California’s Not-Actually-Balanced Budget Ignores Unfunded Liabilities

Reading some of the mainstream news coverage of the recent $96.3 billion California General Fund budget deal, one would think that fiscal restraint has come back and that all is well in the Golden State. In a press conference last week, Governor Jerry Brown announced that “California is focusing, in this budget, on improving the healthcare of the people of our state and improving educational opportunity — that’s the big take-away — while we’re living within balance.”

The 2013-2014-budget plan, which includes salary increases for 95,000 state employees at an estimated additional cost of $735 million over three years, is balanced enough to cover expenditures for the year. But there’s a problem: the “balance” is achieved by ignoring unfunded liabilities and a reliance on temporary revenue increases.

This reality prompted a colorful take on the budget by Assemblyman Jeff Gorell (R-Camarillo): “It’s the mullet budget. It’s conservative up front, but it’s liberal in the back.”

The California Department of Finance notes that the budget does not set aside “significant money” to address the $38.5 billion unfunded liability for state employee pensions (CalPERS), nor the $63.8 billion in unfunded liabilities for retired state employee health care. To make matters worse, “that liability increases by billions of dollars each year” and beginning in 2015, hundreds of millions of dollars in additional spending will be needed to cover pension obligations. Then there is the additional $71 billion in unfunded liabilities for the California State Teachers Retirement System (CSTRS), which according to the Legislative Analyst’s Office (LAO) requires $4.5 billion in additional annual spending in order to maintain solvency.

And those are the rosy numbers. If Moody’s new actuarial method is to be believed, then California’s unfunded pension liabilities for state and local governments could actually be over $329 billion. Two years ago, the Stanford Institute for Economic Policy Research calculated California’s unfunded pension liabilities to be nearly half a trillion dollars.

The current budget does nothing to address these problems.

Further, the extent to which this system is “balanced” is even sketchier when attention is turned to revenue estimates. General fund revenues for 2013-2014 are down by nearly $1 billion from last year, due in large part to a $3.1 billion reduction in revenue from personal income taxes, while general fund spending is up half a billion from last year. The “balance” is established due to the (hopefully) temporary increases in Special Fund revenue resulting from Proposition 30, which raised the state sales tax from 7.25% to 7.5% and income taxes on individuals making more than $250,000. These tax increases, which are set to expire in four and seven years, respectively, are thought to contribute approximately $6 billion in revenue annually. What will happen as this added revenue dries up is up in the air.

In recognition of their “fantastic job,” California lawmakers are getting a 5% pay increase from the California Citizens Compensation Commission.

With the current budget built around ignoring unfunded liabilities larger than the annual General Fund and a temporarily increased revenue stream, California legislators are simply patting themselves on the back for kicking the can down the road at the expense of taxpayers. Again.