More Fanciful Accounting in Sacramento

For whatever reason, California is yet again boasting another budget surplus predicated entirely on ignoring outstanding and growing debts. The latest round of empty optimism was kicked off with a November Legislative Analysts Office (LAO) report, which projects that California is on track to end the current fiscal year in June 2014 with a $2.4 billion surplus. This news has surely prompted Governor Jerry Brown to tell The Guardian that “California is the healthiest it’s been in more than a decade.” Like every other time California has proclaimed surpluses and healthy fiscal states, the optimism is predicated on deliberately ignoring reality.

For one, the optimistic LAO report is entirely based on “continuing economic growth and slow, but steady, growth in stock prices,” and that economic downturn “could quickly result in a return to operating deficits.” Further, the LAO urges legislators to limit new spending projects and save for possible economic downturns. Despite this qualified optimism, California politicians are already brainstorming for ways to spend the illusory surplus. The Democratic Caucus in the State Assembly has already drawn up a list of budget items they’d like to include in the 2014-2015 budget, including universal pre-kindergarden and more spending on higher education.

As for the nature of the surplus itself, the LAO report explicitly mentions that “some items on the Governor’s wall of debt and the state’s huge retirement liabilities (particularly those related to the California State Teachers’ Retirement System), remain unpaid under our forecast.” This is critical. The “wall of debt” as of this year’s budget totaled about $30 billion. This includes $9.7 billion shortfalls in funding the state unemployment insurance system. Under the LAO estimate, California will fail to do anything about this.

The LAO report also assumes California will do nothing about its growing unfunded pension liabilities. This assumption is troublesome given the well-known problems with underfunded pensions in the state. In October, the state auditor listed the California State Teachers’ Retirement System (CalSTRS) as a high-risk issue for California. Echoing concerns raised by the LAO for years, the auditor noted that CalSTRS requires an additional $4.5 billion in funding over the course of 30 years to ensure solvency. Combined with the current contributions of $5.7 billion, $3.6 billion of which is already coming from taxpayers, the necessary increase in contributions towards CalSTRS would effectively wipe out even the faux “surplus.”

Then there is the California Public Employees’ Retirement System (CalPERS), which according to the Department of Finance is short $38.5 billion. California has repeatedly failed to make the full Annual Required Contribution (ARC) to fund CalPERS in recent years. In particular, California has failed to make the ARC payments to the Judges Retirement Fund (JRF) by one billion dollars a year since 2010. On top of this, California is also short over $63 billion in fully funding public employee retiree health care.

Only in Sacramento does this translate to a rebound and triumph of fiscal restraint. California will continue to dig itself deeper into a hole if legislators are able to continue getting away with fantasy accounting and hollow proclamations of surpluses and fiscal well-being.