Tuesday, June 30, 2009

Dysfunction Empire

The State of California is finally about to hit the wall, after a failed initiative that attempted to cut social services and school funding to balance the budget. No budget passed as of today, and the State will begin issuing IOU's. How did this state of affairs come about?

The revenue structure has been so tortured and abused since Prop 13 was passed, that it's no longer structurally viable. What Prop 13 did was create a "layer cake" of revenue tiers that broke up the accountability that the simple local property tax had prior to 1978, per the diagram above (click to enlarge). Ultimately what evolved out of this is a revenue system that pits business growth against residents.

Since all revenue went to Sacramento, which was ostensibly then responsible for returning it to the communities, the bureacracy expanded each year to consume more tax revenue, which was withheld from the residents who pay the tax. As more revenue was captured by State programs, the cities were then forced to rely on increased local business taxes to fund their operations, hence the development binge. Further initiatives by the voters to fund community and social services and force Sacramento to spend the monies in communities resulted in a legislature that is unable to allocate funds in a normal accounting process (maybe a good thing, given Sacramento's prorities). Now the State is holding back revenue from the schools as well as payments to businesses and nonproftis that provide infrastructure and social services, we see a wave of local school district bonds and parcel taxes, which are passed in a panic and facilitated by County administrative practices.

So the whole state is driven by the need to drive growth to gain revenue, rather than living within its means. It bet all the chips on growth in real estate and sales revenue of products shipped in to the ports. The environmental and pollution consequences of growth were abandoned to the "public sector" in a classic "tragedy of the commons" scenario.
An LA Times commentary here from John Vasconcellos summarizes the scope of the problem.

The structure has evolved into such a dysfunctional mess that the legislature is no longer able to deal with it. It's not a matter of fixing a few parts. If California is to become a leader ever again, it must change its structure before the voters create an initiative to dissolve the government. This does, however, present an opportunity to create a state that works on a highly streamlined and effective model of "Design with Nature" instead of destroying it. Accounting practices would have to follow this model, instead of booking development losses as positive GDP investments, and so forth.

I'd vote for that.