CA comeback mostly about shifting funds around

April 10, 2013

By Wayne Lusvardi

Paul Krugman wrote in the New York Times an article, “Lessons from a Comeback.” However, a comeback for state government should not be confused with an economic or jobs recovery.

A number of liberal, conservative and moderate writers responded to Krugman that there has been no California comeback. Victor Davis Hanson wrote, “Krugman’s California Dreamin’.”

Walter Russell Mead wrote, “California’s Hollow Comeback.” Matt Miller, “Jerry Brown Still Has Much to Do.”

But as someone who closely follows California public policy and budgeting, I found myself thinking that Krugman’s critics are probably unaware that Krugman may be closer to the truth, although for all the wrong reasons.  California came back a long time ago. But like a giant redwood tree falling in Sequoia National Park, no one wanted to notice.

All the rebuttals to Krugman sound to me like a quotation from American jazz singer Billie Holiday: “I’m always making a comeback but nobody ever tells me where I’ve been.” 

The reasons cited for a comeback are income and sales tax increases from Proposition 30; a bullet train that isn’t even funded or environmentally certified; and a Sacramento Delta water fix that mostly backfills Colorado River water lost to Arizona.  

More taxes or public works projects won’t save California because it had the financial resources all along to meet its public pension crisis even after budget cutbacks resulting from the Mortgage Meltdown and Bank Panic of 2008.  That was because California government bureaucracies were bloated during the bubble, from 2003 to 2008.  Of course, once the budget bar has been raised, budget deficits inevitably arise.

The question that the media then ignores is: Whether the state budget should be balanced high or low?  It can be balanced either way.

How bloated is California government? 

Californians got a rare look into how much California government was bloated in 2009 when the state Legislature deregulated the “categorical” programs in the education budget under Assembly Bill ABX-4-2.  Categorical programs are politically earmarked non-essential jobs programs.  ABX-4-2 forced categorical educational programs to be prioritized into “tiers.” Tier I reflected the highest priority for continued funding and Tier III the lowest.

The California Legislative Analyst’s Office (LAO) identified that there was $7.5 billion allocated to Tier I and Tier II programs and $4.5 billion to Tier III. In other words, of the $35.65 billion of state general funding for K-12 public schools in 2009, $12 billion or 33.6 percent was allocated for earmark jobs programs.  These programs have been so entrenched for so long that they are considered essential.

Recently, the California Auditor’s Office also gave us a window for seeing into where a portion of California’s state budget has been spent over the past 10 years.  According to the auditor, California is in the red by $127.2 billion.

What is interesting, however, is the Auditor reported about $79.9 billion of this “wall of debt” was spent on bonds for the state to give to local governments and school districts for public works projects. This included about $15.46 billion for five voter-approved water and parks bonds with annual bond payments of about $1.02 billion per year.  The total annual bond payment for the entire $79.9 billion is estimated from $4 to $5.2 billion.

If you take the $12 billion per year in education earmark funding and add it to the $4 to $5.2 billion in annual public works bond payments, you get from $16 to $17.2 billion. If the unfunded state and local public pension liabilities are $328.6 billion, as reported by Reuters, the annual amount needed to plug the pension gap would be around $10.95 billion.

That could have easily been met if the Legislature had not appropriated up to $17.2 billion per year in K-12 education earmarks; and the voters had not approved $79.9 billion in bonds for luxury public goods.

Stated differently, California has had enough discretionary tax revenues over past 10 years to fully fund its public retirement funding gap. Instead, it has squandered those revenues on luxury items: education earmarks, water-less water bonds, and luxury public works projects.  This is to say nothing about when former Gov. Gray Davis blew a $12.3 billion budget surplus on increasing public education funding when he took office in 2000.

This runs counter to the story that liberals like Krugman portray that California is just now experiencing a “comeback.” Or the story by commentators across the political spectrum that California’s budget deficit problems are due to a shortfall of tax revenues.  California’s state budget does not necessarily reflect a comeback or a comedown as much as a come on: it portrays an image of budget deficits due to funding shortfalls when the funding was available all along.

Lessons from California’s budget “comeback” 

The lessons to be taken from a so-called “California Comeback”: Voters should be skeptical of:

1. Annual threats of core teacher layoffs when the real fight is over discretionary “categorical” funding for non-essential earmark jobs programs;

2. Voters shouldn’t fall for popular water and other bond issues that end up crowding out meeting unmet public pension fund liabilities and other needs. A Zen proverb aptly sums it up: “Let go over a cliff, die completely, and then come back to life — after that you cannot be deceived.”