Storylines That Are Holding Back Broader Economic Opportunity in California

July 1 marked the start of the 2015-16 fiscal year in California. As we noted in our “first look” analysis of the 2015-16 budget, this spending plan makes some notable advances, such as creating California’s first-ever Earned Income Tax Credit (EITC), expanding comprehensive health care coverage to undocumented immigrant children from low-income families, and making increased investments across the education spectrum — from child care and preschool, to K-12 schools and community colleges, to CSU and UC.

Yet despite these advances, the budget package enacted in late June fails to put forth a clear strategy for reinvesting in critical safety net services for millions of Californians who are not sharing in the state’s prosperity. In the end, this budget leaves in place much of the cuts made in recent years to essential support for low-income families, seniors, and people with disabilities.

With approximately 4 in 10 Californians living below or just above the California Poverty Measure, and an economic recovery that continues to leave many workers behind, the lack of a strategy for broadening economic gains and further reducing economic hardship is a glaring gap in what in many ways has been a strong track record for the Brown Administration.

Why the gap? To a large degree, the Governor and his representatives, while willing to prioritize investments in other areas (K-14 education, infrastructure, and health care as a few examples), continue to resist investing in the state’s safety net and related public supports that broaden and deepen the state’s economic recovery. Two basic storylines are often repeated by the Governor and his representatives to justify this ongoing disinvestment. Both storylines at first blush seem logical, even fiscally responsible, and they are often placed within the larger “California Comeback” narrative. But upon closer examination, it becomes clear that these two storylines are not only flawed, but are also holding our state back from adequately investing in broadly shared prosperity.

“Steady As You Go”

One storyline that is used to counter calls for increased support for the state’s social safety net is the “steady as you go” narrative, which is captured in this quote from the Governor’s press conference marking the release of his proposed 2015-16 budget this past January:

“If we don’t rein things in, then down the road there will be drastic cuts, just like there were over the last 10 years. It’s either stop and start or steady as you go.”

The premise here is that for families facing economic challenges, it’s better to simply limit state support for the safety net rather than to boost spending now only to face cutting it in some future year due to an economic downturn.

But this premise reflects flawed logic: that the state should not invest in people today, for fear of not being able to offer the same level of support in future years. To put this in more concrete terms, it means we shouldn’t boost basic income support for a low-income family, or a senior, or an individual with a disability because we might not be able to maintain it indefinitely. Yet, even if we accept the possibility that cuts could be necessary down the road, we must remember that safety net programs provide much-needed assistance to individuals and families facing serious economic challenges. So it’s hard to see how withholding additional help today is better for these individuals and families, even if support might potentially be reduced at some point in the future.

A second problem with “steady as you go” is that it ignores California’s current economic realities. Even after several years of job growth, many Californians have yet to benefit from this recovery. Our state has high rates of poverty and deep poverty, while wages remain stagnant, or even somewhat lower, among large segments of workers in our state. An approach to state budgeting that ignores these basic economic facts unduly limits state investment in human capital by, for example, leaving cash assistance provided through the state’s welfare-to-work program at below deep-poverty levels.

“Boom and Bust”

The steady-as-you-go storyline largely rests on a second flawed narrative. This is the “boom and bust” storyline often repeated by the Governor as justifying a highly constrained approach to state spending. Here’s a recent quote from a top Administration official, arguing against increased health and human services spending sought by the Legislature during deliberations over the 2015-16 state budget:

“We really do not want to return to the boom-and-bust times that have really plagued the state over this past decade.”

This storyline invokes the ups and downs of the state’s economy and what they mean for state revenues. California’s personal income tax, a major source of state revenue, has a progressive structure, by which higher incomes are taxed at a higher marginal rate. This structure helps ensure that revenues grow along with the economy. But, it also means that state revenues are susceptible to declines amid economic downturns. This is because investment income, which largely goes to those higher on the income ladder, typically experiences a large drop during a downturn.

Of course, it’s good to be mindful of fluctuations in revenues over time. However, the “boom and bust” storyline is flawed as a rationale for locking state investment in key areas of the budget at diminished levels, for a couple of reasons.

First, the state Constitution contains airtight mechanisms designed to capture a portion of revenue — amounting to several billion dollars a year — during periods of economic growth as a means of both helping to “smooth out” the ups and downs of state revenue collections and allowing the state to meet the challenges of the next economic downturn. Half of these “captured” dollars go into a rainy day fund and half are used to pay down state budgetary debt. These provisions were added to the Constitution by Proposition 2, which was approved by voters this past November with strong support from Governor Brown.

What’s more, the alternative to the revenue fluctuations our state now experiences would be to move toward a less progressive tax system. This would involve asking those who are least able to pay to contribute more to the system, and those who are most able to pay to contribute less — resulting in a less fair tax system for California, and one that would likely produce fewer revenues over time.

Taken to its logical conclusion, this “boom and bust” storyline would prevent California from boosting investments in any public systems and services – from the safety net to education to infrastructure – either during times of stronger revenues (like the present) or during downturns. What this means right now for individuals and families served by the state’s safety net is persistent disinvestment that leaves vital supports operating at severely diminished levels.

Rather than using “boom and bust” as the basis for constraining state spending, the Administration could opt for a different path during periods of strong revenues — one that strikes a better balance between building up reserves and paying down debt, on one hand, and strengthening the foundations of broadly shared long-term prosperity on the other. Using periods of economic growth to make investments that broaden the reach of that growth, thereby helping ensure that the benefits of a growing economy are not limited primarily to the highest-income Californians and wealthiest corporations, would be a wiser path than locking in spending at recession-era levels — a new normal of disinvestment.

Moving Past These Storylines Can Point the Way to Continued Reinvestment

Looking ahead, state policymakers have options for reinvesting in core public services and supports and moving California’s state budget framework beyond the “steady as you go” and “boom and bust” storylines. As we blogged about recently, state revenues continue to be strong, and if revenues appear likely to come in near to or above what was projected in the 2015-16 budget deal, then policymakers could reconsider specific areas of reinvestment that were left out of this spending plan. Specifically, policymakers could repeal the maximum family grant rule — also known as the “family cap” — in CalWORKs, boost cash assistance for low-income seniors and people with disabilities, and roll back prior cuts to Medi-Cal provider payments.

Even if the Governor remains resistant to these specific kinds of investments, the state’s continued revenue growth provides an opportunity to present an alternative strategy for broadening economic gains to the millions of Californians yet to share in the state’s prosperity. For example, the new state EITC could be expanded significantly.

In the coming months state agencies and departments will work with the Department of Finance to begin crafting the proposed 2016-17 budget that the Governor will introduce next January. We’ve continually emphasized that while the January-to-June period gets the most attention, creating the state budget is a year-round process. This means that even now, stakeholders can be making the case to state leaders that it’s time to turn the page on flawed budget storylines that are holding our state back.

— Chris Hoene