New rules in fiscal tug of war

Get ready for the 2008 round of California’s state/local tug of war over scarce budget dollars. A predictably acrimonious outbreak occurs every time the state must cope with an especially large deficit — such as this year’s $14.5 billion shortfall with its proposed 10 percent across-the-board cuts and early release of more than 22,000 prisoners.

In the three decades since unintended consequences of Proposition 13 shifted much of the counties’ prior tax collection and disbursing power to state government, much of the thrust of California fiscal legislation has been to empower Sacramento to withhold, postpone or cancel various mandated or negotiated fund transfers directed for local jurisdictions.

For state officials, this was a relatively easy quick fix for immediate monetary needs, sparing any need to face the more painful tasks of cutting services or raising taxes. Generally the shortchanged counties, cities, school boards and special districts would be issued the equivalent of Sacramento IOUs. And these often as not were paid off only after prolonged public pressure from those interest groups being shortchanged.

Gov. Arnold Schwarzenegger is now calling for 10 percent cuts across every California state department. This opens substantial space for reduced local disbursements that would lead to difficult cutbacks in county, municipal and school services at their exact time of greater demand. For example, if statewide Medi-Cal is cut $1 billion as the governor recommends, San Francisco stands to lose $5 million and San Mateo County would be forced to curtail its methadone treatment program — which had just begun recovering from years of rate freezes — according to respective county health departments.

Lack of early intervention services would then inexorably put more patients into county-funded emergency rooms for more expensive treatments. In the same way, saving the state $400 million by early release of 22,000 prison inmates and halting direct supervision of 18,500 parolees could be expected to put some recidivists back into overcrowded county jails.

Despite such risks — and existing delays of an estimated $1.27 billion in human services payments owed to counties, which the California State Association of Counties has already expressed its concerns about — new rules limit the extent to which the Legislature can withhold future local funds. California’s budget balancing struggle will be the first trial of Proposition 1A, passed in 2004 with bipartisan legislative support and Schwarzenegger’s endorsement. Now the state can only borrow local revenues during fiscal emergencies with a two-thirds vote of the Legislature and the governor’s signature. Such borrowing can only take place twice during 10 years and only after the prior loan is repaid.

Additionally, the state is now required to either pay or suspend most required programs and can approve county requests to trade property taxes for sales taxes. These changes guarantee more stabilized funding for county services and should create less room for rancor.

Perhaps even better, with state government now considerably more restricted in how it can manipulate local revenues, powerful additional pressures are generated for true reform of California’s finances instead of the continued quick fixes.