California needs serious budget reform
The developing budget crisis for the state of California provides the perfect time for long-overdue reforms.
The California Constitution mandates a budget be passed by June 15. The Budget Act of 2020, Senate Bill 74, by state Sen. Holly Mitchell, D-Los Angeles, passed on that date. She is the chair of the Senate Committee on Budget and Fiscal Review. But even advocates dubbed it a “placeholder budget,” pending events that will affect what goes into future trailer bills.
On Thursday, 40 blank trailer bills were approved by the Democratic supermajority. So expect plenty of mischief in the weeks ahead.
In the budget, the biggest hope is anticipating President Trump and the Congress will give California $14 billion in bailout funds. Regretfully, the whole country knows California is racing New Jersey and Illinois for the title of having the largest Unrestricted net deficit. And, good managers can debate on whether “hope” is an appropriate strategy.
California also is the only state that still has not produced a Comprehensive Annual Financial Report (CAFR) for the fiscal year ended June 30, 2019. How’s that for displaying good fiscal management?
With the June 30, 2018 CAFR, the Golden State was bumped out of 50th place among the states for the first time in years, with the second-largest unrestricted net deficit in the nation at $213.3 billion, just ahead of New Jersey’s $214.1 billion. Who knows what the June 30, 2020 and future CAFRs will reflect as a result of the COVID-19 downturn? It will be easy to assume the deficits will grow.
Meanwhile, our constituents are reeling from unprecedented layoffs and business closures, teetering financially, living one paycheck at a time and exhausting their financial reserves. Paying off debts and rebuilding cash reserves will prevent the economy from expanding quickly. Consequently, I believe this COVID-19 depression will be a multi-year event.
Here are three essential strategies that Sacramento should implement to get through this crisis – and prepare for the future.
First, downsize state government to reflect what is happening in the rest of the economy. California’s cities, counties and school districts have already cut staff. The longer Sacramento waits to make real reductions at the state level, other than trigger cuts, the greater the pain will be in the next two fiscal years. The state can’t keep flying at or near the $220 billion level of annual state spending.
Sixty-seven assemblymembers co-sponsored the bipartisan House Resolution No. 97 on June 3, requesting the postponement of $4.2 billion of high-speed rail spending. Let’s get real and do it.
Second, it’s time for substantive pension reform. In two years, the Legislature will be notified by CalPERS and CalSTRS that the defined benefit pension plans’ annual required contributions will rise, probably significantly.
School districts could barely make their CalSTRS payments the last few years, even with Proposition 98 funding increases, because of their requirement to make higher pension plan contributions.
CalPERS is so desperate to achieve a 7 percent return goal, it is resorting to leveraging and acquiring very speculative investments with the proceeds. This is ludicrous.
The governor would be wise to establish a committee to make recommendations. The problem is the current defined benefit plans must pay out a certain amount, with cost-of-living adjustment increases, no matter how well the portfolio’s investments perform. There are better options.
The shared-risk plan Wisconsin implemented in 1982 was created with bipartisan support and the endorsement of that state’s unions. Its funding level hovers around 100 percent, compared to 70 percent in recent years for California’s funds, a funding ratio this is sure to drop. Shared-risk plans are flexible and can be adjusted depending on market conditions.
Public employees should understand that, if their unions stubbornly hang on to the current plans, there will be no employee pay raises or cost-of-living increases for several years. You can’t have both a defined benefit plan and pay raises. The math just will not work.
Third, pursue serious retiree medical reform. California’s current unfunded retiree medical liability of some $90 billion is a hungry animal to feed.
Orange County addressed its unfunded actuarial accrued liability in 2006, the year I was elected to the Board of Supervisors. We were able to work with the union bargaining units and reduced it by 71 percent.If the state of California were to do the same, some $60 billion in liabilities could be removed from its balance sheet. And a significant amount in annual required contributions could be reduced in the state budget.
It’s time to get serious about our state’s finances. The days of tax increases are over. The days of putting bonds on the ballot should also be over. The days of gold-plated pensions must come to an end.
Better retirement strategies must be pursued moving forward. To get into the weeds, retiree medical plans that don’t even integrate with Medicare are inexcusable.
I’ve been through a Chapter 9 municipal bankruptcy with Orange County in 1994-96. I’ve been through the Great Recession when I was chairman of the Board of Supervisors in 2008 and 2012.
These are difficult times, but I’ve learned the sooner the state moves, the better it goes.
The state needs to take a long-term perspective and to take advantage of reasonable opportunities. It’s a matter of urgency.
John M. W. Moorlach represents the 37th District in the California,