Recently, Governor Jerry Brown reached a new labor agreement with the Service Employees International Union (SEIU) Local 1000 that gives 95,000 state employees a 4.5% pay raise beginning in mid-2014. This comes on the heels of a budget compromise between the Governor and Legislative Democrats that is being touted as “conservative” and “balanced”. Under the compromise, State General Fund spending for the 2013-14 budget is $96.4 billion, $1.4 billion more than the 2012-13 budget. Also, total spending from all revenue sources is nearly $5 billion greater than the $228 billion last year, setting a new spending record of $233 billion.
As with all legislative and budgetary actions, the devil is in the details. In this case, the detail that is quickly overlooked in the Democrats’ hurry to pat themselves on the back is the failure of addressing future debt. While nearly 100,000 state employees will receive pay increases, three major budgetary obligations continue to be ignored, which will place further fiscal strain on state budgets in the future.
Perhaps the largest immediate problem the budget fails to address is the significantly underfunded California State Teachers Retirement System (CalSTRS). At the beginning of 2013, CalSTRS approached the Legislature with a serious problem: The state’s second largest pension system was only 66% funded and faced an unfunded liability of over $73 billion dollars. Additionally, the fund was in a downward spiral that could only be reversed with legislative action.
“Every day that this problem is not addressed, the CalSTRS unfunded liability goes up $17 million,” stated CalSTRS Deputy Chief Executive Officer Ed Derman at a joint informational hearing. The Legislative Analyst’s Office (LAO) agreed and predicted that, if no action was taken, all CalSTRS assets would be depleted by 2044. The Legislature responded by promising to deal with the problem, but as of today, no proposal has been proposed. Governor Brown also failed to acknowledge the issue in his May Revision of the 2013-14 budget.
The second major obligation yet to be resolved is the growing cost of the state’s retiree health care benefits. The State Controller’s Office reported that California’s unfunded liability for retiree health benefits was $63.85 billion as of June 30, 2012. Despite acknowledging the problem in his May Revision saying, “Between now and 2016-17, the costs of retired state employees’ health care is projected to rise by 59%. Yet, the state has not set aside significant money to address the $63.8 billion in unfunded liabilities for future obligations. That liability increases by billions of dollars each year;” nothing in the Governor’s budget seeks to remedy this issue.
Finally, the state currently owes the federal government $10.2 billion for loans that kept California’s Unemployment Insurance Fund afloat when it went insolvent in 2009. This debt, if left unpaid, will either jeopardize federal funds in the future or be exploited by Democrats to justify more taxes.
Not only does the recent budget compromise fail to address these major obligations, but it also is balanced on the back of temporary Proposition 30 tax increases. If the state can’t address these important issues with $6 billion in new temporary revenue, what can we expect when those taxes expire and billions of dollars in new spending commitments remain?