Jerry Brown signed the 16th and final state budget of his two-part gubernatorial career last week, and bragged a bit.
“When I took office back in 2011 with the state facing a $27 billion deficit, I pledged to work with the Legislature to fix California’s financial mess,” Brown said in a statement as he signed the $201 billion 2018-19 budget. “Today, the final budget I sign delivers on that pledge and prepares us for the future.”
Those last two assertions are, unfortunately, just half-truths.
Brown has been blessed with an expanding economy and persuaded voters to approve a sharp income tax increase on the state’s highest income residents.
Surging revenues allowed him to pay off accumulated budget deficits, nearly $30 billion, while balancing yearly income and outgo and setting aside money in a “rainy-day fund.”
However, he didn’t “fix California’s financial mess”—not by a long shot.
Although he has been relatively tight on the spending side of the ledger—relative, that is, to the Legislature’s Democratic majority—Brown has nevertheless raised overall spending by 50 percent in seven years for benefits that will be very difficult to reduce if recession strikes.
A 50 percent increase in per-pupil school spending is locked into the state constitution. New entitlements for health and welfare benefits, including an earned income-tax credit for the working poor and a huge increase in Medi-Cal health coverage, are politically sacrosanct.
Moreover, David Crane, an investor and university lecturer who delves into state finances as an avocation, calculates that California has added more than $200 billion in debt during the last decade.
Most of that debt is in “unfunded liabilities” for promises of pensions and retirement health care made to state and local government employees. While Brown has taken passing swipes at both, they are pushing some cities and school districts to the brink of insolvency.
The governor’s claim that the budget “prepares us for the future” is also overblown.
Brown is proud of persuading voters to create the “rainy-day fund” and has not only filled it to the legal limit but created a few other reserve funds, all meant to cushion the impact of a future recession—one he says California is overdue to suffer, based on historic economic trends.
All told, the state now has, or soon will have, about $16 billion in such reserves, and it’s certainly better than nothing.
However, Brown’s own budget staff calculates that even a moderate recession would cost the state $60 billion in declining revenues over three years, so the reserves would cover only about a quarter of such a shortfall.
In fact, despite Brown’s reserves, the state may be less prepared for a future economic downturn than it was when he became governor for the second time in 2011.
While higher spending is largely locked in place, the revenue stream is now even more unreliable because it is even more dependent on the rich. Their taxable incomes, particularly from investments, are highly volatile and they might be enticed to flee California now that federal tax law nearly erases their ability to write off their high state taxes.
Instead of relying on an inadequate “rainy-day” reserve, Brown could—and should—have championed a much-needed overhaul of the state’s tax system to reduce both the volatility and the impact of a new recession. But he refused to take on that difficult task. It could haunt his successors.