During my business career as a Certified Public Accountant and Certified Financial Planner, I also served on a credit counseling nonprofit board and advised those who were deep in debt on a plan toward becoming fiscally sound again.
During a good financial year, these individuals needed to dramatically reduce their existing debts. The unexpected bonus should go toward their high credit card balances. This reduces their monthly payments in the months ahead and makes staying within personal budgets more manageable.
This brings me to California. Sacramento has enjoyed some fiscally remarkable years during Gov. Gavin Newsom’s tenure, but he failed to dramatically reduce the state’s massive liabilities. According to the last audited financial statement the State Controller’s office has released, the Golden State’s balance sheet is upside down to the tune of $174 billion. And the recent bonus years were wasted.
The massive debt load started in 1999, with the passage of Senate Bill 400, which changed the pension formula for California Highway Patrol officers from 2 percent of final salary multiplied by years of service to 3 percent. This 50 percent increase, retroactive to the date of hire, led to taking properly funded pensions in California from 100 percent to 67 percent. And 35 years later, they are still in the two-thirds funded range.
Gov. Jerry Brown did his best to implement some pension reform in 2012, but addressing the massive liabilities needed a leader with the foresight to get California’s fiscal house in order. Mr. Newsom is not that leader.
The final 2022-2023 budgeted expenditures were $240,076,000,000, an increase of 90 percent in Mr. Newsom’s first six years in office.
Depositing the amounts at the beginning of each fiscal year and realizing the same rates of return that were generated by CalSTRS, the $28.4 billion of additional contributions would have earned another $4.1 billion, and the total $32.5 billion would have reduced the system’s unfunded actuarial accrued liability of $76 billion by more than 40 percent. Doing the same for CalPERS would have resulted in a similar reduction for a total positive impact on the balance sheet of $65 billion.
If the stock market holds its current record high status through June of this year, who knows how much lower the unfunded liabilities would be had this debt reduction strategy been implemented?
Twenty years from now it will be very apparent that Mr. Newsom missed an important opportunity. And the reverberations will probably be a continuing out migration and the resulting ongoing revenue reductions.
Like credit cards, making significant reductions on the outstanding balance means a similar reduction in the monthly minimum payments.
Now that this opportunity was foregone, Mr. Newsom still has high debt balances and high minimum payments, while revenues are dropping like a rock.
Hindsight maybe 20/20, as the old saying goes, but Mr. Newsom knew that this strategy needed to be taken. He disregarded it. Call it arrogance. Call it over-reliance on never-ending personal income tax revenues generated by Silicon Valley. Call it imprudent. Call it lousy stewardship. Call it a disaster for his final two years and a massive case of his mismanagement to be passed on to his successors.
Adding insult to injury, the Golden State is also delinquent in releasing its audited financial statements.
Now over a year late, California is the only state that has yet to release this critical management tool. We’ll know for sure what the balance sheet really holds when the State Auditor finally releases the state’s annual comprehensive financial report for June of 2022 in a few weeks. It will reflect a massive federal infusion of cash for the pandemic. And it will not have advanced our state out of its deep fiscal hole.
The annual comprehensive financial reports for the next few years will be sad reading. The best we can hope for is that they will at least be timely.
Financial problems usually occur from three basic areas: mismanagement, misjudgment, and misfortune. Mr. Newsom misjudged how his policies would impact the state, anticipating that the good times would never stop, thus causing the misfortune of ever decreasing annual revenues, contributing to the mismanagement Sacramento will have to address for many years to come.
It’s a sad legacy to pass on to the next generation.
