State must tackle its debts

By John Moorlach
Saturday, December 3, 2016

Published at the OC Register

The Legislative Analyst’s Office recently announced that it is forecasting a $2.8 billion budget surplus for the state of California next year.

As the SNL Church Lady would say, “Isn’t that special?”

But, it’s not special. I believe the report’s conclusions are deficient, as many fiscal concerns are being smoothed over, rather than being highlighted. The LAO takes an auto-pilot approach in its assumptions. This is understandable, but it screams for a leadership decision to make a major course change. Sacramento needs to re-evaluate the priorities for its most obvious obligations.

Why do I say this? Because California has the largest unrestricted net deficit of any of the 50 states. It’s nearly $170 billion – and growing. And this number does not take into account other significant unfunded liabilities. So, a $2.8 billion budget surplus may be special, but it is illusory.

With this in mind, let’s ask Gov. Brown to use this supposed surplus for the real fiscal demands facing our children and grandchildren, and not toward more new programs. With budget season around the corner, there are allocations he must consider.

We’re told that deferred maintenance for the state’s roads and highways is some $59 billion. Let’s start saving up. Why does California not set funds aside for future repairs and improvements? Instead, Sacramento screams for a new tax after things have fallen apart. If it set funds aside in a methodical manner for these costs over the next 30 years, the annual budgeted amount would be $2 billion.

The state is only making the minimum required annual contribution into its retirement plans. Yet, CalPERS alone has fallen behind nearly $50 billion in the last two years on its meager investment returns. While CalPERS has a long-term plan to reduce its expected rate of return assumption, perhaps it’s time to accelerate the annual contributions to pay down the unfunded liabilities. If a 10 percent increase was added to the annual contribution, it would require another $800 million out of the budget.

These two critical investments would increase the state’s general spending by the $2.8 billion. But, there is more. California has an unfunded actuarial accrued liability of $80 billion for retiree health care. Promises to pay for the medical costs of retired state employees will come due. If the trust fund that is utilized to manage this obligation has an earnings assumption of 7.5 percent and the Capitol pays this balance off like a mortgage over 30 years, then the annual set aside would have to be $6.7 billion (such is the cost of compounded interest).

With this, the budget would have a deficit. At least the LAO has accounted for other costs on the horizon. The voters just approved Proposition 51, the $9 billion school bond measure. This adds another $500 million a year into the mix to pay for the principle and interest.

And, that’s not all. The governor raised the minimum wage earlier this year to $15 per hour. His own estimates show that it will cost the budget $4 billion per year in additional personnel costs.

I would suggest that the governor’s last two years in office be spent improving the state’s fiscal house. I recommend he focus on the following:

1. More expeditiously fund the retiree medical liability. Asking employees to fund this massive debt through payroll withholdings will fall woefully short of the goal.

2. Set funds aside for future infrastructure improvements and repairs, just like the state demands of homeowners’ associations. We have reached capacity on debt issuances and must start paying as we go.

3. Gov. Brown acknowledged that we cannot address the pension debt in a year or two, or even ten. However, it needs to be addressed now. And that can be done by paying a little more than required to accelerate the payoff schedule.

4 Start reducing the state’s workforce, as compensation and benefit costs are rising. This can easily be done through the increasing attrition of baby boomer employees. Stop new hiring where feasible. Outsource where possible.

If Sacramento squanders this period of supposed budget surpluses, then the next fiscal downturn will see California taken to its fiscal knees. And, with the new administration in Washington, D.C., a bailout will be about as likely as Gov. Jerry Brown coming back for two more terms after a brief break.

It’s time to make California fiscally solvent, and it will take strong fiscal leadership. Wouldn’t that be special?