Volcker Report Praises California Budget Moves But Raises Warnings

Joel Fox
Editor and Co-Publisher of Fox and Hounds Daily

California has taken positive steps to deal with its budget problems and processes in the last few years, according to a new report from The Volcker Alliance, but there could be problems ahead if the state reverts to its old ways of budgeting during good times.

With news coming out of Sacramento that the budget prepared by Democratic leaders would spend $2 billion more than the governor requested, the Volcker report warning seems right on target: “California still faces a number of challenges and risks – particularly its tendency to overspend during boom years.”

Will the legislature want to follow that path that could become economic quicksand? Looks that way.

Issued by a non-partisan organization formed by Former Federal Reserve Board Chair, Paul Volcker, the Volcker Alliance hopes to address “effective execution of public policies and to rebuild public trust in government.”

One aspect of policy the Volcker Alliance has looked at in the past is state budgeting. The report issued yesterday was a follow up study on the issue focusing this time on three states, California, Virginia and New Jersey. The report intended to see how those states responded to revenue growth coming in as the economy grows following the recession. The goal was to discover responsible budget practices that all fifty states might adopt.

California was praised for changes made under the Brown Administration – but caution flags were also raised.

The study reported that the financial rating agencies, Moody’s, Standard & Poor’s, and Fitch have given the Golden State four upgrades. In addition the Alliance said California turned its budget problems around by securing a simple majority vote for the budget, (noting that five consecutives budgets have passed on time), temporarily raising taxes, strengthening a budget reserve, taking a stab at pension reform, and reducing some long-term debt.

However, the report also mentioned fiscal risks including $94 billion in bond debt; $195 billion in pension and retiree costs; and a shortfall for infrastructure needs. According to the report the retiree debt equaled more than 9-percent of the state’s $2.1 trillion economy, a burden of about $5,100 per resident.

In addition, the part of the debt that is principally worker retiree health care was equivalent to $1,700 per capita, or 68-percent above the median for all 50 states.

Like other economic experts, the members of the Alliance worried about California’s reliance on high-income taxpayers and their investments stating that, “the state is hostage to the vagaries of the stock and real estate markets.”

The state’s highly progressive income tax, says the report, is 70 percent more volatile than the US average from 1995 to 2013. However, the Alliance wondered if Prop 30 taxes ended, that might undermine the fiscal improvement the state has enjoyed.

The Legislative Analyst and Standard & Poor’s have both said there should be no fear of a fiscal cliff when Proposition 30 taxes expire.

Of course, they don’t assume wild spending by the legislature.

As the Volcker Alliance report indicated, “It remains too early to tell if the state’s fiscal culture has changed permanently or if California will revert to its previous tactics in the next economic or stock market downturn.

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