Dan Walters: Federal, state and local budgets just a big fiscal food chain

By Dan Walters -- Bee Columnist

Sacramento Bee

February 10, 2003

When reporters write about the state budget, they often use a time-honored total that includes the state's general fund, special funds and "selected bond funds." By that count, Gov. Gray Davis is proposing a $96.4 billion spending plan for the 2003-04 fiscal year.

In fact, however, the "total state spending plan" for the fiscal year, according to the budget documents Davis submitted to the Legislature, is more than twice as large, some $213.4 billion. And the largest single factor in the difference is federal aid, more than $50 billion, which would pass through the state's hands.

The numbers underscore one of the most important factors about public budgeting: the increasingly intertwined finances of federal, state and local governments. And during a period in which governments at all levels are feeling the pinch due to a soft economy, it becomes something of a fiscal food chain. Those occupying loftier links on the chain can "solve" some of their problems by pushing them onto those at lower levels. And this pass-the-pain syndrome is in full operation these days, especially in California, whose intergovernmental circuits are more pronounced than those of other states, and whose fiscal problems are among the nation's most severe.

President Bush's new budget puts more emphasis on military spending and slices money to the states. The White House insists that federal "subventions" to the states would actually increase from $384.2 billion this year to $398.8 billion in 2004, but they would not keep pace with costs in the mandated programs, especially medical care for the poor, and thus place greater financial burdens on the states. Nor does Bush give states the federal aid on homeland security that they are demanding.

Davis and other governors are complaining loudly about Bush's tightening of the money spigot. Ironically, last year Davis "balanced" the state's budget on an assumption that the federal government would give California an extra $1 billion -- which never happened, of course. And to double the irony, as he complains about Washington pushing its fiscal problems downward, he's doing exactly the same thing to local governments.

Local governments' vulnerability to Sacramento's decrees is a fairly recent phenomenon, dating to the voters' enactment of property tax-cutting Proposition 13 a quarter-century ago this year. As local governments and schools lost billions of dollars in property taxes, Gov. Jerry Brown and the Legislature enacted an emergency "bailout" of local governments and schools. It eventually evolved into a complex web of state aid, some of it for general use but much of it earmarked for specific purposes.

In effect -- although it was never officially acknowledged -- the budgets of the state and thousands of local governments and school districts became one big budget. And that also meant the locals' finances became more intertwined with the federal budget.

The dependency relationship became crystal clear a decade ago, when the state faced another budget crisis and solved its problems, in part, by grabbing several billion dollars a year in local property taxes, forcing cities and counties to eat the reductions that resulted. And as Davis faces a new fiscal crisis, manipulating local government aid is the centerpiece of his plan to close the state budget shortfall.

Davis wants local governments to lose $3 billion a year in state aid that was originally extended to make up for a loss in revenues from license fees on cars. The fees, a form of property tax, had previously gone to local governments, but when they were cut, state politicians promised to keep the money flowing from the general fund. Davis not only wants to cut the aid, but also refuses -- so far -- to increase car taxes to replace it, perhaps to spur local officials, police officers and firefighters into pressuring Republicans to accept an even larger tax bite.

Davis also wants local governments to absorb some $8 billion in health and welfare services, and increase income, sales and cigarette taxes to pay for the program shifts. But local officials are understandably wary, having learned the hard way that state aid often is arbitrary, depending on the condition of the state treasury, and that they occupy the bottom links in the food chain.