Despite the recent improvements in California’s budget
situation, there remain a number of major risks that threaten the state’s new
found fiscal stability, including billions remaining in budgetary debt,
hundreds of billions of dollars in longer term liabilities for unfunded state
employee retiree health care and pensions as well as demands for new program
spending. In addition, a quarter‑cent sales tax increase under
Proposition 30 will expire at the end of 2016, and the higher income tax rates
on the state’s
wealthiest residents will expire at the end of 2018. The combination of the
fleeting capital gains surge and the temporary Proposition 30 revenues should
leave no doubt that the state’s modest surplus must be carefully guarded or
fiscal ghosts of budgets past will haunt California.
So, What Can We Expect
Out of Sacramento in 2014? Governor
Brown introduced his state budget on January 9, 2014 and provided a road map
for the Legislature to follow for what the Governor believes will keep the
state finances on track. His plan includes fully funding all current state
government commitments to education, health and welfare, public safety and
environmental and natural resources programs. He also proposes some modest
restorations of previous cuts in health and welfare and education spending. In
addition, he proposes to take the projected $5 billion surplus and pay off bond
debt early & build a rainy day fund ($3.2 billion), increase discretionary
higher education spending ($1.2 billion) prepay various state loans, pay down
deferred maintenance costs in various areas like transportation and state parks
as well as addressing other state liabilities. The key element to the
Governor’s surplus allocation proposal is to make each one of the initiatives
“one-time” in nature and not commit the state to on-going future spending it
cannot afford.
The pressure to increase state general fund expenditures is
enormous and the state Capitol is controlled by Democrats who are inclined to
expand existing programs and create new ones. Many in the Capitol tend to see
this temporary budget surplus as an opportunity to achieve their policy and
spending agendas. For example, on January 7th, 2014 the Senate Democrat Caucus
introduced legislation that would make all four-year-olds in the state eligible
for pre-kindergarten classes. This proposal, when fully phased in, will cost
the state over $1 billion annually in new general fund spending. It is these types of new spending
commitments, made when times are good, that drives the fiscal roller coaster of
boom-bust cycles in state budgets.
How Does Governor
Brown and California Avoid Repeating History?
Maintaining the new found fiscal stability will require considerable
restraint. There are numerous risks, each of which could hit the state’s budget
to the tune of hundreds of millions, or billions, of dollars. These include the
threat of future recessions, changes in federal spending policy, on-going
litigation related to redevelopment and other programs, and so on. As part of
his 2014-15 budget plan, the Governor has proposed to put a constitutional
amendment on the next ballot as a step in that direction. It would divert peak
capital gains revenues, like we have had in the past and which are currently
projected, away from the general fund and deposit them instead into a rainy day
fund so legislators and future governors could not commit them to ongoing
program spending. It would make sure the funds stayed in the rainy day account
unless and until it was actually “raining” and California needed the funds to
stabilize the budget in times of economic downturn. This proposal, like
previous attempts made by past governors, will be subject to being “watered
down” by the various spending interests in the Capitol that do not favor
additional controls on spending. It will be a fiscal battle with very high
stakes. We believe the most likely scenario is that the current surplus of
around $5 billion will grow even more before budget negotiations are completed.
This will likely increase pressure on the Governor to cave in to more permanent
spending demands by the Legislature.
Governor Brown will have to use all of his political and
negotiating skills to avoid history repeating itself. If he fails in that, his
reelection bid in 2014 as the 39th Governor of California could get
interesting.
Thomas L. Sheehy
January 2014
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