Despite Alleged Surplus, California Budget Is Late and Unbalanced

California Gov. Gavin Newsom outlines his 2021–2022 state budget proposal during a news conference in Sacramento on Jan. 8, 2021. (Rich Pedroncelli/Pool/AP Photo)

Commentary

California’s state budget is supposed to be crafted by the June 15 constitutional deadline. For fiscal year 2021–22, which began July 1, it wasn’t. Instead, the legislature passed a “placeholder” budget—that is, a fake budget.

Proposition 25 from 2010 mandates legislators’ pay be cut off if they miss the deadline. Then-Controller John Chiang actually did just that in 2011, until a judge ruled against him.

Of course, if you’re even a minute late with paying your personal or business taxes, state tax authorities will impose massive penalties, plus interest.

Last week, the legislature finally did pass what appears to be an actual budget, although some parts still are being negotiated with Gov. Gavin Newsom.

It spends $262 billion, including federal funds. The key always is the general fund, which clocks at $196 billion. That’s up 18 percent from last year’s $166 billion during the COVID year.

The positive part is $25 billion is slated for “total reserves,” a good thing. When that’s deducted, the budget would be $171 billion. That would be up three percent from the previous year.

But the problem is a budget in some ways is a wish list. The obvious recent example is how the budget passed in June 2019 did not include funds for COVID because that was six months or more in the future.

The real way to judge state finances is through what used to be called the Comprehensive Annual Financial Report (CAFR), but starting in 2020 will be called the Annual Comprehensive Financial Report (ACFR).

Unfortunately, in recent years Controller Betty Yee has been tardy in compiling these reports. Her CAFR for the fiscal year ending June 30, 2019 was produced only on October 23, 2020. That was far too late to provide legislators—let alone citizens and journalists—the data they needed to craft the budget during the previous June.

And you can’t blame COVID for the lateness, because it should have been completed by the end of 2019. Even the troubled Los Angeles Unified School District (LAUSD) produced its Audited Annual Financial Report for June 30, 2019 on December 13, 2019. And the LAUSD’s Audited Annual Financial Report for June 30, 2020, although later than the previous one, came out on March 21, 2021.

So we’re stuck with the numbers from the 2019 CAFR for the state.

Wouldn’t it have been great to know the updated number for the fiscal year ended June 30, 2020, the COVID Spring?

In any case, the number probably won’t be much different from $281 billion, still a staggering number. These high numbers were caused by the “pension spiking” of the past two decades.

“Not setting more aside, not more aggressively reducing existing high interest debt obligations and creating new annual programs is a recipe for a fiscal train wreck,” former Sen. John Moorlach told me; I served from 2017–20 as his press secretary.

What about all that extra money flowing in like gold at the end of a leprechaun’s rainbow?

“Economies operate in cycles,” he said. “With a huge boom in personal income tax revenues, the state’s new budget does not adequately account for a potential bust or down cycle.” He said the $25 billion in reserves “should help, but we won’t know for another year.” That would be when next year’s ACFR comes out, whenever that is.

While in office, Moorlach was the only CPA among 120 legislators. Given how finance is about 80 percent of what governments do (budgets, taxing, spending), you might think numbers guys would be more in demand. Who would run a $262 billion corporation this way?

We’ll have to wait for the final budget documents to see how much is going to the unfunded liabilities of pensions, which are supposed to be “self-funding” through investments. But the governor’s May Revision of his budget proposal includes the following costs for retiree pensions and health care:

CalPERS	$5.4 billion
CSU CalPERS	$677 million
CALSTRS	$3.9 million
Judges I	$193 million
Judges II	$86 million
Retired Health & Dental	$2.3 billion
CSU Retiree Health	$410 million
Employer OPEB Prefunding	$1.3 billion
Total	$14.3 billion

That’s all money that could have gone to roads, schools and permanent tax cuts.

The governor and legislators love to gabble on about all the new “investments” they’re making in transportation, education, the environment, etc. But if the numbers don’t add up, there will be a reckoning. Those pension payments only are going to go up, not down.

The last time California’s general fund enjoyed healthy reserves was under Gov. Gray Davis. But, Moorlach noted, “Davis squandered a healthy unrestricted net position and the Great Recession lasted for years. Short-term memories may come back to haunt Californians in the years ahead.”

John Seiler is a veteran California opinion writer. He has written editorials for The Orange County Register for almost 30 years. He is a U.S. Army veteran and former press secretary to California State Sen. John Moorlach. He blogs at [email protected]