California House of Cards

California House of Cards – From Forbes Magazine – by Thomas Del Beccaro

Jerry Brown, soon to be California’s longest-serving Governor, is obsessed with his legacy. Legacies, however, are judged retrospectively. For now, Brown has been receiving much credit nationally for “balancing” the budget. In truth, the budget is not really balanced and Brown is setting California up to fall like a house of cards.

Jerry Brown certainly is having a good year in the media. This year, PBS told us: “Gov. Jerry Brown Makes Tough Choices to Balance State Budget.” The Atlantic recently heralded: “California’s New ‘Problem’: Jerry Brown on the Sudden Surplus.” EvenBusinessWeek proclaimed that Jerry Brown had “Scared California Straight” and that “Jerry Brown Stays Stern on California’s Budget Surplus.”

Brown has received such praise in connection with the California budget process this year, and the ruling Democrats’ self-proclaimed budget balancing. The real score in California, however, demonstrates that the budget is not really balanced and there is nothing but trouble ahead.

First, to use Jerry Brown’s own words, California has a “wall of debt,” which doesn’t include unfunded pension and medical liability – and that wall of debt is NOT included in the budget. The total amount of that debt is somewhere in the $27 billion range and includes over $10 billion owed to the federal government. That money was used to fund California’s Unemployment Insurance Fund, and California seems to have no plan to pay it back – a sort of “reverse” unfunded mandate, if you will.

The fact that California began borrowing that money in 2009 demonstrates the fallacy of the prior claims of balanced budgets. The fact that it is kept off budget, like the other debt mentioned above, demonstrates the fallacy of the 2013-14 budget.

Of course, California has far greater debts than that. One study showed that California governments are over $1 trillion in debt. Most of that is in the form of unfunded pension and medical liabilities owed to state employees. California’s Legislative Analyst told Brown and the Democrat-run legislature to increase the contributions to the state’s teacher’s pension fund by a paltry $4.5 billion to address its announced $73 billion short fall.

The new budget, which includes a call for an increase in spending of 26.2% over the next four years, ignores the Legislative Analyst’s advice. Keep in mind that the main public employee retirement fund is said to be underfunded by $329 billion and that the unfunded medical benefit deficit is said to be $64 billion in the red. The latter figure, according to Brown, is expected to grow 59% in the next four years.

If you ignore all that, then California has close to a balanced budget. I say “close” because, in fact, the so-called balanced budget steals (sorry – “borrows”) $500 million from the State’s cap-and-trade environmental emission reduction program. Brown’s budget does that even with the recently passed, retroactive tax increase that produced higher-than-expected revenues.

Add it up and you find that the budget really isn’t balanced and Brown hasn’t really made any “tough choices.” Brown isn’t alone in that distinction. His predecessor, Arnold Schwarzenegger, promised to “blow up boxes” of government waste and, if I recall correctly, there were no such explosions. Of course, it could be worse. The Democrats in the legislature actually wanted to increase spending more than 26.2% over the next four years.

While we are looking at numbers, consider these: California has the highest income taxes in the country, the highest gas taxes, the most regulations of any state and – surprise – the fourth-highest unemployment rate (which, as every serious person knows, is understated). The latter is a real feat when you consider California’s natural resources – including oil reserves which could easily be a big part of the answer to many of California’s economic and budget problem. See my Forbes article: California’s Anti-Fracking Ideologues Look A Gift Horse In The Mouth.

In the final analysis, instead of addressing those runaway deficit freight trains headed California’s way, Jerry Brown is bent on funding High-Speed Rail in the Golden State to establish his legacy. Interestingly, the yearly budget for high-speed rail is larger than the amount California Democrats appropriated for the California State University system – which tells you a lot about Brown’s priorities. Speaking of legacies, the one of Brown’s father, Governor Edmund G. Brown, Sr., was the improvement to the state’s educational system made under his tenure. Jerry Brown’s legacy will be the gamble he took with our budgets and high-speed rail – both of which more accurately represent a California house of cards.