Sacramento's Trump tantrum worsening state's fiscal health

Sunday, January 29, 2017

[Also published at The Orange County Register]

Have you ever watched someone playing chess who realizes that they are a few moves away from being checkmated? But, instead of playing to the conclusion or tipping the king, the player totally disrupts the board and storms off in a tantrum?

I sense this strategy may be playing out in Sacramento, but with the state’s finances.

Consider these concerns:

  • Personal income tax revenues, although at all-time highs, are not expected to reach the same levels in the next fiscal year.
  • Because California has the largest net unrestricted deficit in the nation, it has to pay the opportunity cost of financing the borrowed money. With interest rates rising, these costs will rise.
  • With pension systems that have not earned the projected annual 7.5 percent returns, annual contribution rates for the state and contract cities will rise aggressively.
  • The governor has been generous in recently granting higher wages to the state’s bargaining units, exacerbating unfunded pension liabilities.
  • The governor also raised the minimum wage for public employees, impacting county public employees, as well.
  • The Department of Finance made an error in last year’s budget, spilling costs into next year’s budget by up to $1.9 billion.
  • These fiscal pressures are a major squeeze play for the state’s general fund budget of $122.5 billion.

So, why not get even more reckless and tell the new president to pound sand, jeopardizing another funding source, representing some one-third of total state revenues? Why not become a sanctuary state and risk losing some or all federal funding? One guess is that if this state is going to implode anyway, maybe our governor is scrambling to blame it on someone else.

Aside from the pure defiance, there is another aspect that is likely motivating this nonsense. California’s volatile personal income tax revenue system, which represents two-thirds of all income, has not been reformed by our governor. His answer to economic cycles? A rainy-day fund. Ironically, to fund this commitment in the next fiscal year, the budget goes into a deficit.

Building a reserve seems to be a reasonable approach to managing California’s annual finances — I’ve advocated for setting aside monies to pay for future infrastructure maintenance. In prior years, the strategy was to borrow to bridge budget gaps. This explains why the unrestricted net deficit for the state has grown to nearly $170 billion in the last 17 years. Compared to the other 50 states by the Mercatus Center, California is in the bottom seven.

California now has the highest tax rates, is barely making its budget, and is not paying down its debts. Yet, it wants to subsidize all of its residents, including those who are here illegally. I can understand that a state that is flush with cash may want to be generous, but not one that is against the proverbial financial ropes.

Need another reason to know that things are bleak? The state’s roads are a mess, thanks to poor government planning and not making maintaining them a priority. And what’s the majority party’s solution? You guessed it — another tax!

What do we do? First, pray that we do not encounter an economic downturn anytime soon. Second, pray that the retirement systems have better investment return results (likely under a rising stock market since the election of President Trump). Third, see where efficiencies can be found within, by trimming staffing and outsourcing where feasible. Fourth, start gradually allocating more funds toward road repairs, pension liabilities, growing retiree medical obligations and other financial debts. Fifth, pursue and implement a more stable tax system within the next few years. And sixth, design a 10-year strategic financial plan and stick to it.

It’s time for leadership, not showmanship. It can be done. But, only if California’s elected leaders cut their auto-pilot mentality, eliminate distractions and pull up a seat to the table with the rest of the country.