The Pew Charitable Trusts

SACRAMENTO, California — Fiscal crisis is so familiar in California that the annual state budget here has come to resemble an ever-shrinking suitcase: no longer able to contain what politicians and the public crammed inside the year before. In the coming years, space will become so limited that lawmakers may be forced to jettison some of their most prized possessions — indeed, some of the very programs and policies that have defined California for decades.

Those who depend on state government do not like to consider the possibilities. Years of billion-dollar budget cuts already have caused the state to drift from the vision its leaders once articulated: a state of gleaming infrastructure, a generous social safety net and world-class public universities accessible at bargain prices. Today, infrastructure is decaying, human services are strained and college is out of reach for thousands of families. "Arguably, this isn't the state that I grew up in," says Jean Ross, head of the California Budget Project, which advocates for poor and working-class families.

But it is California's future finances that worry budget watchers such as Ross even more. If anything, concern about the Great Recession and its aftermath have masked a long-term structural imbalance between California's spending and its revenues, one so severe that the nonpartisan legislative analyst here, Mac Taylor, recently forecast annual state deficits of $20 billion until 2016, long after most economists expect a national recovery.

That huge imbalance comes from the steady growth of California's many spending obligations and the inability of the state's revenue system to keep up, a gap that remains clear even after state officials announced an unexpected influx of $6.6 billion in tax collections on Monday (May 16). A sum that huge would make lawmakers in other states jump for joy; in California, however, it does not come close to solving the long-term problem.

The fiscal pressures cut across state government. Health care rolls are swelling and becoming costlier because of inflation, more retired state workers are collecting pension checks, and expensive interest payments on billions of dollars in state debt are coming due. Meanwhile, a raft of political roadblocks, from ballot-box budgeting to powerful special interests that benefit from the status quo, only compounds the problem. For those with the responsibility of balancing the books, the result is a constantly shrinking pot of discretionary dollars — and a ticking clock.

Taylor discounts talk of California "going bankrupt" or defaulting on its bonds, an almost unheard-of occurrence for a state and one that could jeopardize the entire U.S. economy, given California's size and economic importance. Those often-rumored scenarios, he says, are not even "remotely likely to occur." But he makes clear that the state is on a dangerous trajectory toward budget cuts that would fundamentally shift the social compact between California and its citizens.

In a recent letter to the chair of the state Senate's budget committee, Taylor and his analysts went "far beyond our normal comfort level" in examining what $14 billion in potential budget cuts could look like. They included a possibly illegal $2 billion cut to K-12 education, resulting in bigger class sizes and shorter school years; a 9 percent pay cut for hundreds of thousands of state workers; and another round of tuition increases and financial aid reductions in a higher education system that already has been chopped repeatedly. 

Taylor's grim analysis drew immediate attention in a capitol accustomed to dismal fiscal news. But it was a conservative projection: It did not even contemplate the tens of billions of dollars in additional budget cuts that could become necessary once the next 12 months of fiscal emergency are up.

Jerry Brown, the past and present face of California government, is also the central figure in its future. Brown, a Democrat who became one of the youngest California governors in 1974, returned this year as the oldest. Now 73, he has decades of hands-on experience in state government, pledging to bring "insider's knowledge but an outsider's mind" to Sacramento — a city that has become synonymous not only with fiscal but with political dysfunction.

For his part, Brown sees another way to address the ever-shrinking suitcase of California's finances: not simply by abandoning prized possessions in round after round of painful budget cuts, but by coming up with an entirely new way of packing. 

Since returning to office in January, Brown has outlined an unusual goal for a state chief executive: taking the state out of large areas of government. Brown wants services delivered to a greater degree at the local, not state, level . His plans include transferring tens of thousands of low-level inmates who now sit in state prisons to local jails; shifting mental health, substance abuse, foster care and child welfare services to localities; and, eventually, handing over to local communities management of the state's welfare-to-work and food stamp programs.

Brown sees his plan as a realistic way to avoid some of the darker doomsday predictions made by state budget analysts like Taylor, while giving voters the chance to see how taxpayer-funded programs are being managed in their own back yards. The plan, he believes, would have the added benefit of giving California's many politically, socially and economically diverse communities a chance to define for themselves what government should look like. To make his case, he has spent countless hours schmoozing with Democratic and Republican legislators in Sacramento. 

For all of his years of experience, however, Brown is re-learning a tough political lesson: Sacramento is a brutally partisan place. This is truer now than in his first gubernatorial years nearly three decades ago. Legislative stalemates are far more likely than bipartisan breakthroughs, and since Brown last left the executive office in 1983, governor after governor has seen an ambitious state agenda derailed. This has happened to Brown even sooner than most: It has taken a mere five months for his own agenda to be knocked off its tracks.

