California’s Next Tax Increase

Inevitable unless the Big Diversion is ended.

Jerry Brown’s budget for 2018–19 predicts revenues will be 32 percent greater than ten years ago yet that same budget proposes 14 percent less for the Judicial Branch and only 8 percent more for the University of California.

The principal reason is the “Big Diversion.” Revenue gains are being diverted to increased spending on (i) unfunded pension and health care obligations to retired government employees and (ii) higher wages and profits for private sector health care enterprises funded by the state single-payer health insurer, Medi-Cal. The Big Diversion disproportionately hurts courts, parks, social services, UC and CSU.

The Big Diversion is happening despite a lengthy bull market and 30 percent tax increase. One horrific example is that of the San Francisco Unified School District, where only 29 percent of the budget will be available for active teacher salaries this year because spending on retired teachers jumped 106 percent in five years.

In the absence of reform the Big Diversion will get worse. That’s because the state has added more than $100 billion in unfunded retirement obligations and seven million people to Medi-Cal over the last decade and state revenues are correlated with the stock market, which will not always be in a bull mode. Despite the establishment of a rainy day fund, state and school budgets are at least as susceptible to a fall off in revenues as in 2001 and 2009.

Governor Brown acknowledges all this in his budget but he has not been able to convince his partner in governing the state — the California Legislature. Governors can stop new unsustainable spending, which Brown has admirably done, but reforms such as those described here and here require 41 votes in the State Assembly and 21 votes in the State Senate.

This is not about big government versus small government. It’s about government dollars actually being used for citizen services. Needless to say that’s not happening when only 29 percent of school district budgets are available for active teachers and the state doubles spending in favor of health care profits without producing better health.

Ending the Big Diversion — ie, protecting taxpayers, students and citizens — requires only 62 members of the California Legislature and approval of the governor.