Can a Two-Year Budget Help Solve California’s Financial Woes?

 Can a Two-Year Budget Help Solve California’s Financial Woes?

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EDITOR’S NOTE—The direness of California’s budget crisis has one silver lining: efforts to reform state government are finally gaining traction with voters and lawmakers. In the new legislative session, one much-discussed proposal involves shifting from a one-year budget cycle—in which the state’s $100 billion budget is hammered out every year— to a two-year cycle. To find out why this idea makes sense, NAM’s Nina Martin talked with Santa Cruz County treasurer Fred Keeley, a former speaker pro tempore of the California State Assembly and a board member of California Forward, a key player in the reform movement.

First, some background. What is California Forward?

California Forward is a nonprofit whose mission is to modernize the tools of governance in the state of California. We came out of a project of the Commonwealth Club of California called Voices of Reform. The project captured the attention and imagination of five large foundations that do a lot of work in the state and were concerned that they were losing their partner in terms of state government being able to function effectively. As a general rule, these foundations don’t get in involved in things like public policy making, but when the system can’t make public policy at all, that’s a problem.

In the last four years, California Forward has played a collaborative role in passing three important ballot measures: the independent citizen redistricting commission, the open primary, and this past November, Proposition 25, which allows lawmakers to adopt the state budget with a 50 percent majority, instead of a two-thirds vote. The remaining projects on our agenda include additional budget reforms, such as moving to a two-year budget process; an amendment to the current term-limits law; and some change to the initiative process in California. All in all, a major goal is moving governance closer to the people of California.

That’s quite an ambitious agenda—and also an impressive track record, considering that California has become a national symbol of a government so broken that it can’t be fixed.

There are a lot of ways to look at what is not working in California. One belief system would be that we are not sending the right people to Sacramento. Another is that is no matter whom we do send, they can’t get anything of consequence done because we send them into a system that’s dysfunctional. The work of California Forward and its collaborators is to address both these problems: Reforming the process by which we elect lawmakers and then modernizing the tools of governance to help those lawmakers govern more effectively.

Voters passed Prop. 25 because they were disgusted with the yearly budget process—the chronic infighting and delays. Aside from a $28 billion deficit, why is agreeing on a budget so difficult in California?

One of the biggest problems is that we have been using a 19th- and early 20th-century process to try to develop a 21st-century budget. Until the passage of Prop. 25, we were one of just three states to require a two-thirds vote to adopt a budget. In the past, and especially in the last couple of decades, this has caused an enormous distortion of the content of the budget—the choices we make about what to pay for or cut from the general fund, such as public education, prisons, CalWORKs and Medi-Cal. It’s also meant that when a budget finally does come together, it is not, in anyone’s estimation, a genuine document that can be relied on.

In the current fiscal year, for example, we haven’t had one budget, as most voters believe, but four budgets adopted by the Legislature and the governor. Budgets that can’t hold up for more than three months. That’s because, in order to pass a budget when there isn’t enough money to go around, lawmakers wink and basically agree to pretend that the federal government will play Santa Claus— that it will make up the difference and give us money that, in fact, the federal government has no intention of providing such money. This is literally a made-up, fictional number that everyone agrees on through secret handshakes. Three months later when—surprise—the federal money doesn’t come through, the budget process begins again. So you have this constant year-round budgeting activity—budget, budget collapse, rebudget, budget collapse, rebudget, budget collapse.

Now contrast that to a budget system that is disciplined and contained to a specific number of months in the legislative session. Boy, does that look different.

One of the major reforms advocated by California Forward is switching to a two-year budget process. What would that accomplish?

A two-year budget does a couple of things. First, it allows a degree of foreseeability and predictability that is good for everyone: the business sector, the nonprofit sector, and government. That instills a sense of confidence that will lead to more investment.

Second, it gives lawmakers the space to do other things, including thinking more creatively about solving our most pressing problems. Not only does the current process lead to a complete lack of confidence in state government, it sucks all the oxygen out of Sacramento for doing anything else. If you’re a lawmaker and you care about prison reform or education or greenhouse gases or smaller government, too bad, because now you’re occupied by the budget 24/7.

What other budget reforms are critical to fixing California?

The most important is outcome-based budgeting, also known as “management by objective.” This means formulating a budget based on agree-upon outcomes—goals—rather than outputs—aka money and spending. Often government gets stuck in the following rut: "What did you do last year? Now let’s add X percent or take away Y percent." That’s not a very good way of operating.

As an example of output-based budgeting, look at prisons. If you just look at spending, you can see how much goes toward food, guards, health care, etc. But those output measures tell you nothing about what the prisons are accomplishing. So a different way of looking at the issue would be: What is the recidivism rate? Even if you don’t care about the people in prison, you probably do care that 95 percent of those prisoners will end up back in society. What factors do we know reduce recidivism? Now let’s start managing—and budgeting—toward a lower recidivism rate. That means more money for public education, drug abuse programs, mental health services, job training.

Another reason the two-year budget is important is that it gives lawmakers the time and space to debate these kinds of issues, which would ultimately lead to true budget reform. Yes, there would be many rip-roaring discussions, and there should be. The fact that people will get into these fights does not mean we should continue the status quo.

People in public service are mostly well-meaning, good folks If we want change, we have to give them enough time and space to make decisions and implement them. You might not see much progress at the end of the first two-year session or even at the end of several two-year sessions. But it’s absolutely a path worth getting on.

Are there any states that actually do a good job on budgeting, or are they all as dysfunctional as California?

There are a few states that offer some pretty good examples: including Virginia, Washington and Minnesota. Mind you, we’re not talking about the politics of these states or how they spend their money—just pure fiscal responsibility. These are states that have managed to weather economic ups and downs relatively well—not the once-in-75-years economic collapse that we’re experiencing now, but normal cycles of expansion and downturn. The states that do best have a two-year budget, a prudent rainy-day fund that they really don’t touch unless they meet a certain set of conditions, some form of pay-as-you-go budgeting, and some form of management by objectives.

How do recent electoral reforms, like taking redistricting out of the hands of lawmakers, further the goal of budget reform? Is the idea to elect a Legislature that’s more moderate?

It’s more nuanced than that. I would say changes like the independent redistricting commission and the open primary are intended to create a Legislature that looks more like the vast majority of Californians. The fact is, California is a Democratic state and this will continue into the future. The question is, who are the Democrats—and the Republicans—who go to the Legislature? How can we encourage them to be more open to principled compromises and finding common ground?

I served in the Assembly for six years 1996-2002, when we had a version of the open primary system. I saw colleagues, especially Central Valley Democrats, who were able to make decisions and able to work with some of the more moderate Republicans because there was a bigger middle. I was from the People’s Republic of Santa Cruz, which is never going to send a moderate Democrat to Sacramento. Similarly, places like Santa Claritia are never going to elect moderate Republicans. The question is, what about the other places?

The need isn’t for the entire Legislature to become more moderate, the need is for a bigger middle.