California Budget

Yesterday the California voters went to the polls and defeated all proposed tax increases but did impose a salary reduction on the state politicians. I don't pretend to be an expert on what is going on in California, but it does seem that the state is effectively broke. Of course it is no great surprise that in a time when many of the state residents have lost a ton of home equity, jobs, income and any sense of security, they would reject any increase in taxes.

Of course those same residents are using the state services more and more because they as a group are poorer and more in need of those services. California is going to have to make massive cuts to discretionary spending and what this can be quite dramatic. In most Government budget there is a large percentage devoted to mandated items that can't be cut. Suppose those represent half the budget. Often, in times like these, those mandated expenses actually rise due to greater demand, i.e. unemployment benefits. So in a 50-50 situation the mandated could be up 10% going in effect to 55%. So the non-mandated would fall to 45%. Now if the budget is 10% short because of a lack of revenues, so you have to reduce total spending by 10%, effectively the entire cut has to come out of the discretionary funds, dropping them to 35%. This is only 70% of what they were previously and that can be a dramatic reduction indeed.

This has led to complaints that the California system in antiquated and that the voters can't make the "right" decisions in cases like this. Maybe, but I'm not convinced. Voters do vote in their own best interest. In this case it is very clear that the average householder in California and the rest of the country for that matter feels that there is no additional money available to pay higher taxes. It is going to be painful in California, but Government needs to find a better way to finance its needs. Every service delivered needs to be self funded if at all possible.

I have noticed in my career that budget reductions can be done in two different ways. In the first you try to determine what you can do without. This is usually not very effective since almost everyone feels they only have the things they need already. The other method is simply to say "your budget is now 10% less manage it" That is what has happened in California, and you know what, it works.