Gov. Brown warns of recession, but his budget sets spending records

California Gov. Jerry Brown points to a chart showing the growth of the state's Rainy Day fund as as he discusses his proposed 2018-19 state budget at a news conference Wednesday, Jan. 10, 2018, in Sacramento, Calif. Brown proposed a $131.7 billion state spending plan, dedicating $5 billion toward the fund. (AP Photo/Rich Pedroncelli)

SACRAMENTO – Gov. Jerry Brown’s annual budgets have become familiar affairs. During his last two terms in office, Brown routinely offered a budget plan that broke spending records, but also was designed to limit the creation of new programs while girding against the possibility of another recession. The governor’s budget release from last Thursday was true to form.

Brown’s 2018-2019 budget plan would spend a record $132 billion in the general fund – which is 4 percent higher than last year and 44 percent higher than the first budget he released in his modern gubernatorial terms (2011-2012). The total budget – including spending from bonds and special funds – tops $190 billion. As columnist Dan Walters points out, Brown’s first-ever budget from the 1970s spent only $11.5 billion in the general fund.

But Brown touted his infamous chart showing that balanced budgets often have been followed by deficits.  “California has faced 10 recessions since World War II and we must prepare for the eleventh. Yes, we have had some very good years and program spending has steadily increased. Let’s not blow it now,” he said in his budget statement.

The governor also warned about the ramifications of the recent federal tax plan, signed by President Trump, which increases the tax bite on high-income Californians by limiting their ability to write off state and local taxes. Unless the state Legislature passes a workaround (such as a proposed plan that allows Californians to designate their state tax payments as a “charitable contribution”), the new rules are expected to reduce revenues in high-tax states.

There are other steps that followed in a more fiscally conservative manner. Following the recent increase in the gas tax and vehicle-license fees, the new budget showed a healthy surplus. Instead of spending it on new programs, Brown has earmarked $5 billion to the state’s rainy day fund. That’s $3.5 billion more this year than he is obligated to set aside in case of a coming downturn. It brings the total fund to $13.5 billion.

These efforts drew praise from across the political spectrum for their prudency. As the San Francisco Chronicle opined, Brown’s “proposed budget, drenched in a $7 billion surplus, spends money sparingly, dumps dollars into a record rainy-day fund, and dodges big-ticket programs favored by his would-be successors.” Democratic legislators and statewide elected officials likewise praised the governor for spending more without breaking the bank.

He even earned the faint praise of some Republicans legislators, who fear that the next Democratic governor will be far more eager to spend beyond Californians’ means. “As usual, the governor gave a good speech this morning,” said Sen. Jeff Stone, R-Temecula. “But as has been the case far too often, the initial budget is the floor and I’m sure the Democrat leadership in Sacramento will now begin the spending spree we all know is coming.” Other Republicans argued that the surplus proved that the gas-tax hike was unnecessary – and urged the governor to return the surplus to taxpayers.

There are a number of other noteworthy spending proposals. For instance, the governor plans to quickly start spending $4.6 billion in road improvements, which some observers believe could blunt the momentum of a proposed statewide initiative, which is now in the signature-gathering stage, that would repeal the unpopular tax. The governor also proposes spending nearly 3 percent more on California State University and the University of California systems – a proposal that drew criticism as being insufficient from some education officials. Total K-12 spending would be up by 2.5 percent.

Of particular note, the governor proposes the creation of a new fully online state community college to serve the “2.5 million Californians in the prime working ages between 25 and 34 who have only a high school diploma or some college but no degree.” Brown says these Californians – mostly Latino and women – are most vulnerable to recession and to automation in the workplace. The proposed cost to get started is approximately $100 million and then $20 million a year.

Social services spending remained stable. The budget boosts health care spending but contains some uncertainty, pending a coming decision from Congress regarding whether it will continue to split the costs of the Children’s Health Insurance Program with the states. The governor continues to boost funding for programs to combat climate change. He continues to pay down the so-called “Wall of Debt,” which hit $35 billion in 2011 and is down to $6 billion in this budget year.

One big fiscal issue, that doesn’t directly affect the current, proposed budget, involves the state’s growing payments to cover its unfunded pension liabilities. “When the next recession comes around, the governor will have the option of considering pension cutbacks for the first time in a long time,” the governor said at a press conference. They will, he said, be on the “chopping block.”

Brown was referring to a series of cases that the California Supreme Court has agreed to review this year involving something known as the “California Rule.” That refers to a series of decisions dating to 1955, which forbid government from cutting pension benefits for current employees even going forward (i.e., you accrue the promised benefit through today, but start earning a lower amount starting tomorrow).

Unions have challenged some changes in the governor’s 2013 pension-reform law. Brown’s legal team submitted a brief to the court that defends not only the reform law, but which seems to back broader changes to the rule. Clearly, the governor expects the court to side with him, which would not only give the state more latitude in reining in spending, but local governments, too.