Faced with a staggering $26.6 billion budget shortfall when he took office, Brown vowed to close it within 60 days — warp speed in Sacramento, where spending plans in two of the past three years have missed their June 15 constitutional deadline by 85 days or more. Brown sought to close the enormous gap in roughly equal parts by cutting spending and by extending earlier tax increases on sales, income and vehicles, money that would be redirected to the local governments at the center of his "realignment" proposals. 

But more than 120 days have now passed and there is still no budget. More ominously for the prospect of future negotiations, Brown's originally friendly overtures to minority Republicans — just four of whose votes were needed to approve his budget legislatively — have collapsed in angry accusations. The same Brown who earlier this year insisted on a bipartisan solution to the state's fiscal crisis is now planning to bypass Republicans altogether and take his budget directly to the voters. If that happens, Republicans promise a bruising political campaign that likely would divide the legislature even more.

Why are California lawmakers unable to find common ground, even with such stark fiscal warnings on the wall? Far more than other large and fiscally troubled states, California is a victim of its own political structure, not simply of the tough times that have hit the rest of the country. 

States such as Arizona, Florida and Nevada were crushed by the housing bust and declining tourism. In California, huge budget shortfalls were around long before the economic downturn came along and they will be there long after it ends. That is true even though a recent report from Wells Fargo found "the state's economy may not be as troubled as headlines suggest," and even though tax collections are now improving considerably.

California's partisan politics are not simply the result of lawmakers' personalities. While state legislators — who draw bigger salaries than their counterparts in any other state — may not relish protracted standoffs over spending, they also are not particularly vulnerable because of them. Heavily gerrymandered districts dominated by one party or the other have ensured that many lawmakers come from the extremes of the ideological spectrum and have little political incentive to compromise. Strict voter-approved term limits have further dissuaded many lawmakers from finding middle ground, since they will be seeking higher office in similarly skewed constituencies a few years down the road.

Meanwhile, the ballot box has upended the California budget process. It takes a two-thirds majority in the legislature to increase taxes — a voter-imposed rule that has made it exponentially harder for lawmakers to raise revenue, as Brown wants them to do. Even though Democrats control both chambers of the Legislature by comfortable margins, they have only been able to muscle through billions of dollars in spending cuts, not the parallel tax increases the governor believes are necessary. That is because almost all Republican legislators have taken a formal pledge not to raise taxes, preferring an all-cuts strategy to rein in what they see as out-of-control government spending.

That spending itself, however, is often mandated by the voters. Criminal sentences tend to be extraordinarily long and costly in California because voters have demanded it. Education spending is mandated to increase every year, the result of another citizen-approved initiative. Borrowing projects backed by the voters have contributed to a crushing debt load that costs more and more every year to pay off. At the same time, voters have sharply limited tax collections, most famously by capping property taxes through Proposition 13, the 33-year-old ballot measure that dramatically limited government revenues. California voters, in other words, have sent inconsistent messages at the polls. 

"We've never really reconciled our taste for a high level of public services with our pocketbook," says Brad Williams, a former economic forecaster for the state and now a consultant in Sacramento.

Pessimism prevails

As Williams and others point out, Proposition 13 ushered in dramatic changes to California's fiscal structure. The state now relies overwhelmingly on the personal income tax — and, within that tax, on the earnings of the wealthiest residents — to pay for the broad array of public programs that the voters want. But the personal income tax is among the most volatile of revenue sources, fluctuating wildly with the economy. That is especially true for the wealthiest earners, whose incomes are influenced disproportionately by capital gains.

The result is a roller coaster of state finances that can bring gaping shortfalls for years on end, punctuated by occasional surpluses. One difficulty is that on the occasions when California's budget has been in good shape, lawmakers have shown no inclination to build up a rainy day fund or, as Williams says, "do what a business would do" by preparing for the future. Instead, they have pursued tax cuts or spending programs, mostly to please their respective constituencies, on whom they rely on for tens of millions of campaign dollars. "When there is money," Williams says, "there is intense pressure to do something with it." 

Such outside pressures lead many longtime Capitol observers to conclude that there is little hope for compromise in the coming years of fiscal crisis.

The current stalemate in Sacramento illustrates the extent of the problem. Brown and the Democratic majority in the legislature owe a huge debt of gratitude to the public employee unions that elected them, and have been unwilling to demand major union concessions that independent budget experts say are necessary. Brown recently negotiated a contract with the politically powerful prison guards' union that fell well short of the savings the legislative analyst recommended. 

At the same time, Republicans not only have ruled out tax increases; they have refused to allow the voters to decide for themselves whether they want to pay higher taxes. Watching over the legislature's every move have been groups like the Howard Jarvis Taxpayers Association and Americans for Tax Reform, which grade lawmakers and make clear that they will face electoral repercussions for any moves that could lead to higher taxes.

Given the obstacles, it is hard to escape the conclusion that California's next decade will be defined not by innovation and adjustment to difficult circumstances, but by multi-billion-dollar budget cuts that will erode state services for years to come.