Commentary: State’s ‘balanced and progressive’ budget carries big risks for taxpayers

Gov. Jerry Brown and legislative leaders are patting themselves on the back for what Brown describes as a “balanced and progressive budget” for the 2017-18 fiscal year that begins July 1.

The “progressive” description of the $185 billion budget alludes to expanding benefits for the very large number of impoverished Californians – at least a quarter, and perhaps more than a third of the state’s 39 million residents. They include an expansion of the state’s new “earned income tax credit” from low-income wage workers to the low-income self-employed.

The “balanced” claim refers to politicians’ traditional view that if they don’t spend every last dollar the state receives, or is projected to receive, a budget is “balanced.”

However, a more comprehensive view of the state’s financial situation clouds that characterization.

For instance, while the $125 billion general fund doesn’t directly rely on borrowed money, as have past budgets, it also doesn’t account for an increase in debt that will have to be eventually covered by general fund taxes, such as income and sales levies.

Brown’s revised budget proposal, released last month, points out that “the state now has $282 billion in long‑term costs, debts, and liabilities. The vast majority of these liabilities – $279 billion – are related to retirement costs of state and University of California employees (which) have grown by $51 billion in the last year alone due to poor investment returns and the adoption of more realistic assumptions about future earnings.”

The budget does little or nothing to whittle down that burden on future generations of taxpayers.

The budget allocates nearly $6 billion just for payments to the California Public Employees Retirement System (CalPERS) and Brown’s budget predicted sharp increases in the years ahead. He proposed, and legislators endorsed, another $6 billion one-time payment by borrowing the extra payment from another state fund.

Borrowing to make the extra payment would not reduce the state’s overall debt, obviously. Brown contends that it would save money in the long run, because the interest paid on the loan would be less than the projected growth of pension debt.

It’s quite similar to the “pension obligation bonds” that local governments have floated, hoping to come out ahead via arbitrage, but they have sometimes backfired, and Brown is betting $6 billion that CalPERS can achieve its 7 percent annual earnings goal despite what the governor describes as “poor investment returns.”

Even if this fiscal gimmick works as hoped, the state’s retirement debt will continue to grow. The state’s regular payments to CalPERS fall way short of what would be needed to keep the debt from growing, much less pay it down. Overall, CalPERS has less than two-thirds of the money it needs to cover all pension commitments.

Another cloud on the budget is the $9.9 billion in reserves that Brown and legislative leaders are touting as hedge against an economic downturn.

Most of it is in a “rainy day fund,” it had better be a very light shower, because it’s a truly paltry sum. Brown’s own budget staff estimates that even a moderate recession would slash state revenues by $55 billion over three years, largely because the state has become ever-more-dependent on income taxes from a relative handful of affluent taxpayers, making its revenue stream increasingly volatile.

The state sorely needs tax reform to reduce that volatility and ensure that the money will be there for all the goodies Brown and legislators are happily handing out. But that would take political will that is in very short supply.