California Still Needs a Balanced Approach

Although new projections have improved California’s revenue outlook for the next fiscal year, the state will still need to take a balanced approach to closing its budget shortfall to avoid excessive, additional cuts to core services like education and health care. Earlier this year, Governor Brown proposed to close the state’s shortfall (then estimated at $26.6 billion) through a roughly 50-50 split between budget cuts and new revenue generated mostly by extending previously enacted tax increases. California’s legislature enacted many of the cuts in the governor’s plan that include deep reductions in state services on top of the steep cuts that the state has already made in recent years.  For example, the state will:

• Cut funding for the state’s universities by $1 billion, reducing it to the level of the late 1990s when the university system had far fewer students.
• Increase health insurance premiums for the low-income families of 565,000 children.  The number of children whose families have purchased health coverage through the program has already dropped by over 6 percent since peaking in July 2009, due in part to previous cuts.
• Reduce the lifetime limit on the number of months that vulnerable families with children can receive cash assistance from the state, from 60 to 48. The state will also reduce the size of these cash assistance grants to about the same amount that families received in 1987; for instance, the maximum monthly grant for a family of three in high cost counties will fall by 8 percent, from $694 to $638.
• Cut cash assistance that helps low-income elderly and disabled residents meet their basic needs to the minimum allowed by federal law.  In July 2011, the maximum grant will drop to $830, down 8.5 percent from the grant provided in January 2009.

Even as the legislature has enacted cuts, Republican lawmakers have blocked the revenue portion of the governor’s proposal. As a result,   California’s budget negotiations are at a dangerous standstill.  Assembly Republicans recently put forth a plan based on their claim that stronger- than-expected revenues will allow the state to close its remaining shortfall (now estimated at $10 billion) without increasing taxes and without deep cuts to education.  But as Jean Ross of the California Budget Project points out, their plan relies on gimmicks and wishful thinking. The truth is that even with a somewhat improved fiscal outlook, and even after making deep reductions in state services, the state still needs to close a large budget gap. Failing to raise new revenues would force severe new cuts that would further damage the state’s already weakened schools, universities, and other public investments. Just how deep would these further reductions need to be?  In his revised budget, Governor Brown said that the required cuts could include:

• An additional cut of $1 billion for the state’s universities.  According to the state university system, cuts of this size would require 30 percent increases in student fees on top of substantial fee increases from prior years.
• Further significant reductions in spending for K-12 education and community colleges; K-12 education funding has already been cut by more than $1,000 per student (13.1 percent) since the 2007-2008 school year.
• A $150 million cut to the state’s court system that would likely lead to court closures twice a month.
• A range of additional cuts to health and human services programs already battered by previous rounds of reductions.  Such cuts include further reductions in cash assistance grants, the elimination of services that help the elderly remain safely in their own homes rather than moving to nursing homes, increases in the costs of AIDS drugs, and caps on Medicaid coverage for prescriptions and other supplies.

Raising new revenue makes more sense than imposing additional cuts. As we’ve explained, raising revenue during recessions is generally a better choice to promote economic recovery than cutting state spending. Higher income people will pay a portion of the tax increase by reducing their savings. Consequently, the impact on consumer demand will be limited. Perhaps even more importantly, the new revenue will protect California’s future by limiting the damage done to its children and its basic public systems. California got a nice surprise last week. But if legislators insist on doing even more damage to public investments, the state’s future will still be diminished.