Commentary

05/11/2015 by Lenny Mendonca and Pete Weber

Part 5: Spend unexpected revenues in ways that will make money in lean times


Northern California Nanotechnology Center (Photo Credit: Kevin Tong/UC Davis College of Engineering)

Boom, Bust, Repeat? Part 5: Spend unexpected revenues in ways that will make money in lean times

CA Fwd encouraged lawmakers this week to be cautious over the next month as they hammer out next year’s budget. Revenues are up—too much to be sustainable—and government has some huge financial obligations on the horizon.

But that caution also should be complemented by a few careful and smart investments that could help close the income gap, deliver better results, and avoid the painful cuts that always accompany the slide down the backside of the business cycle.

Here are four ideas for investing a portion of the windfall—the byproduct of California’s innovative private sector—into innovations in the public sector.

1. Find new ways for safety net programs to get people out of poverty.

Lawmakers could set up an innovation fund for community and regional programs that are rethinking how to reduce chronic unemployment and intergenerational poverty—challenges that impose heartbreaking circumstance on millions of Californians, and unbearable costs on public budgets.

The state tried an approach like this last year with its new higher education innovation awards—and found that educators are finding smart ways to improve completion of bachelor’s degrees.

A similar program targeted at safety-net programs would surface innovations like the Fresno Bridge Academy, which is showing extraordinary success in moving chronically unemployed and underemployed people from public assistance to self-reliance. For every taxpayer dollar spent on the program, participating families benefit to the tune of $16.78 and the taxpayers get a $5.50 return in reduced spending for public assistance, plus income tax generated as families move up the income ladder.

In addition to encouraging and rewarding such innovations, the state should use these models to transform the safety net throughout California.

2. Support new ways for educational programs to lead to satisfying and sustainable careers.

While schools will likely receive over $4 billion of new revenue this year, roughly $2 billion of that may be one-time in nature. (Most of the money appeared unexpectedly after Tax Day, usually a sign it is the result of bonuses or stock market gains.)  Schools can and should use this revenue as they see fit, but state and local leaders ought to explore ways to direct some of this money into the one-time startup costs required to replicate programs that have improved results.

For example, the Center for Advanced Research and Technology (CART), a joint venture of the Clovis Unified and Fresno Unified school districts serving high-school juniors and seniors from fifteen different high-schools, is doing an extraordinary job of achieving what should be the overarching goal of our K-12 system: graduating high school kids with the skills required to succeed in college or compete for jobs in the global economy. All instruction is project-based, adding relevance to rigorous academics. Each of the fifteen career-specific laboratories has partnerships with community employers to ensure what is taught is consistent with the workforce needs of area employers. Schools like CART require start-up funding, but the returns to society are immense.

The budget also could set aside funds to implement the recommendations of the California Community College Board of Governors’ Task Force on Workforce, Job Creation, and a Strong Economy, a public-private partnership seeking new ways to prepare students for high-value jobs. At least some of the recommendations will require one-time expenditures to set up new structures and data systems for aligning curriculum with the skills needed in the workplace, which will be critical to making sure ongoing program funds are well spent.

3. Support the development of effective community corrections.

Four years ago the state shifted responsibility for low-level offenders from prisons to counties. Last year voters supported Proposition 47, which further reduced the crimes that result in jail. Local governments are now scrambling like never before to develop data-based management systems and put in place quality programs that offer an alternative to revolving-door incarceration.

This year’s budget should fund the one-time costs of building local management and program capacity for services that reduce drug and alcohol abuse, develop cognitive skills, and integrate job training, health and mental health services. Without this startup capital, California will repeat the painful mistakes of the past, when institutions for people with physical and mental disabilities have been closed with the promise—often unfulfilled—that they would receive community-based services that never materialized.

4. Invest as a partner in infrastructure that supports sustainable communities and jobs.

State leaders have made infrastructure investment a priority—and rightly so, with the drought expanding and transportation dollars lagging behind the needs of a growing population. The state expanded local governments’ authority last year to pair public and private investments to support local infrastructure projects from transit stations to stormwater systems.

This year, a portion of the revenue windfall could be used to expand the state Infrastructure Bank’s ability to match public and private dollars and develop new partnerships that encourage economic and job growth—and in turn, increase tax revenue and decrease the demand for public services.

The state has done this before, with great success. The California Institutes for Science and Innovation were launched in 2000 to support research in fields recognized as critical to the state’s economic growth—biomedicine, bioengineering, nanosystems, telecommunications, and information technology. The four separate institutes, housed on UC campuses, used state resources to forge partnerships between university research and private industry that could expand the state economy into new industries and markets. These investments have produced a wealth of research, patents, and spinoff companies.

As CA Fwd has pointed out in Boom, Bust, Repeat?, there is still not enough money to do what everyone wants.  But if at least some of the windfall is invested in innovations, California will be able to do more with the revenue it has in good years as well as bad. The business cycle will never go extinct, but this year’s budget can make it less threatening to the critical education, social, health and public safety programs Californians rely on.

Lenny Mendonca is Co-Chair of California Forward and former director of McKinsey & Company. Pete Weber is a member of the California Forward Leadership Council and former Executive Committee Chair of the California Partnership for the San Joaquin Valley.

Read the rest of "Boom, Bust, Repeat?"

Categories: Fiscal Reform, Budget Reform, Boom, Bust, Repeat, State Budget, Revenue Reform, Tax Reform, Budget Reform, State Budget, Tax Reform

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