California's Finances, a Retrospective

Below is a snippet from an old November 2009 LAO report--but boy, does it have amazing data. Here is one particularly juicy excerpt:

In General, the Legislature Retains Power Over the Budget. Some observers of the California budget process have asserted that—due to voter–approved propositions, federal law, and court decisions—the state’s budget is unmanageable and basically impossible to balance. In reality, however, the Legislature remains in control of the vast majority of state spending. This is particularly true over the longer term when there is enough time to allow major decisions by the Legislature to be fully implemented. Even in the shorter term, the Legislature generally holds a considerable degree of freedom to adjust state spending. Such decisions are often more restricted by the lack of political consensus as opposed to any structural budgetary constraint.

More here. Voters must realize that almost everything they read from CNN, Fox, or any major media outlet contains some element of bias. In contrast, all states have finance departments that will provide you with the (mostly) unvarnished truth. In California, we have the LAO. For the feds, we have the CBO. Turn off your television, and go forth and read.

Fiscally Responsible? Follow These Resolutions

An oldie from 2010, but still a goodie:

Don’t vote for any ballot measure that creates an unfunded obligation on the state budget or “locks in” more of the budget.

Constitutional provisions that limit the use of certain tax revenues or impose spending requirements on the budget without providing the resources to fulfill those obligations exacerbate California’s fiscal problems. These provisions range from dedication of sales taxes collected on gasoline to transportation to the “Three Strikes” law establishing minimum sentencing requirements.

Why don't we teach these civics concepts to kids in high school? More here.

Myth of the Underpaid Government Employee

Chris Martenson has an excellent article here about the ballooning size of American government.

Also, see here for an excellent article about the myth of the underpaid government employee.

California Spending

Imagine a place where everyone knows they have a spending problem, no one cares, and no one minds passing the financial consequences to their children. Welcome to California.

Fun facts: California paid out $2.1 billion in bonuses, overtime, and other extras in 2007. (See SF Chronicle, Erin McCormick, A1, June 30, 2008.)

A Superior Court Judge makes $178,789 a year; an Appellate Court Justice makes $204,599 a year; and a state Supreme Court Justice makes $218,237 a year. All state judges are eligible for generous pensions, dental benefits, health benefits, basic life and AD&D insurance, supplemental life insurance, vision service plans, long term care insurance, a voluntary tax savings program (FlexElect), and a savings plus program (a Thrift Plan, i.e., a 401K, and a Deferred Compensation Plan (IRC 457)).

California Legislators Got Drunk on Stock Market Gains

I've been studying California's budget. From 1998 to 2009, California added over 80,000 full time government employees. That means future taxpayers must pay for an additional 80,000+ pensions, lifetime medical benefits, and annual salaries. However, adding 80,000 more government employees is not the major problem, as long as we reform their generous long-term benefits.

The biggest problem is that starting in 1999, California's legislators assumed revenue/tax numbers based on stock market gains/sales and spent accordingly. From 1998 to 2000, spending jumped dramatically, but from 1999 to 2008, expenditures declined only once--right after the tech bubble popped, in 2003/2004. (Note: the tech bubble's peak was in 2000; hit a low in September 2002; and continued in a tight range until 2007.) Basically, it seems our legislators banked on an ever-increasing stock market to finance spending. Oops.

Public sector unions aren't helping. Even though the stock market money isn't there anymore, public sector unions are still acting like it's 2004. Behind closed doors, various unions have negotiated generous benefit packages, such as lifetime medical benefits and pensions. Unfortunately, it is difficult to project the cost of such benefits because no one knows how long a state employee will survive after retiring. As a result, if taxpayers desire consistently balanced budgets, it makes more sense to pay public sector employees higher salaries while reforming their generous benefits. (CalPERS, the state's public pension/health care fund, already has over $200 billion in assets.) Fiscal reform is possible without threatening state workers' job security, because government workers will continue to be unionized--reform would affect only the hard-to-project costs inherent in pensions and lifetime medical benefits.

As far as education is concerned, I am concerned we are spending too much money on it without seeing results. The state's website indicates that approximately 50% of the General Fund is reserved for K-14 education. In addition, California's Constitution requires that school coffers receive first crack at the largess:

"From all state revenues there shall first be set apart the moneys to be applied by the State for support of the public school system and public institutions of higher education."

Education spending is probably a sacred cow that needs to be slimmed down before we see any real change in California's fiscal health.

See here for a detailed webpage outlining the major issues, with plenty of stat-porn for the political wonks.

