First cut’s the deepest

The Legislature is ignoring the need for real structural budget reform and thus billions of dollars in savings

Illustration By B.Z.

You may have heard how we buy $36,000 European super-wheelchairs for the disabled when more modest wheelchairs work fine, or how the Legislature slips an extra $266,000 in the budget to satisfy its taste buds, having found that $125 per diem for food and housing doesn’t keep legislators in sufficient luxury.

It finally appeared as if the California Legislature had turned a new leaf, as the Assembly held “efficiency” hearings in March, at which such excesses came to light. Speaker Fabian Núñez, a Los Angeles Democrat who was mostly interested in raising new taxes 12 months ago, even stated: “First, we’re going to find cuts instead of talking about taxes.”

If you add up the cuts suggested at the efficiency hearings, they amount to hundreds of millions of dollars. That sounds impressive—if these cuts are ever really made.

Bravo. Except for one problem. It was mostly an exercise in distraction.

“You have to really give credit to the Democrats for trying to find some efficiencies,” said Assemblyman Keith Richman, a San Fernando Valley Republican and physician known for his pragmatic centrism.

But Richman is being a diplomat. The savings they might recover are petty cash compared with the shortfall of $14 billion to $17 billion embedded in the 2004-2005 budget because of chronic legislative overspending.

To make up for the $14 billion shortfall he estimates, in January, Governor Arnold Schwarzenegger proposed big program cuts plus sliding fees for the non-poor for all sorts of free services, including health care. He also wants to borrow a few billion dollars.

It’s no secret that the Democratic majority in Sacramento intends to reject some very big cuts proposed by Schwarzenegger. Regardless of how much the Democrats refuse to cut from state overspending, the truth never varies. And the truth is we still have to undertake deep structural reforms—fundamental changes to the way the state does its business—because that’s the only way to close the monumental gap.

Yet, Núñez and Assemblyman Darrell Steinberg of Sacramento, who chaired the efficiency hearings, allowed all of March to slip by without addressing this structural issue at all. Sure, they deftly manipulated the media into printing gushing stories about efficiency hearings. But they took off the table the two biggest chances for reforming years of chronic state-government overspending.

As Richman noted, “Two things were not allowed on the table at all, and those issues were cutting back the size of the state employment rolls and rolling back the massive compensation packages granted to state unions.”

The state’s high-carb, high-fat, 235,000-person workforce needs to go on a fiscal crash diet. Yet, as Richman noted, cutting the huge bureaucracy, protected by powerful public-employee unions, was not allowed as a serious topic for discussion at the efficiency hearings.

If we can’t even talk about it, is it any wonder why we have several thousand highly paid Caltrans union engineers sitting around, mostly unneeded, because the state’s transportation projects have dried up? This Legislature is still far too gutless to consider handing out lots of pink slips.

The state’s workforce, the size of a city, enjoyed a mind-blowing 41-percent jump in salary and benefits in the past five years. It’s not uncommon for a state worker to make $70,000 to $80,000 a year. According to a report by Los Angeles Daily News journalist Troy Anderson, state workers enjoyed this massive jump in compensation while Californians’ per-capita income increased by 24 percent.

During the same period, unions representing state workers managed to wangle an incredible concession out of our weenie political representatives amid the stock-market dot-com frenzy, and this concession is costing taxpayers a bundle.

Under a terrible law signed by former Governor Gray Davis, the state’s workers now can retire with a fat pension just when many reach the height of their knowledge and expertise, at the age of 50. This is just absurd. This cushy early-retirement reward was once reserved for those with dangerous jobs, such as highway-patrol officers. But we, the public, now must pay a staggering amount of money so pencil pushers can retire at 50.

Here’s why: The state Legislature—led by the union-controlled Democrats and abetted by the wussy Republicans—suffered a mass hallucination in the 1990s. The Legislature became convinced that riches flowing into California’s worker-pension funds from investments in the frenzied stock market would last forever.

Somebody forgot to tell our dopey legislators, few of whom hail from the private sector, the Wall Street truth that what goes up always comes down—as in market slumps. As in reality.

