California’s ‘Close Enough for Government Work’ Budget

The California State Capitol building in Sacramento, Calif., on April 18, 2022. (John Fredricks/The Epoch Times)

Commentary

It’s hard to believe I first started writing about California budgets in 1987, now 35 years ago.

In those days, it still took a two-thirds vote in both houses of the state legislature to pass a budget, instead of simple majorities as today after Proposition 25 passed in 2010. And Republicans then still held more than one-third of the seats. The budget tempo was set by what was called the Gang of Five: the Democratic and Republican leaders of the Assembly and state Senate, plus the governor.

That commonly meant wrangling going on long after the constitutional deadline of June 15 to pass a budget, especially under Republican Gov. Pete Wilson and the Democratic-majority legislature.

In 1999, much as today, the state was flush with surplus tax money from the dot-com boom. New Gov. Gray Davis and the four legislative leaders quickly came to an agreement on the budget numbers. The budget was passed a few minutes into June 16, technically over the deadline, prompting Davis to deadpan, “Close enough for government work.”

Soon, the dot-com boom turned into the dot-com bust. The surpluses flipped into $40 billion deficits. And unlike today, there was no Rainy Day Fund. In 2003, Davis was recalled, for the budget crisis as well as mishandling the 2000-02 Electricity Crisis and illegally hiking the car tax.

It could happen again. In 2022, the legislature passed a budget on June 14, supposedly a day early. But it left unnegotiated large elements of this $300 billion monstrosity, especially what tax rebate might be sent back to suffering drivers paying $7 and climbing at the pump. Close enough for government work!

The legislature also gave about half the projected $97.5 billion surplus to “education,” as mandated by Proposition 98. Even though schools already, according to Gov. Gavin Newsom’s projections, were slated to get more than $20,000 per child—or $600,000 for a typical class of 30. Yet the state, according to EdSource, just scored 50th of the 50 states in literacy.

It’s like buying a new Mercedes S550 and ending up with a used Yugo.

This time, at least, budget reserves have risen to $38 billion, largely due to Proposition 2 from 2014. Below is a graph from the ballot pamphlet that year, showing how quickly revenue from the PIT (personal income tax) can drop during recession years. Notice the 2001 dot-com bust and the 2007-09 Subprime Meltdown. For the latter, Gov. Arnold Schwarzenegger also had not prepared the state, going on a spending binge from 2005-07. That led to a record $13 billion in tax increases he signed in 2009, as well as major budget cuts.

But give Newsom credit where it’s due. Budget reserves probably could withstand a year of a recession, provided it’s not too severe. And he has insisted the surplus go to one-time expenditures. Although the teachers’ unions, as they have in the past, are going to be reluctant to give back their half of the money even during a recession. Last time, Schwarzenegger got the unions to agree to education budget cuts on the condition the money would be “backfilled” when good times returned, which is what happened after he left office.

There’s also the problem of the state’s K-12 school population declining. On April 22, the California Department of Education reported, “Overall enrollment is down from 6,163,001 in 2019–2020 to 6,002,523 in 2020–2021, a decrease of more than 160,000 students and 2.6 percent from the prior year. This follows a modest, steady decline in public school enrollment statewide since 2014–15.” Full data is not yet available for the 2021-22 school year that just ended.

Yet the Prop. 98 mandate that 40 percent of state funding go to schools remains in place. Shouldn’t it be adjusted downward as the population declines? The extra money could go to pay down the debt from the California State Teachers Retirement System.

According to CalSTRS’ latest Annual Comprehensive Financial Report, released on Dec. 1, 2021 for the fiscal year ended June 30, 2021, “A snapshot of the Defined Benefit Program’s assets and liabilities as reported in the June 30, 2020, actuarial valuation (released in June 2021) reflects steady improvement in our funded status. The funded ratio—the amount of assets on hand to pay for obligations—improved from 66.0% to 67.1%, even as the unfunded actuarial obligation increased slightly from $105.7 billion at the June 30, 2019, valuation to $105.9 billion as of the June 30, 2020, report.”

The new report also boasted, “The valuation did not reflect the 27.19% investment return earned by CalSTRS in 2020–21. The historic returns of last year significantly improved projected funding levels. CalSTRS now expects the Defined Benefit Program to reach full funding prior to 2046 under current actuarial assumptions. The state’s share of the CalSTRS unfunded actuarial obligation is now projected to be eliminated by June 30, 2023.”

However, so far in calendar year 2022 the stock market is negative and seems to keep going downward. A recession clearly is here, severity unknown.

Prudence would dictate giving all the “surplus” to paying down pension obligations and refunding something to the taxpayers who pay the bills and will bear the brunt of the economic decline. But this is California, home of Fantasyland.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.