Bonus: Meg Whitman promises to cut 40,000 government jobs--back to 2004 levels--if we elect her Governor; however, I am unclear how she will accomplish that goal without incurring massive litigation and settlement costs. Perhaps the 40,000 positions she wants to cut are non-union or part-time? If so, then it doesn't appear that cutting these positions will reform the problem of generous public sector benefits, which are typically reserved for full-time government workers.

Meg Whitman is probably the most successful female CEO in Silicon's Valley's history, but I wish she'd be more specific about how she plans on accomplishing her goals. If she does well in the Governor's race, expect to see her as the GOP's Vice Presidential candidate in 2012.

California's Education and Pension Costs Out of Control

From AP writer Judy Lin:

Funding for K-12 schools and community colleges accounts for roughly half of annual state spending.

Funny how we haven't gotten smarter, but we've definitely gotten poorer. Meanwhile, California's state worker pension fund--which includes teachers' pensions--is still worth $177.7 billion. (Yes, that's billion with a "b.")

After years of staying mostly neutral, the San Jose Mercury News (July 7, 2009) finally issued an editorial opinion asking Sacramento to enact pension reform:

http://www.mercurynews.com/ci_12772192

The unfortunate truth is that the Democrat-controlled Legislature has been too quick to increase pension benefits and will resist reconsidering them unless it's forced to. Now is the time to do that...

Now, because of stock market declines and rising costs of health care, retirement costs are already siphoning $3.3 billion from the state budget, just when California is facing substantial cuts in education and services to the poor. That cost is expected to rise steeply. [Emphasis added]

By the way, in case you're wondering, state workers get the following benefits: "3 percent of pay for every year worked, up to 90 percent maximum after 30 years for safety officers and 60 percent for other employees." Where can non-government workers get 60% of their salary guaranteed in retirement? If you discover a place that allows non-executives to claim the 60% retirement bracket, let me know. I won't be holding my breath.

Update on July 12, 2009:

For the record, I favor increasing teachers' salaries as long as pension costs are eliminated. Why not replace teachers' pensions with 403b plans (the public-sector equivalent of a 401k)? If a 401k/403b is good enough for a Google/Apple/Target employee, why isn't it good enough for a government employee, too?

The average government worker should not have better retirement benefits than the average non-government worker. Is a secretary or lawyer who works for the government "better" than a secretary who works for Pfizer or Pepsi? I don't think so, especially not when the modern economy is so inter-connected.

Retirement benefits like lifetime pensions and lifetime medical care are inherently unstable because you have to predict how long a worker will live--that's not an easy task. As a result, costs are unpredictable, which makes accurate budget planning difficult. Why not create a budget framework that allows us to definitively ascertain employee costs without worrying about the ticking time bombs of unfunded, unpredictable long-term liabilities?

Finally! Public Pensions Exposed

Thank you, Craig Karmin, for your June 24, 2009 WSJ article, "Group Shines Light on Hefty Government Pensions."

http://online.wsj.com/article/SB124580096328044597.html

Pension funds provide guaranteed payouts, so even though public funds lost a collective $1 trillion last year, their retirees' monthly checks are unchanged. And the funds' solvency is ultimately backed by taxpayers.

By the way, apparently, the California School Employees Association, a union, represents 230,000 public employees. And that's just one union. No wonder public sector unions have so much power in Sacramento.

California's Budget Crisis Continues

An interesting perspective from Assembly-member Jim Beall, Jr. in Campbell Times (June 2009, page 19):

The state's biggest cost driver is prisons. The prison budget has doubled in the past decade to $10 billion. The state has 173,000 inmates, which is roughly equivalent to locking up everyone in the city of Ontario [California]. We spend roughly $45,000 on each prisoner, which is just about what it costs to send a student to Yale. Yet, California has a 70 percent recidivism rate...what we are doing now isn't working...

The state's 2009-2010 revenue is chiefly derived from personal income taxes accounting for almost half--49 percent; sales and use taxes make up 34.6 percent; corporation taxes represent 10.7 percent; the rest come from a myriad number of sources.

Two thoughts:

1. The war on drugs is bankrupting the state. The state spends huge sums jailing thousands of drug addicts.

2. The pro-law-enforcement mentality post-9-11 may have caused D.A.s to prosecute more non-violent offenders, knowing juries would be more fearful of anyone suspected of a crime.

To be or not to be a libertarian--more Californians should be asking themselves this question.

More on California's problems here.