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Institutional Causes of California's Budget Problem

Sep 2010
Working Paper
By  Bruce Cain, Roger Noll
Since the early 1990s, California has experienced a recurring budget crisis. This article examines the combined budgets of state and local government and the institutions for creating these budgets to ascertain the source of the problem. The facts are that the state collects more taxes and fees as a percent of income than most other states, but local government has lower revenues in California. Total revenues to all governments as a percentage of income are very near the national average. On the expenditure side, the state spends less than the average for other states, but local governments spend much more. High local expenditures are financed by revenue transfers from the state that account for about 40 percent of the state’s budget. The cause of California’s unusual fiscal relationship is decades of initiatives that more severely constrain local revenues than state revenues. The state has responded by creating a system of state-local transfers that allow local governments to face a form of soft budget constraint, leading to excess local spending and lack of clear accountability for the state’s recurring fiscal crisis. Because the cause is the cumulative effect of numerous state-wide initiatives, the only plausible cure is initiative reform and revision of numerous initiatives, which most likely can be accomplished only through a state constitutional convention. All other pending reforms are at best palliatives, and many would make the fiscal situation worse.