California Budget Do’s And Don’ts

Having served in California’s state government during two difficult budget periods (2003–4 and 2009–10) and on the Volcker-Ravitch State Budget Crisis Task Force in 2012, I have participated in and studied many bad and good state budget practices. Some takeaways:

1. Maintain Perspective. As Governor Newsom pointed out last week, the state’s expected shortfall this time is smaller as a percentage of the going-in General Fund than the shortfalls of 2003, 2009 and 2011, and the Legislative Analysts’ Office predicts an even smaller shortfall.

2. Some Borrowing Is Ok If Short-Term. As Governor Brown would attest, one mistake we made in 2004 (with my direct assistance) was to issue an 11-year bond that — as this 2015 press release from Governor Brown’s Department of Finance makes abundantly clear — was too long.

3. Protect The Vulnerable. Teacher layoffs are bad enough but especially under a California law the Legislature should change that discriminates against early-in-career teachers by laying them off first regardless of performance.

4. Don’t Cover Up Structural Problems. Many budget problems preceded COVID (eg, Sacramento City Unified School District started laying off teachers last year despite record revenues) and as the LAO has pointed out, using one-time federal funds instead of enacting fixes would exacerbate structural deficits.

5. Be Transparent. The Administration very visibly proposed a pay cut for employees while less visibly informing employees they would be permitted to skip health insurance contributions. While we don’t encourage cuts to pay, especially before cuts to lavish subsidies and other unnecessary expenditures, we always support transparency.

6. Avoid Gimmicks. One legislative proposal to raise cash we’ve read about is framed as an offer to taxpayers to prepay future tax payments but looks to us to be an off-balance-sheet borrowing not requiring voter approval that would cost more than a bond. If the state is going to borrow, it should only do so transparently and at the lowest possible cost.

7. Keep In Mind The Budget Doesn’t Tell All. Budgets reflect only cash expenditures but every day the state is also issuing debt to employees that shows up only in the state’s CAFR* while the servicing of that debt with cash is postponed to later budgets. That’s how the state silently built up $85 billion of OPEB (Other Post-Employment Benefits) debt generating $3 billion per year in interest expense. Absent OPEB reform, this year alone the state will quietly issue another $2.5 billion in debt to state employees, and UC, CSU, CCC, SF, LAUSD and many other cities and schools will quietly issue billions more.

8. Don’t Divert General Funds To Economic Subsidies. California has a $3 trillion economy dominated by more than a million small and large private sector for-profit and not-for-profit enterprises. Unlike the ~20 percent role in the economy played by the federal government, which is not a material provider of services and also can run deficits and print money, the state’s General Fund amounts to just 5 percent of state GDP and finances critical services like K-12, public safety and public health. The state could help the economy more by improving learning and other state services, addressing obstacles to affordable housing, and reforming licensing and other rules hamstringing job and wage growth.

Govern For California supports lawmakers who legislate in the general interest.

*CAFR = Comprehensive Annual Financial Report. California is the only state we’ve come across that — nearly a year after the end of FY2019 — still hasn’t published a 2019 CAFR. See here. Legislators should insist on timely reporting.

Written by

Lecturer at Stanford University and president of Govern For California

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