During their shared hallucination, the Legislature voted to approve the so-called 3-percent-of-50 deal. It awards a very robust 3 percent of state workers’ earnings for every year they work. This retirement money can be collected beginning at age 50. According to Steven B. Frates, a senior fellow at the Rose Institute of State and Local Government at Claremont McKenna College, one loophole allows a worker’s earnings base to be boosted substantially by accumulating overtime or sick-pay benefits.

In the bizarre collective mind of legislators, this treasure was supposed to be paid to retirees from the state pension fund, which was skyrocketing because of investments in the stock market. Under this law, if the fund’s investments faltered, guess who would pay so that our pre-Botox state workers could keep retiring young?

Oh yes, California taxpayers.

Frates said that because workers can pad their base salaries with accumulated overtime and unused sick pay, “You can actually make more in retirement than when you are working for the state of California.” Said Frates, “If you were to ask an actuary … how much it would cost an average citizen to pay for somebody else to retire at the age of 50 on $90,000 or so for life, I suspect they will say it will cost over $1 million.”

The deal was a scandal the moment Davis signed it. Many who leave state jobs do what other 50-year-olds in America do: They go to work. They are taking away jobs in California—possibly thousands of jobs—while getting huge retirement checks. That’s a stupid policy for our truly jobless citizens.

State Senator Tom McClintock of Thousand Oaks argued fiercely against the 3-percent-of-50 law. Naturally, he was ignored. He told me, “We now have exponential increases in taxpayer subsidies for this. Was it Louis XVI who said, ‘After us, the deluge?’”

Whether you agree with the Republican McClintock’s fiscally ultra-tough politics or not, he is a respected budget watchdog. That’s one big reason why Democratic voters in California gave McClintock a huge “integrity” rating during the gubernatorial recall race last year.

Unfortunately, it’s nearly impossible to turn back the clock on the 235,000 state workers who have been told for three years that they will get fatter pension checks and can retire early. So, McClintock suggests a two-tiered system in which all new workers return to the sensible old deal, or something like it.

Even if Schwarzenegger somehow forces the Legislature to deal with an issue it has strained to distract us from, he still faces other huge battles to cut the state’s workforce and contract out for routine work that can be done more cheaply by private businesses.

McClintock noted that, according to a study by the Reason Foundation, if California adopted extensive contracting of out-of-state services, “We could save $9 billion from that single reform. It’s the Yellow Pages principle of government: If you can hire them from the Yellow Pages, government shouldn’t be doing it.”

Bill Eggers, director of Deloitte Consulting’s public-sector research division in Washington, D.C., worked on the Texas Performance Review that cut billions in costs—a model that Schwarzenegger hopes to emulate.

Eggers’ associates from Texas—including efficiency expert Billy Hamilton—are now in Sacramento, hired by Schwarzenegger to scour for cuts. The performance-review team includes more than 150 keen-eyed state employees culled from the ranks for their cleverness and money-saving ideas.

Eggers told me, “California is one of fewer than 10 states that have significant laws against contracting out, including the recent law banning school districts from doing things cheaper and requiring them to use unions. In Sacramento, the restrictions go all the way up to the executive level. These restrictions handcuffed Wilson and Davis, and they’re handcuffing Schwarzenegger.”

The California team is likely to produce 100 detailed issue papers that each propose a cut and that explore whether and how to proceed with legislation or executive order, as well as detailing the so-called best practices by other states, according to Eggers.

California’s Legislature has resisted a lot of “best practices” that swept the nation, and this bullheadedness has cost us billions in missed savings. Our lawmakers continually argue that California is “unique,” so its policies must be created from scratch and the wheel reinvented with each new issue.

This attitude has bred our most powerful law, the law of unintended consequences, which has, in turn, bred disaster after fiscal disaster.

Yes, California is big. Yes, California is diverse. But California is not unique. California faces the same troubles faced in many big states. Our uniqueness is in how grossly we have failed to protect the public’s money.

Sadly, the March “efficiency” hearings investigated the petty-cash drawers. The real troubles are still locked deep inside the vault.