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Budget buster

The high cost of education is behind California crisis

Associated Press / Rich Pedronecci

Budget buster
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The basic facts of California's budget fiasco are mostly well-known: The state has a $26 billion budget deficit, and the revenue-raising ballot initiatives that Gov. Arnold Schwarzenegger and the state's left-wing legislature sent to the voters were soundly defeated in May.

Those initiatives would have raised taxes by $16 billion over four years in a state that already boasts a top income tax rate of 10.3 percent, the highest in the nation.

California's general budget was $76 billion in 2004, and grew to $103 billion in 2008-a 35 percent budget hike that continued its trajectory even as tax revenues have now dropped below $88 billion due to the weakening economy. Some in the Golden State are crying "déjà vu all over again": A similar drop in tax revenue shocked the state legislature during the technology bust of 2000-2002.

California may have one of the largest economies in the world, but unlike the federal government, it has no printing presses at its disposal to cover budget deficits. Faced with their $26 billion debacle, lawmakers had no way out but to pay bills with IOU notes, as they have been doing throughout the month of July. While selling bonds to the public has traditionally been a popular way of paying for things politicians cannot afford, California is already in debt to its bondholders for $53 billion, with interest expenses alone costing nearly $5 billion per year (that number is expected to exceed $9 billion per year in 2018). Investors do not have an appetite for a functionally insolvent state's debt when the interest payments alone exceed the entire budget of nearly a dozen states.

With the legislature seeking a way out of the crisis now, how did things get to this point to begin with? A look at the basic numbers indicate that the answer is easy to find. With the muscle of the most powerful public employee union lobby in the country behind it, California voted Proposition 98 into law in 1988, requiring that a minimum of 40 percent of the state's annual budget be spent on the public-school system, and that minimum annual increases be enacted as well (these increases far surpass the rate of inflation growth or even population growth).

California's teachers unions have fought for, and obtained, annual budget figures that are staggering: Over $41 billion of the state's general fund alone went to K-12 state schools in 2008. This is on top of:

• nearly $1 billion in state lottery money

• $6 billion of "other state funds"

• $6 billion in federal funds

• and $14 billion in revenue from local property taxes.

And what have Golden State taxpayers gotten for nearly $70 billion spent on K-12 eduction and the behemoth educational bureaucracy? Test scores in reading, science, mathematics, and writing massively lag the national averages. Morgan Quitno Press ranks California 47th place in the country based on its proficiency results. And California has the 37th worst graduation rate (68 percent).

Since California is spending over $8,000 per pupil to achieve these results, it may be time for the legislature to break free from the powerful hold of the teachers union. Many residents have thought that the safety conditions on school campuses, the moral relativism in the classroom, and woeful academic results would one day come together to force a breakdown of the school system. But it may be dollars and cents that deal a fatal blow.

David L. Bahnsen

David is a financial adviser and frequent WORLD Radio guest. He serves as chief investment officer of The Bahnsen Group, a national wealth management firm managing more than $3.7 billion in client capital. He is the author of There’s No Free Lunch: 250 Economic Truths.


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