The Legislative Analyst’s Office says the state budget is in its best shape in over a decade, and predicts California will have a nearly $10 billion surplus in five years.
Color me skeptical. Many Sacramento lawmakers are already planning ways to spend that money. It’s also important to note that the state budget would have a surplus only if the tens of billions of dollars in unfunded liabilities for government worker pensions and healthcare benefits are ignored. But let’s put that aside for now and accept the rosy scenario of upcoming budget surpluses in years to come. What should the state government do with all this extra money, if it appears?
First, how about sharing the wealth with those who actually create it? Just one year ago California voters approved billions in new taxes to stave off an alleged budgetary disaster. Now that tax revenue is up and the crisis is apparently over, some of the surplus should be returned to the taxpayers, not used to fund new spending. Those tax increases were promised to be temporary anyway, so state leaders could modestly and gradually roll back the new taxes, rather than keeping them in place until they expire.
The state is supposed to have at least a 5 percent “rainy day” fund, called a budget stabilization fund in Sacramento, to help avoid sudden spending cuts or tax increases whenever there is a lull in the economy. The Legislative Analyst recommends that at least $5.6 billion be set aside so the state can weather potential future economic downturns. The rainy day fund is basic, sound financial management and the money should be set aside.
Even if the state is headed for a surplus, California is still in debt up to its eyeballs so using some of the projected surplus to pay down debt should take priority over any new spending. Gov. Jerry Brown’s “wall of debt” is almost $30 billion borrowed from other state funds, mostly from state universities and colleges. Add on around $75 billion in general obligation bonds, over $20 billion in other bonds, and over $10 billion borrowed from the federal government to spend on unemployment benefits, and the state owes nearly $140 billion total. That debt is costing the state $8 billion to $9 billion per year in interest payments. Basic budgeting principles dictate the state’s debt should be cut to at least half of its current size. The predicted surplus could go a long way toward reducing debt and creating lasting budget stability.
Finally, a portion of California’s extra funds should be earmarked to address its long-term pension problems. The state government estimates it has $256 billion in unfunded liabilities for government worker pensions and healthcare. That figure is optimistic, and the real amount taxpayers could be on the hook for is likely closer to $450 billion. Pushing those costs off to the future, compounded by interest, only increases the burden on the next generation. The state has to quit making unsustainable promises to workers, and it needs to fund the obligations it has incurred. Utilizing the expected surplus for this purpose would be a great place to start.
To be fair, the Legislative Analyst had similar recommendations. But what about state leaders? Senate President Pro Tem Darrell Steinberg and Assembly Speaker John Perez have already said they want to use surpluses to fund new spending. This is the thinking that brought California the ballooning budget deficits that helped spur the recall of Gov. Gray Davis more than a decade ago.
If California is actually headed for surpluses, letting taxpayers keep some of the new tax revenues, and using the rest to pay down debt and get ready for the next recession would be the fiscally responsible path to choose.
Adrian Moore is vice president at the Reason Foundation.