Sacramento Spotlight: AB 110 – The Not-So-Balanced Balanced Budget

Carson Bruno
Assistant Dean for Admission and Program Relations at the Pepperdine School of Public Policy

“A tremendous achievement.”

“Ho-hum, another on-time balanced budget.”

These quotes, the first from Assembly Speaker John Perez and the second from Senate President Pro Tempore Darrell Steinberg, perfectly encapsulate the mood of Sacramento last week as California’s State Legislature voted to approve a state budget—officially known as AB 110As mandated by law, lawmakers had until June15 to pass a balanced budget, or go without pay.  This incentive mechanism has achieved one of its intended goals—an on-time budget—but hasn’t necessarily proved successful on the balanced provision. 

Despite the claims from the Senate and Assembly Democratic caucuses or from Gov. Jerry Brown, calling this budget “balanced” is a stretch, to be kind. A quick look shows the spending plan relies upon temporary tax increases, fails to address unfunded pension and retiree obligations, pays down state debt slowly and – surprise – resorts to gimmicks to make the numbers work.

In November 2012, California voters passed Proposition 30, which increased the state sales tax by 0.25% and created four new “millionaire” tax brackets (10.3% for taxable income over $250,000, 11.3% for income over $300,000, 12.3% for income over $500,000, and 13.3% for income over $1 million).  The additional revenue generated from the tax increases was sold to the electorate as strictly for education.  However, while there is a debate as to whether the money is actually being spent on education, there is no doubt surrounding the temporary nature of the taxes.  These taxes expire at the end of FY 2019 – meaning the estimated $6 billion in additional revenue will disappear with them.

However, even with the boon in additional revenues, the FY 2014 budget does nothing to address serious unfunded liabilities facing the state.  Earlier this year, CalSTRS—the public teacher’s pension fund—notified the state that it was only 66% funded facing an unfunded liability of $73 billion.  To make up the difference, the California Legislative Analyst’s Office suggested the state increase its annual contributions by $4.5 billion a year bringing its annual total to just over $10 billion per year.  LAO analyst Ryan Miller called the CalSTRS problem perhaps “the state’s most difficult fiscal challenge.”  Here’s one reason why: If contributions aren’t increased, it’s estimated the fund’s unfunded liability will increase $17 million per day. The LAO agrees with this sentiment, predicting that CalSTRS will run out of money by 2044 if no additional action is taken. Adding to the misery: CalPERS, the state’s public-employee retirement system, is also unfunded by the tune of approximately $329 billion, based on a recent revision of Moody’s actuarial methods.

Meanwhile, none of these estimates includes the completely unfunded nature of retiree healthcare. While at least a portion of the pension costs are funded in some capacity, the legislature has done absolutely nothing to prepare for healthcare costs for retirees.  In his office’s most recent report on California’s retiree health benefit valuations, State Controller John Chiang estimates the total unfunded liability at approximately $64 billion. Gov. Brown’s own May Budget Revision acknowledges that “between now and 2016-2017, the costs of retired state employee’s health care is projected to rise by 59%.” The longer these problems are left unaddressed, the bigger they continue to grow.  And the FY 2014 completely ignores these issues.

While the so-called “wall of debt,” which only includes a small portion of the state’s total $127 liability, has decreased from about $35 billion to $27 billion, the budget only projects it further decrease by about $5 billion by 2017. In addition, the state shows absolutely no interest in repaying approximately $10.5 billion in loans from the federal government to keep California’s Unemployment Insurance Fund solvent.  In January 2009, California’s Unemployment Insurance Fund hit a deficit and has had to borrow from the federal government since to plug the hole.  This borrowing has ballooned from approximately $350 million in January 2009 to $10.5 billion this April.

Lastly, to make the numbers work out, the budget slyly borrows from special funds to plug holes in the state’s General Fund.  While this is common practice in budgetary accounting, FY 2014’s budget gimmick is particularly egregious. It borrows $500 million from the state’s cap-and-trade auction fees to cover budget increases for welfare and Medi-Cal benefits – even though those fees, as specified under the landmark AB 32, are reserved to fund ways to lower the state’s carbon emissions.  Apparently, even environmentalists—considered a protected species in California political circles – aren’t safe from fiscal trickery.

So, while legislative leaders and Governor Brown high-five themselves on their success, it’s doubtful that Californians will ever see that $1.1 billion rainy day reserve officials are predicting. Contrary to Speaker Perez’s assessment, only when California has a balanced budget that doesn’t rely on temporary tax increases, addresses adequately the state’s long-term unfunded obligations, pays down its massive amounts of debt, and doesn’t use accounting gimmicks will the budget’s passage truly be a “tremendous achievement.”

Meanwhile, California’s fiscal state continues to deteriorate . . . just maybe, not as quickly as before.

Check-out the previous “Sacramento Spotlight”: AB 158/SB 405 – Statewide Plastic Bag Bans

Follow Carson Bruno on Twitter: @CarsonJFBruno

Crossposted on Advancing a Free Society – Eureka

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