Spending Reductions Are a Necessity, Not an Option

Thursday, January 8, 2004

Page 7

AFFAIRS OF STATE (Column)

Spending Reductions Are a Necessity, Not an Option

By DAVID KLINE

The California Commission on Aging objects to Gov. Arnold Schwarzenegger’s proposed budget cuts, believing reductions in Medi-Cal funding will force more seniors into nursing homes.

A proposed 10 percent reduction in state payments to doctors who treat the poor would “incentivise institutionalization of seniors by chipping away at the network of home and community based services in California,” according to a letter to the governor from Commission on Aging chair Nancy Dolton.

Reduced payments to doctors would result in fewer doctors accepting Medi-Cal patients. That, in turn, would increase delays at the offices of the doctors who do treat Medi-Cal patients, Dolton says.

“With the delays, sicker patients will turn to expensive emergency room visits, putting a strain on the health system safety net funded by county tax revenues,” Dolton concludes.

She also criticizes the governor’s plan to quit giving tax dollars to people who stay at home to care for frail, elderly family members. If this money is withheld, Dolton says, many family caregivers will have to get jobs and no longer will be able to provide full-time care. Many of the elderly people will be moved to state-funded nursing homes as the only option, she predicts.

Dolton cites a UC Berkeley study which found “the cost of the average consumer receiving services at home through the In Home Supportive Services Program is $5,722 per year versus the consumer in a nursing facility at $31,028.” In other words, cutting a little from the IHSS spending could add a lot to Medi-Cal spending on nursing homes.

The Commission on Aging chair might be right. The reductions in previously authorized spending could have a dramatic impact on those who receive state services, and the impact won’t always be obvious and predictable.

Problem is, there is a $14 billion difference in the amount of spending already authorized for the next fiscal year (which begins July 1) and the amount of projected revenues. The recent $15 billion budget maneuver in the Capitol doesn’t solve this problem—it merely gives voters a chance to approve, and thus legalize, borrowing already accounted for in the last budget signed by Gov. Gray Davis.

And since Davis already used every conceivable accounting trick and borrowing method to paper over the problem, Schwarzenegger has very little room to maneuver.

If cuts aren’t made, the state’s deficit will get bigger, the bond rating—which affects how much interest we pay on all the past borrowing—will get worse and eventually the state will go bankrupt. And bankruptcy will cause problems a lot worse than anything that could result from Schwarzenegger’s proposed cuts, which so far total just $2 billion.

Dolton suggests spreading cuts to “corrections and other general government programs” so seniors’ programs can be saved. That sounds good, but the reality is that the entire budget for the Department of Corrections is $5.3 billion. We could close every prison, lay off every guard and let all the inmates go free and we’d still need to cut almost $9 billion from other sources.

Some suggest taking money away from state lawmakers to help balance the budget. Good idea, but if the Legislature’s entire budget was wiped out, the state would save just $206 million.

The major spending is on K-12 public schools (32 percent of the total budget), health and welfare programs for the poor (28 percent) and higher education (11 percent). To balance a $14 billion problem, spending in these areas cannot go unscathed.

Those who oppose spending cuts often suggest tax increases to raise more revenue for the state. But while these members of what state Sen. Tom McClintock calls “the spending lobby” are adept at calculating the domino effect of every budget cut, they ignore even the most obvious effects of tax increases. Taxes stifle growth. When businesses have to pay taxes, they have less money for hiring new workers. When consumers have to pay taxes, they have less money for buying more products. Increasing tax rates now, when the economy is just getting back on sound footing, would be precisely the wrong thing to do.

Nor do we need tax increases to generate more revenue. The nonpartisan legislative analyst reports that because of increases in economic activity, tax revenues are up by about $2 billion even without rate increases. State income tax revenue is running 4 percent above budget estimates, sales tax revenue is up 5.2 percent, taxes on capital gains and stock options are up $1.2 billion and corporation taxes are projected to generate $600 million more than previously estimated.

If the state does what it can to sustain and expand this economic activity, it can expect tax revenues to continue increasing by billions of dollars, even without increases in the actual tax rates. As a side benefit, more jobs will be created, meaning fewer people will be collecting welfare or unemployment checks from the state treasury.

While this improving economy will be a huge help to the state budget, the legislative analyst says economic growth alone won’t solve California’s $14 billion overspending problem. State officials must make cuts while taking care to keep the economic engine running smoothly. The cuts will not be popular, but they will solve the problem.

—Capitol News Service