California Budget Deficit Already Back Up to $25.4 Billion

Well it certainly didn’t take long for California’s bogus budget, signed just last month, to unravel. According to a new report from the state’s non-partisan Legislative Analyst’s Office, the state is facing a deficit of $25.4 billion over the next 20 months. That includes a shortfall of about $6 billion for the remainder of the current fiscal year and a $19 billion deficit in FY 2011-12. In fact, the budget analyst expects budget gaps of roughly $20 billion for each of the next five years.

As the Los Angeles Times’s PolitiCal blog explains,

One main reason the deficit remains so large is that the spending plan signed by Gov. Arnold Schwarzenegger and approved by legislators 33 days ago relied on billions in accounting gimmicks, rosy assumptions and unlikely handouts from Washington, according to the report from the nonpartisan Legislative Analyst’s Office.

These unrealistic assumptions include $3.5 billion in federal funds that have not been approved by the U.S. government, significantly underestimated costs for programs such as corrections and prisoner medical care, and billions of dollars in expected “savings” from collective bargaining agreements and other personnel actions, Medi-Cal reforms, anti-fraud activities related to the In-Home Supportive Services program, and information technology efficiency measures that will never materialize.

Moreover, the LAO notes that even these projections are likely understated because its forecasts generally do not include cost-of-living adjustments, inflationary increases in departmental budgets, or other massive—and growing—unfunded liabilities.

These liabilities include unfunded pension obligations estimated at several hundred billion dollars (see here, here, and here), unfunded retiree health care liabilities of over $50 billion, and a $10 billion debt for the state’s unemployment insurance program. Those who thought that the pension reform, included as part of the recent budget deal, to roll back benefits to 1999 (pre-SB 400) levels for new state employees would solve the state’s pension problems are going to be disappointed. According to the LAO, salary increases over the next couple of years and rising employee health-care costs will swamp the savings from the pension reform:

In our forecast, we estimate state costs to pay (1) salary increases beginning 2012 or 2013 for employees at their top step (pursuant to memoranda of understanding for the 15 bargaining units with ratified contracts) and (2) employee healthcare premiums (forecast to increase by 7.7 percent annually). By the end of the forecast period, these costs will more than offset the state’s ongoing savings from the increased employee pension contribution rates and workforce cap.

As I argued in my California public pension study, released earlier this year, it will take more significant reforms to stop the fiscal bleeding and even begin to address the enormous liabilities that have already been racked up. This includes shifting new state workers to 401(k)-style defined-contribution retirement plans comparable to those received in the private sector and implementing a constitutional amendment to require voter approval of all future employee benefit increases.

Here are some other notable excerpts from the LAO report:

  • “The unfunded liabilities of state retirement systems, however, loom over the state’s budget prospects. Left unaddressed in the near term, costs to service CalSTRS, UCRP, and retiree health liabilities will only grow, burdening future Californians more and more and requiring even harder decisions about taxes and services. The state should look for ways to address these problems soon, to avoid passing these huge obligations to future Californians.”
  • “California faces immense short—term budget problems and perhaps even more troubling longer—term fiscal challenges. Without immediate action to begin tackling the structural deficit for the long term, the state may not be able in the foreseeable future to move beyond its current stumble from one terrible budget problem to the next. As such, it will continue to be difficult for the state to address fundamental public sector goals—such as rebuilding aging infrastructure, addressing massive retirement liabilities, maintaining service levels of high—priority government programs, and improving the state’s tax system.”
  • “The solutions needed to balance the budget will mean unavoidably painful sacrifice by today’s Californians. The benefit of this sacrifice would be putting the state on a sound fiscal footing. That sound footing may allow future Californians to live in a place where the annual state budget process is a chance to improve government’s ability to serve its residents.”

In order to address the immense fiscal problems facing California, political leaders and citizens will have to undertake a serious re-evaluation of state priorities and discover the political will needed to make the significants—and painful—changes necessary to get the state back on the road to recovery. In a previous article I outlined some measures that the state should undertake to help get it there. Here is my plan for reform:

  1. Avoid accounting gimmicks
  2. Acknowledge that spending—not revenue—is the problem (California is already one of the highest-taxed states in the nation and revenues have grown significantly until very recently due to the recession) and enforce a real spending and revenue limit that would cap budget growth at the rate of the increase in population plus the increase in the cost of living (inflation)
  3. Implement a debt limit that would prevent the issuance of additional bonds or the placing of bond measures on future ballots whenever the amount needed to service existing debts exceeds 6% or so of the General Fund budget
  4. Adopt a performance-based budgeting process so that funding decisions can better be tied to program results and priorities
  5. Consolidate duplicative governmental functions and eliminate some of the hundreds of unnecessary boards and commissions
  6. Adopt personnel reforms such as reducing the number of state employees, reducing pension obligations for future employees to get workers’ benefits back in line with compensation in the private sector, and providing incentive bonuses to state employees for innovative ideas that lead to cost savings
  7. Aggressively purse outsourcing and privatization (The state could achieve significant cost savings and/or service improvements by contracting out numerous services to the private sector and getting out of certain businesses altogether. Moreover, it should implement a “Yellow Pages” test: if the state is performing services that private companies listed in the phone book are already performing, then the state probably shouldn’t be in those businesses in the first place. At the very least, it should put these services up for competitive bid.)
  8. Implement education reform by cutting red tape and adopt funding reforms such as merit pay for teachers and weighted student funding
  9. Reform health and social service programs by eliminating optional Medicaid services and reducing the waste from fraud through the use of recovery auditing
  10. Switch to a biennial budget to encourage longer-term thinking in the budget process
  11. Improve the state’s business climate by reducing regulations and taxes that drive people and businesses out of the state.
  12. Implement the more than 1,200 recommendations made by the California Performance Review Commission back in 2004

Related Research and Commentary:

” Reason policy study: How California’s Public Pension System Broke (and How to Fix It)

“How to Fix California”

” Reason policy study: Citizens’ Budget 2003-05: A 10-Point Plan to Balance the California Budget and Protect Quality-of-Life Priorities (just as timely now as it was when it was written during a previous California budget crisis!)