Stupid Things We Do In Sacramento

Monday, June 25, 2012

When guilt is demonstrable, confession is the best bet.

So allow me to confess: as the California’s Director of Finance for four years, I did some stupid things.

Let’s take a few examples and see if they help the casual observer to better understand how government, or at least how the Golden State’s’ budget process works – or fails to work.

1)   The Bullet Train.  Early in the Schwarzenegger Administration, the budget outlook was bad enough that a consensus emerged that we simply could not afford $10 billion in bonds to build a high-speed rail line. Folks at DoF were thrilled because we’d seen the numbers; the bullet train was (and still is) a dead-bang loser. But, in discussing whether to kill the ballot measure altogether or just postpone it to a later election, the newly-elected governor, who still hoped to win friends and influence legislators said almost as an afterthought: “Let’s not kill hope.” The “train to nowhere” is still on the books and set to cost us billions. Sometimes, not killing hope is stupid.

2)   Selling the Lottery.  You may think that our budget situation has long been dire.  You’d be correct in that, but the state’s big political powers – i.e., unions, environmentalists and advocates for tax-breaks – have always assumed better days were just beyond the horizon (or at they least pretend to).  So, when we really started to hit the wall, the pressure was on to find ways to avoid real fixes – i.e., cuts and taxes – and, instead, to find stop gap measures.  Sure, California’s budgets have been rife with stopgaps since at least 2002.  But the proposal to sell the lottery was the mother of them all. Not only did it suffer the same flaw as all stopgaps – postponing real fixes – but also it had an even worse flaw. It was entirely imaginary.  No one really thought it would work constitutionally, politically or financially.  But, to some degree, the skeptics were wrong. The ploy did work in that it postponed tough choices for the brief time that everyone pretended to believe it.

3)   The New Home Tax Credit.  One day, out of the blue and with no forewarning, I was called into the Governor’s Office and placed in front of 20-or-so homebuilders. I was asked to comment on a proposal to provide a large, refundable tax credit to anyone who would buy a newly constructed home. Later, I was told that I had done a great job in explaining that (a) the state was broke and couldn’t afford it, (b) we were in the midst of the largest surplus of housing in the state’s history, and (c) tax credits, especially state tax credits that are not coordinated with federal credits, create far less changed market behavior than they do windfalls to folks who would do whatever the credit tries to incentivize anyway. My pride in this praise was quickly overcome by astonishment when I learned we were going to support the credit. We made the homebuilders feel better, but at a cost of millions to our budget.

4)   Furloughs.  When we finally got desperate enough to cut state workers’ pay, we all understood that furloughs were a stupid way to go about it.  A straight pay cut is always better than a furlough because: (a) pay cuts do not reduce the number or hours worked and therefore do not reduce services to the public; (b) pay cuts provide permanent, ongoing savings, whereas furloughs merely postpone costs because furlough days are saved and used instead of vacation, which builds the employees’ “bank” of credits to be “bought out” upon separation; and (c) furloughs do not reduce the base used to calculate retirement, so they produce no long term pension savings (Gov. Brown’s latest proposals to cut pay would actually provide that the base for retirement not be affected, which makes his idea almost as stupid as ours). So, why did we go with furloughs anyway? Because we didn’t need unions’ permission to do furloughs, whereas pay cuts would have had to go through the union-dominated legislature.

I could go on . . . and on. But the bottom line is this: to a Sacramento outsider, California’s budget seems a simple arithmetic problem, easily fixed with minuses (cuts) and pluses (tax increases).  But political pressures often make the obvious solutions unattainable.

Budget cuts are difficult. The fastest-growing program in California’s government during my time was In Home Support Services.  Fast-growing cost centers are always the first place to look when cuts are needed.  Besides, 30 years ago, aged/blind/disabled Californians who needed care in their homes made due with very bare-bones county programs and help from their friends and family members.  Now, the program is a unionized statutory entitlement with federal law protections. Whatever people did for these services 30 years ago, hundreds of thousands of real people have come to rely on them today.

Tax increases, on the other hand, are probably even more difficult – at least as far as California is concerned. Even the most liberal legislators understand that Golden State taxpayers are not inclined to support tax increases.  But tax breaks tend to receive bipartisan support, since corporate lobbyists who seek them give plenty to Democrats and Republicans. So when we decided to enact a tax rule change that would actually generate more revenue from out-of-state companies, we ended up with a huge loophole that actually reduced revenues.

This leads to a paradox of life inside Sacramento: when the clearly right things to do are not politically possible, what would you do? My hope is you wouldn’t do something stupid.

But don’t be surprised if the state’s budget process continues its stupid tricks.

Michael Genest runs Capitol Matrix Consulting, LLC. Previously, he served as Director of California's Department of Finance for four years under Governor Schwarzenegger. 

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