Feel like cussing

March 7, 2010

California’s union-dominated, Democratic-controlled Legislature is temperamentally incapable of fixing the state’s structural budget deficit, given that such a fix would require reduced government spending and the granting of fewer benefits to the state’s class of government workers. As Rome burned, legislators last week debated a meaningless “no-cussing” measure, which suggests how out-of-touch these lawmakers remain.

Meanwhile, the bad fiscal news keeps pouring in. From the front page of Wednesday’s Sacramento Bee: “Bruised by heavy losses and wary of the economic road ahead, California’s two big public pension funds are considering reducing their official forecasts of future investment results.” Investment income is supposed to pay for the absurdly generous pensions enjoyed by government retirees, but when there’s a downturn the taxpayers pick up the slack. So the $100 billion pension losses will result in reduced forecasts which will “put pressure on taxpayers and workers to support the two retirement systems,” the article continued.

We’ve got us a big mess in California state government, which seems designed to chase away every last working stiff to Nevada or Arizona. I spoke last week to the Chamber of Commerce in the northern city of Redding, and a large crowd showed up to listen to discussions of pension reform. That tells you something. Shasta County has been tweaking its system by requiring additional employee contributions and pushing out the retirement age. Orange County and the city of San Diego, likewise, have passed minor tweaks in their retirement packages, but the entire fiscal problem – especially at the state level – is getting beyond the need for tweaking.

Orange County Supervisor John Moorlach recently said that the state is “technically bankrupt.” On Wednesday, I talked to Assemblywoman Diane Harkey, a Republican representing parts of South Orange County and northern San Diego County, and she did not shy away from the B-word (“bankruptcy”), either. She had just given the Republican caucus a presentation summarizing the sorry state of California’s government. Echoing a column she wrote last month for the political Web site Flashreport, Harkey first compared the state’s predicament with that of a family that has overspent its two-earner income, lost its bonus (capital gains), lost some of its permanent income (income tax reductions), maxed out home equity (general obligation bonds), maxed out the credit cards (revenue anticipation notes), borrowed from family members (internal accounts) and now is in foreclosure.

I like the analogy. Her conclusion: “Even if we begin to earn more income, and we cut our expenses, we still will not have enough cash. …. We can file for bankruptcy …. [o]r convince a lender that we can repay if they help us through.” She says the state is “facing de facto bankruptcy.” States can’t technically go bankrupt, but they can end up in federal receivership.

As I touched on in a previous column, people are hungry for solutions. Average citizens are showing up to Tea Party protests and listening to journalists rant about pension obligations. Californians know that something is wrong, and they also know that their elected officials – at least operating under today’s political dynamic – can’t even get themselves to stop digging a deeper hole. Few economists believe that the economy is poised to come roaring back, which would paper over the problems.

Hope can come in the initiative process, but the public-employee unions, with their deep pockets, dominate that process. I previously discussed the death of a useful pension initiative that would have created a still-generous second-tier level of benefits for state employees. The unions and their wholly owned subsidiaries in the Legislature don’t want to touch any level of benefits for public employees or cut any government program. Their solution is always the same – make it easier to raise taxes on Californians!

For an idea of what the unions think, consider this statement by Services Employees International Union California President Bill Lloyd in response to a Legislative Analyst’s Office report from January: “We need a new approach that lays the groundwork for recovery and that protects Californians, our public investments, our communities, and our future. The only way to do that is to make sure that everyone in the state pays their share, including the corporations who keep getting a free pass from the governor and the Legislature.”

That sounds more like the old approach – keep sticking it to businesses and keep “investing” in $100,000 public employee pensions and bigger government bureaucracies.

That approach has led to lingering, structural budget deficits, according to Harkey, who points to Treasurer Bill Lockyer’s statement from September, pegging that budget gap at an astounding $56 billion over the next three years. She gave me a chart from the state controller, predicting that total state borrowing will hit almost 34 percent of the general fund budget by July 1, the start of the 2010-11 fiscal year. The state’s bond rating has gone from AA to A to BBB, she said, and now almost is not investment grade.

Harkey showed me a chart pinning the state’s debt-service ratio – the share of the budget devoted to repaying debt – at 6.7 percent this year, 7.59 percent next year and 9.69 percent by 2014-15. And that assumes that the state doesn’t issue any more debt (bonds), which is like assuming that a drunk won’t find his way to the liquor store on Saturday night. And if interest rates go up, the state’s debt-servicing costs also go up.

Scared yet?

California appears headed toward a massive fiscal collapse. Despite the big problems, Harkey believes the state can get back on track if its adopts some simple measures to reduce future debt, cut spending, reform pensions and prevent recurrent deficits via a rainy-day fund. Well, these measures aren’t that simple, given what we’re dealing with in the state Capitol, but they are sensible and modest.

Harkey calls herself the “banker of the Assembly,” referring not only to her deep interest in boring fiscal matters but in her financial and mortgage background. I asked, if California were a family, would she give it a home loan? “No,” she said, but she’d consider it if the family first followed her simple workout plan.

–Steven Greenhut