELES - Professor Dan Mitchell recently participated in a roundtable discussion at UCLA to talk about the lessons to be learned from the worst financial crisis in California’s history. Moderated by Barbara J. Nelson, dean of the UCLA School of Public Policy and Social Research, the panel also included California Director of Finance Steve Peace, former Speaker of the California State Assembly Robert Hertzberg and UCLA professor emeritus of economics Werner Hirsch.

Questions ranged from how to make California’s budget more “user friendly” and “transparent” to what structural and constitutional changes in budget financing strategies might help prevent a future crisis like the current estimated $38 billion shortfall that California now faces. Below are some thoughts from Professor Mitchell, who holds joint academic appointments at The Anderson School and the UCLA School of Public Policy and Social Research.

How to Avoid Future Budget Crises:
First Give the Governor Budget Authority
and Then Demand Accountability

Daniel J.B. Mitchell
Ho-Su Wu Professor, The Anderson School at UCLA

By now, the basic cause of the California state budget crisis is well known. At the peak of the business cycle, the state was already taking in less in revenue than it was expending. The faltering economy and the loss of taxable gains from the stock market worsened the deficit and brought about the current fiasco. Political analysts blame factors such as voter-approved term limits for legislators, a two-thirds requirement for passing budget bills, and redistricting of the Legislature that removed centrists from the budgetary process.

Although there is much talk about relaxing term limits and changing the two-thirds rule, voters are unlikely to see much virtue in returning to a system of entrenched deal-makers. The old system placed great power in the hands of a few players in the Legislature who were answerable only to voters in their districts, not the statewide electorate. Nowadays, opinion polls and the current recall movement indicate that California’s voters tend to look to one public official — the Governor — to solve the key problems facing the state. When the electricity goes off, or when the budget isn’t passed on time, they blame the Governor.

It is true that Governors are limited to two terms. But in fact only one California governor — Earl Warren — ever served more than eight years. In adopting term limits, the voters were effectively weakening the Legislature relative to the Governor. They wanted someone to be in charge and to be held accountable on a statewide basis. The problem is that the Governor is being held accountable but has only limited budgetary authority.

Under current procedures, the Governor submits a tentative budget to the Legislature in January for the next fiscal year. In May, armed with more recent data, the Governor submits a revised budget. The Legislature is supposed to pass the budget in time for the start of the fiscal year on July 1. But when tough decisions are required, it often experiences paralysis. Last year, for example, no budget was passed until early September, creating a legal limbo and doubts on Wall Street about California’s fiscal agenda. If that scenario repeats this year, the Controller has warned that the state could run out of cash as it exhausts the patience of its Wall Street lenders. And there are more legal problems this time about paying state employees absent a budget, thanks to a recent California Supreme Court decision.

So here is a simple reform — albeit one that would require a constitutional amendment. If as of July 1 of any fiscal year, no budget has been enacted, the Governor’s “May revise” budget would become the state budget until such time as an alternative is enacted. There would then be no legal issues about whether the state could pay its bills since a budget would be in place. And, if the Governor’s budget proposals were fiscally responsible, whatever deficit financing might be needed would be available from a re-assured Wall Street. Moreover, the likelihood that a Governor would be more fiscally responsible would be enhanced since pressure to compromise with the Legislature would be reduced.

Of course, this reform would substantially increase the power of the Governor. Members of the Legislature would know that if they dawdled, or if they proposed a budget the Governor would veto, the Governor’s own budget would become law. Some might be tempted to remain intransigent in order to please a particular interest group. But others might see virtue in having an influence on the final budgetary product.

In any event, a Governor would have substantial leverage in obtaining approval for his/her budget proposals, either through legislation or by default. And the voters clearly want a chief executive they can hold accountable. Under this procedure the Governor would surely be accountable, with all of the perils and rewards that accountability entails. If this reform were in effect today, there would definitely be a budget in place on July 1, 2003. And the “May revise” budget — or whatever budget was enacted — would likely be more fiscally prudent than the current budget proposals of either the Governor or the Legislature.

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