Gov. Jerry Brown is telling everyone that California’s state budget problems are “fixed” and predicting surpluses for years to come.
It’s become sort of a tradition for the state to make rosy budget predictions and to then make downward revisions as the year goes on and reality sets in.
Last November, for example, California’s nonpartisan Legislative Analyst’s Office wrote, “The 2012-13 budget assumed a year-end reserve of $948 million. Our forecast now projects the General Fund ending 2012-13 with a $943 million deficit.”
And before that, there was the even bigger budget revision in May 2012, of which the Los Angeles Times reported at the time:
Brown’s revised budget reflects a steadily worsening fiscal picture for California. On Saturday, he announced via YouTube that the state’s deficit had grown to $16 billion, nearly twice what he projected when he released his initial budget proposal in January.
To make his budget proposal look balanced this time around, Gov. Brown makes another series of optimistic assumptions, including that the tax increases California voters approved last November won’t hurt the economy and the state’s economy and tax revenues will grow; that California’s millionaires, hit with higher taxes again, won’t pack up and move to low-tax states; that California’s housing market will improve and home prices will go up; that President Barack Obama and Congress won’t do anything to hurt the national economy; and that the stock market will rise.
Beyond the hopeful predictions, the governor has also distorted how much money is actually being spent. Sacramento Bee Columnist Dan Walters notes:
…there’s been so much recent jockeying on how the state keeps its books that referring merely to the general fund as the budget is not only incomplete, but downright misleading to the voting and taxpaying public.
The tendency has been to shift expenditures from the general fund to new special funds and that has the effect – intended or coincidental – of flattening out general fund numbers and thus making the growth of state spending look smaller than it has been.
For all of Gov. Brown’s talk about spending cuts and “fiscal discipline,” his budget forecasts a 5 percent jump in state spending, rising from $93 billion in 2012‑13 to $97.7 billion in 2013‑14. But as Walters notes, you need to add in all the other spending that is not included in those numbers: nearly $41 billion in special funds and over $7 billion in bond funds. Suddenly, the state is spending over $145 billion in 2013-14, not $97.7 billion.
Maybe that’s why even the Los Angeles Times isn’t fully buying this balanced budget:
But even though it appears to be free of the deficit that dogged the Capitol in recent years, the state is no model of financial health.
Sacramento is legally obligated to pay many billions of dollars withheld from schools, local governments and healthcare providers as lawmakers struggled repeatedly to balance the books. It owes Wall Street more per resident than almost every other state. And it has accumulated a crushing load of debt for retiree pensions and healthcare, now totaling more than taxpayers spend each year on all state programs combined.
The budget Brown proposed Thursday addresses only a small portion of the overall debt, which stems from the same types of bills that drove cities like Vallejo, Stockton and San Bernardino into bankruptcy. The state is likely to find its debt consuming an ever larger share of money meant for the basic needs of government.
The “crushing load of debt” is just one of the elephants in the room. The Department of Finance puts it this way:
The state’s budget challenges have been exacerbated by the Wall of Debt–an
unprecedented level of debts, deferrals, and budgetary obligations accumulated over the prior decade. In 2013‑14 alone, the state will dedicate $4.2 billion to repay this budgetary borrowing–paying for the expenses of the past, instead of meeting current needs. Moving forward, continuing to pay down the Wall of Debt is key to increasing the state’s fiscal capacity. In 2011, the level of outstanding budgetary borrowing totaled $35 billion.
The Department of Finance goes on to proudly say that the debt is “already” paid down to less than $28 billion. Of course that doesn’t include government employee pension and health benefits that have been promised but not yet funded. California estimates its unfunded pension and benefit liabilities total around $181 billion. Stanford University research, however, pegs the unfunded liabilities of California’s largest state pension systems a lot higher:
The combined unfunded liability for CalPERS, CalSTRS, and UCRP under the 6.2 percent discount rate is $290.6 billion, equal to more than three state General Fund budgets. That figure represents an unfunded amount per household of nearly $24,000. Using a low-risk, or riskfree, discount rate, the combined unfunded liability for these three systems reaches $497.9 billion.
There’s a parallel crisis in unfunded state retiree healthcare liabilities too, which a 2012 Pew Center on the States report set at $77.4 billion and growing. Worse, Golden State politicians have systematically skimped on making annual contributions to retiree pension and health systems (akin to making the minimum required monthly credit card payment), so future taxpayers’ tab to cover the cost of the “shadow” state workforce that’s no longer actually working continues to climb.
Until California tackles its pension and retiree healthcare crises, it will simply be nibbling at the margins of its fiscal problems. Many had hoped that Gov. Brown, as a Democrat, would be uniquely equipped to bring about serious public pension reforms by negotiating with public employee unions. He has not.
Similarly, he hasn’t fundamentally reformed the state budget. David Osborne, who led then-Vice President Al Gore’s “reinventing government task force” and was the lead author of the Clinton administration’s “National Performance Review,” authored a 2010 Reason Foundation study showing how to fix the state’s budget. In a nutshell, California would determine how much money it has to spend, zero-out every program, rank the state’s priorities (education, health care, transportation, etc.), make the programs all compete for the money, and then assign the money to taxpayers’ highest priorities.
This type of budget, Osborne wrote, “can be summarized in one page per outcome: a list of programs to be funded, a line, and below that, a list of programs the state can no longer afford, because they don’t produce enough value. Every citizen can understand it, because it reflects common sense and taxpayers’ priorities.”
The programs would all have to prove their worth. If a social program wants more money, it has to show why it deserves money that would otherwise go towards another program, like transportation or education. It would reveal the real-life trade-offs that Gov. Brown and state lawmakers should be making. Unfortunately, instead of fixing the fundamental problems, lawmakers are off doing victory laps for a state budget that has largely been balanced with smoke, mirrors and tax increases.
Leonard Gilroy is director of government reform at Reason Foundation and editor of the Annual Privatization Report. In 2010 and 2011, Gilroy served as a gubernatorial appointee to the Arizona Commission on Privatization and Efficiency, and in 2010 he served as an advisor to the New Jersey Privatization Task Force, created by Gov. Chris Christie.