California: A Textbook Example of the Perils of Short-Sighted Policy

Autumn Carter
Executive Director, California Common Sense

The opening words of Governor Jerry Brown’s recent California state budget should ring true. “Since the January Budget, the state’s economy has strengthened and revenues have surged upward, driven by increased capital gains and other income from high‑wage earners,” it begins. “Despite these stronger revenues, the budget remains precariously balanced and faces the prospect of deficits in succeeding years. The state has hundreds of billions of dollars in existing liabilities, such as deferred maintenance on its roads and other infrastructure and its unfunded liability for future retiree health care benefits for state employees and various pension benefits.”

From a budget stand-point, taken together, California’s last 15 years are a textbook example of the perils of short-sighted policy. Long-term planning and fiscal responsibility are always public goods, but the state government’s budgeting decisions have now taken them from good governance principles to practical necessities. As it turns out, years of short-sightedness tends to beget short-sightedness, thereby limiting any real discretion policymakers may want (or actually think they have).

In 1999, short-sightedness drove CalPERS to propose retroactively expanding retirement benefits for public employees (especially police officers and firefighters) and lowering the retirement age. CalPERS assured lawmakers and the public that the plan’s funding surplus and the Dotcom Boom would generate more than enough investment returns for CalPERS’s portfolio to fund the expansion, negating the need for increased funding contributions. Short-sightedness drove California lawmakers hungry for union support and re-election to run with the idea that CalPERS’s argument was a plausible one. They were wrong.

Even pre-Dotcom-bust, math and common sense clearly indicated otherwise. The retroactive pension benefit expansion would have been expected to support more public employees at a higher annual cost and for longer periods of time because they could retire earlier and were expected to live longer. Perhaps a never-ending stock market boom would have been able to cover larger pensions for decades of workers, but that unrealistic pension math makes no sense. The Dotcom Boom did not do away with economic cycles and it did not make markets invincible. Markets decline, and declines produce losers. In this case, every California resident then, today, and for generations going forward lost. Growing unfunded liabilities have increased annual pension costs, which have repeatedly crowded out public services.

Short-sightedness drove the state legislature to repeatedly budget for program expansions in the midst of revenue spikes during the 2000s, just to cut them soon thereafter during downturns. Even a revised 2015-16 budget that anticipates $6.7 billion more in revenue than its January version leaves little room for budget flexibility. In the name of temporary austerity, state policymakers spent years withholding mandated funds from schools, allowing the CalSTRS teacher pension fund to languish, leaving roads in despicable disrepair, paying lip service to rising retirement healthcare costs, and watching Medicaid costs gobble up more and more of the state budget. We can trace short-sighted inaction on these issues back to short-sighted decisions like the retroactive pension hike a decade prior.

Even supposed solutions these days are short-sighted and politically expedient ways to focus the public attention on the symptoms of our budget problems rather than their root causes. In 2012, the popular argument was that Prop 30’s temporary income and sales tax hikes would bail us out. In 2014, Prop 2’s stronger Rainy Day Fund would force legislators to stockpile revenue during booms to spend it during busts. In principle, Prop 2 is a step in the right direction, but even it ultimately relies on an unsustainably volatile tax system that became even more dependent on volatile capital gains following Prop 30’s passage.

The fact is that quite often, political expediency and sound public policy just do not jive. Willful negligence, avoidance, and ignorance among supposed leaders have long-lasting negative implications for citizens and those tasked with leading in the future. Years ago, it should have been entirely foreseeable that decisions then would manifest themselves in policy today. Today’s policymakers should see the same when they consider whether they will give future lawmakers any real opportunity to improve this state. Short-sightedness may seem like a cycle that is too tough to break, but we know just how costly that kind of short-sighted thinking can be.

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