Reverse Engineer the Budget

George Plescia
President of Apex Consulting, Inc.

California voters are among the savviest in the nation, and it is because they are very well informed skeptics.  In 2010, they overwhelmingly passed Proposition 25, which essentially said if lawmakers aren’t doing their job – namely, passing a balanced budget – they won’t get paid.  A judge’s ruling recently defanged the Proposition, and it remains to be seen whether or not a sham balanced budget is passed just so Legislators can get their paychecks.

Voters, well-armed with the fact that unfunded pension liabilities were unaffordable and costing them essential services like police and firefighters, passed pension reform in San Diego and San Jose, two cities hardest hit by the costs.  These initiatives are already being challenged in the courts.

Meanwhile, California’s budget is $17 billion dollars out of whack is saddled by $500 billion in unfunded retiree’s health and pension benefits statewide.  And yet, with a deadline looming, it is business as usual in Sacramento.  The most glaring indication of the continuous budget dysfunction is that Legislators are already counting the $8.5 billion tax hike proposed by Governor Brown as revenue projected for next year.

The vote on the proposal isn’t until November, and its passage is less than certain since voters are skeptical, as they should be, that higher taxes will solve out-of-control spending.

This insanity could be ended if Legislators reverse-engineered the budget.  Any real budget must address chronic over-spending and acknowledge falling revenues as a structural reality, and cannot depend upon a tax hike that hasn’t happed yet as projected income. Without pension reform the budget will continue to sink into debt.

On June 5th voters in San Diego and San Jose overwhelmingly passed measures that will begin to realistically address the costs of unfunded pension liabilities.  The astonishing results – nearly 67% and 70% respectively  – underscore a two larger points:  1) local voters had to make the decision because legislators in Sacramento refused to pass real pension reform and 2) that California’s larger budget crisis can’t be resolved without addressing pension reform statewide.  Voters understand that fairness, spending accountability and transparency are the right components to fix the Sacramento budget mess.

California’s budget problem cannot be solved without comprehensive statewide pension reform.  Pension obligations are the largest chunk of debt owed by the state.  These obligations out pace even bond and debt service payments.

Whether Legislators in Sacramento will absorb this message and act accordingly remains to be seen.  They are required to pass a budget by the statutory June 15th deadline.  They face a $17 billion deficit, because the “revenue projections” which were the foundation of their budget last year were completely delusional.  Also, the unions court challenges to any voter-passed pension reforms mean resolution of the matter is not going to happen in the near-term.

The Legislature could act at any time on the pension reform measure proposed by Governor Brown six months ago that has been languishing in the Assembly Public Employees, Retirement and Social Security Committee.  Fiscal reality demands action.  Cities and counties throughout the state have been forced to cut essential services to pay for pensions.

The cost of delaying pension reform is $3.4 million a day according to the Stanford Institute for Economic Policy Research (SIEPR) pension study.  In the last two years, the Legislature’s inaction on the issue has added nearly $2.5 billion in debt.  Current pension obligations alone are projected to cost each household between $12,000 to $31,000.  Meanwhile, Legislator’s insistence on relying upon a huge tax increase that has not been passed yet as a budget reality is absurd and does nothing to address the $17 billion dollar deficit.

Senate Pro Tem Darrell Steinberg has said that the election results “didn’t change a thing for me.  My opinion is the same: We know we need to get pension reform done before the end of the legislative session and we will get it done.”

Exhausted taxpayers are still waiting and have reason to be skeptical, given the inaction and reliable gimmicks of the past.  And they won’t be fooled.

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