California’s 2020-21 $202 billion state budget spends about three times as much per state resident, adjusted for inflation, as 30 years ago. But look around and you won’t see your tax dollars at work. You will see public schools in disrepair, potholes large enough to take out your rear axle and century-old water pipes bursting. Basic government functions are grossly inadequate.
Just how bad is California’s infrastructure? California roads are among the worst in the country, so bad that drivers spend an additional $3,000 annually in car repair, car insurance and wasted fuel compared to other states. About 80 percent of schools have substantial deferred maintenance, including many that are at risk for earthquake damage. Over 75 percent of water pipes are at least 75 years old, creating frequent ruptures that damage property and waste millions of gallons of water each year.
California taxpayers have the sixth-highest tax burden in the country. So where do your taxes go? Three spending categories — health and human services, K-12 education and the state prison system — are consuming 67 percent of the state budget.
Health and human services accounts for about 35 percent of the budget. This spending category has skyrocketed since California took a deep dive into Obamacare in 2012, which expanded California Medicaid rolls enormously. More than 14 million Californians — the equivalent of the fifth-largest state in the country — are enrolled in Medicaid. This decision continues to be a costly mistake that hurts taxpayers and those relying on Medicaid for health care.
Medicaid is not incentivized to be efficient, nor is there adequate accountability within it. These failures create persistent and costly mistakes. A 2016 review of California’s Medicaid administration identified fundamental problems with integrity and non-compliance, some of which remained from a 2012 Medicaid review. The report failed to mention that the system also struggles to identify eligible beneficiaries. Medi-Cal spent over $1 billion in a six-month period on ineligible and possibly ineligible beneficiaries.
Medicaid tries to contain costs by reimbursing providers at very low rates, which reduces the number of providers who accept Medicaid patients. But fewer providers mean Medicaid patients have long waits to be seen. This leads some patients to go to the emergency room for non-emergency treatment. The problem of using the ER as a primary care alternative was supposed to be solved by Obamacare. It wasn’t.
Medicaid was supposed to provide reasonable health care for those who could not afford it. But it is not moving the needle in patient well-being. A recent analysis found that Medicaid patient outcomes were about the same as those without any health insurance.
To improve outcomes, we should remove regulatory barriers that depress competition between insurers, expand health savings accounts, permit insurance plans without all the Obamacare required coverages and require providers to transparently post prices so that consumers can shop around for their non-urgent care, which has been shown to be sensitive to pricing. Increased competition, higher efficiency and providing incentives to economize on care will tend to improve quality without unnecessarily increasing costs.
The second largest budget component is K-12 education. Despite higher spending, California student learning remains among the worst in the country, particularly in mathematics and science, where 40% or fewer of students are proficient.
The United States ranks only 30th in international comparisons of mathematical proficiency. The difference between U.S. student performance and that of top-performing countries isn’t close. Students from China correctly answer twice as many math questions as U.S. students.
More so than ever, mathematics training is the golden ticket to careers ranging from all the STEM occupations, to accounting, finance and other occupations requiring mathematical know-how and logical thinking.
But this deficiency can be turned around without major new spending. Many studies show modest reforms that leverage the benefits of competition would improve our learning outcomes considerably. These include teacher tenure reform, switching from seniority-based pay to merit-based pay that rewards the best teachers, more effective use of learning technologies and expanding school choice, particularly for families in poor neighborhoods.
These reforms can have big effects. Researchers have found that being able to replace the teachers who are performing poorly would raise lifetime student earnings in a single classroom by about $250,000.
These reforms, however, are consistently blocked by teacher unions, which provide plenty of political support to Democratic state lawmakers. This blocking occurs despite nearly 70 percent of taxpayers failing to support teacher tenure.
California’s state prison system accounts for about 8 percent of the budget. This share is rising over time even prison populations have declined by 25 percent. It costs about $81,000 annually per incarcerated inmate, which places California’s prison costs twice as high as the national average. This gap reflects very high labor costs negotiated by the California Civilian Prison Guards Association (CCPOA), one of the most politically savvy unions.
In 2015, the average prison guard’s wage was nearly $86,000. Since then, large annual raises have likely pushed this average wage to around $100,000. The CCPOA negotiates directly with the governor. Its leaders demand high wages and benefits, and the governor typically gives in to a union that has strategically spent over $72 million on political campaigns since 2001.
Prison guard salaries are just one example of high public sector labor costs. Average compensation (including benefits) for California’s public sector workers is about $140,000, far above the private sector. The state needs to overhaul its compensation review practices to ensure that workers are reasonably compensated at market-consistent rates and that taxpayers are not overpaying for these services.Over 2/3 of California’s state budget is devoted to functions that substantially underperform and that are far too expensive for what we receive.
Left to their own devices, the politicians who control the budget will simply allow these failures to continue. But there are straightforward fixes. Reforms that would repair these problems are possible if more taxpayers demand accountability from their elected representatives. Only then can California provide the basic functions of state government.
Lee E. Ohanian is a professor of economics at UCLA and a senior fellow at the Hoover Institution at Stanford University.
