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California’s Spending Boom Masks a Spate of Problems

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California’s Spending Boom Masks a Spate of Problems

The Wall Street Journal November 23, 2019
Urban PolicyTax & Budget

Politicians are rolling in tax revenue, but they can’t seem to solve basic issues like housing and energy.

This should be the best of times in California. A vigorous national economy is providing record numbers of jobs and robust growth in tax revenue. But far from flourishing, California is increasingly beset by social and economic problems, from homeless encampments to rubbish-strewn streets to blackouts.

“California is what America is going to look like,” Gov. Gavin Newsom boasted in a TV interview recently. The state, he said, “is America’s coming attraction.” The rest of the country can be forgiven for finding Mr. Newsom’s vision of the future less than attractive. High costs have strapped local governments in the Golden State, housing is often unaffordable, and gasoline and electricity are more expensive than elsewhere. Mr. Newsom’s first budget devotes billions of dollars to these problems, but much of the spending merely offsets problems the state itself has created. What should be a golden age of prosperity for California is turning into an age of anxiety with infectious-disease outbreaks and long nights without electricity.

California’s problems aren’t due to a lack of resources. Mr. Newsom’s budget, enacted in June, is a record $215 billion. Fueled by growing tax collections on California’s wealthy, state spending has increased $59 billion since 2014. The state’s personal income tax alone is projected to yield $102.8 billion this year, a nearly $28 billion increase in five years. That sounds like plenty of money, but it disappears fast in the Golden State. Sacramento spends more than $60 billion from its general fund on K-12 education alone, and $36 billion in state funds on Medi-Cal, as the state calls its version of Medicaid, which subsidizes health care for low- and moderate-income residents, including some illegal immigrants.

Mr. Newsom’s budget devotes nearly $3 billion to homelessness and housing. That’s on top of money that cities are already throwing at the problem. Last year San Francisco voters approved a new $250 million tax on business, earmarked for homelessness. The state’s money includes some $650 million for cities to build or convert structures like hotels into emergency shelters, and $1.7 billion for housing development, including $500 million for a tax credit for new construction.

All this cash is supposed to solve a chronic housing shortage. Over four decades the state has produced housing at half the rate needed to meet its population demands. Lengthy environmental reviews and labor laws requiring union workers drive up the cost of building. A U.S.

Government Accountability Office study found that a single unit of affordable housing in California costs $750,000, more than anywhere else in the country.

Yet the state keeps piling on. In 2017 Sacramento imposed new fees on real-estate transactions to fund affordable housing, expecting to reduce the cost of housing by increasing the cost of building. In October Mr. Newsom signed statewide rent controls that limit the ability of landlords to increase rents, despite overwhelming evidence that rent control exacerbates housing shortages because developers curtail building.

Some of the money is meant to house tens of thousands of homeless people who politicians say can’t find affordable shelter. But many live on the street because of addiction and mental-health problems. These problems have grown worse as California cites have welcomed more homeless.

California’s myriad experiments with bad public policy have compounded the crisis. The state has decriminalized many low-level property crimes and drug offenses, closed some of its drug courts and allowed open-air drug markets. Cities and local advocacy groups distribute needles to the homeless and provide free meals. Some shelters welcome pets.

California has become a magnet for unstable street people from around the country, and disorder is growing in many cities, including outbreaks of infectious diseases like typhus.

The state’s budget also includes $1 billion to respond to disasters like the Camp Wildfire, which started from sparks from a power line, killed 85 people in 2018, and forced Pacific Gas & Electric Co. into bankruptcy. State officials blame the fires on climate change, but PG&E and other state utilities have fallen behind on power-grid maintenance while being forced to invest billions in renewable energy mandated by California’s plans to eliminate fossil fuels. A Credit Suisse report estimated that PG&E is locked into renewable energy contracts that are five times the going rate at a cost of $2 billion. Californians already pay 50% more for electricity than the U.S. average.

Sacramento is also pouring money into pensions as local governments and school districts complain of benefits that many can’t afford. From 2014 to 2018 the average cost of teacher pensions more than doubled—to $1,020 a student from $506. California’s latest budget devotes nearly $850 million to help school districts make this year’s pension payments. Yet a recent state auditor’s report found that nearly half of California municipalities aren’t putting away enough money to meet their pension promises and risk running dry in five years.

All this new spending comes in the 10th year of an economic expansion, and no state faces greater risks in a recession than California. Although Sacramento has built a nearly $20 billion surplus, California has among the most volatile tax systems of any state because it relies on taxing the rich. The Public Policy Institute of California estimates that the state could lose up to $100 billion in revenue over four years from a moderate recession and up to $185 billion in a severe slowdown.

California’s elected officials seem unconcerned. This year they added nearly $100 million to fund health care for young adult migrants and have proposed subsidized Medicaid for all undocumented aliens, including the elderly, at an annual cost of more than $3 billion. Mr. Newsom blocked that extravagance—for now—but admitted it would be a major step toward universal coverage, which is California’s next big goal. If that “coming attraction” sounds too good to be true, that’s because it almost certainly is.

This piece originally appeared in The Wall Street Journal (paywall)


Steven Malanga is the George M. Yeager Fellow at the Manhattan Institute and a senior editor at City Journal. 

Photo by Justin Sullivan/Getty Images