That’s a longer-term picture, but in the short term the budget proposal is pure Jerry Brown. He wants to spend more on government programs, but wants to be certain that the state isn’t committing itself to huge new spending obligations if the economy goes soft.

Steven Greenhut is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.

This article was originally published by CalWatchdog.com

What taxpayers should know about the California budget

BudgetCalifornia voters are pretty good at figuring out what is going in the state capital when it hits them directly. For example, recent polling shows that citizen awareness of the $5.2 billion annual gas and car tax is very high and, incidentally, very negative.

But the same can’t be said when it comes to the more complicated and arcane actions of our state politicians such as the annual California state budget process. While Californians are painfully aware that taxes are very high (they’ve been watching their friends and neighbors moving out of state at record pace) they typically have little comprehension of where their tax dollars go. That’s not surprising since California ranks dead last in budget transparency according to a recent study by U.S. News & World Report.

Nonetheless, here are the main takeaways that every California taxpayer should know.

First, the budget is huge – over $125 billion in general fund spending – by far the largest budget in California history. Since the recovery began after the great recession, taxpayers have infused California’s General Fund with $41 billion and special funds by $28 billion. That translates into a 63 percent increase since 2010. And property owners have done their part as well. With real estate values fully recovered (and then some) property tax revenues are up 72 percent. This is where our schools get the lion’s share of their money.

Second, the budget is only balanced if you ignore debt. The majority party is practically breaking their arms trying to pat themselves on the back for a “balanced budget.” This is like a family celebrating the fact that they paid all their bills this month but ignoring the fact that they have a mortgage that is way beyond their means over the long term. California’s pension debt is, by some measurements, close to a trillion dollars.

Third, the budget is, as usual, full of tricks and questionable accounting. One of the more dubious ploys involves borrowing from special funds. This year, there’s a proposal to borrow $6 billion (with a “b”) from the state’s Surplus Money Investment Fund to reduce the unfunded liability of the state’s pension fund, PERS. While there is agreement that appropriating more money to PERS now helps to reduce unfunded liability in the future, that payment should come from current revenue, not a special account designed to cover ongoing operating expenses.  Let’s call this for what it is: Paying your Visa bill with your MasterCard.

The budget is being praised for adding a couple billion more to the state’s rainy day fund (technically called the Budget Stabilization Account) bringing it to over $8.4 billion. But recall during the last recession, the budget shortfall was many times that amount. Thus, while it seems like a lot of money, the state’s reserve funds remain woefully inadequate. You can’t save a penny a day for a couple of years and think it will be enough to fix the roof when it collapses.

Other trickery includes several dozen so-called “trailer bills.” These are supposed to be budget related bills – many are not – that can pass with a simple majority vote and are not subject to citizen referendum. Because they can be jammed through on short notice without citizen recourse, they are a favorite tool of the majority party to effectuate big policy changes. Two examples of this are the gutting of the California Board of Equalization – one of the few state tax agencies in America actually accountable to voters – and a blatantly political power grab by changing the law as it relates to recall elections designed solely to throw a lifeline to a tax-and-spend democrat who cast the deciding vote on the gas and car tax hike.

Bottom line? The majority party has adopted laws and policies which will unquestionably push state spending permanently higher by expanding programs, increasing welfare costs and giving their political funders – labor unions – higher compensation via costly collective bargaining agreements. Our elected leadership is driving California right off the cliff.  Thelma & Louise would be proud.

Jon Coupal is president of the Howard Jarvis Taxpayers Association.

This piece was originally published by the Orange County Register 

California Budget: Balanced and progressive or out of control?

Jerry Brown Budget 2017SACRAMENTO – The California Assembly and Senate have until Thursday to approve the budget deal announced by Gov. Jerry Brown last week, but there’s little uncertainty about the outcome. The general-fund budget is a record-setting $125 billion – something Brown describes as “balanced and progressive,” given that it spends more on social programs, but doesn’t bust the bank.

In fact, the budget plan conforms almost exactly to the governor’s longtime fiscal approach. He wants to fund social programs as much as possible, but not create new, permanent spending programs that cannot be curtailed when fiscal times are bad. He talks repeatedly about frugality, yet his budgets continue to ramp up state spending to record levels. He did set aside $8.5 billion for the rainy-day fund to prepare for any downturn.

Even the governor’s approach to the state’s unfunded pension liabilities is prototypical Brown. The governor speaks regularly about the size of the state debt to pay for pensions and retiree medical programs, but he typically addresses the problem with small-scale solutions that trim debt levels without antagonizing state workers and the unions that represent them.

This particular deal would borrow money from a state fund that pays a low interest rate, and pay down some of the state’s pension debt by investing it with the California Public Employees’ Retirement System, which predicts a fairly high rate of return (7 percent). Brown says this plan will save the state $11 billion over the next two decades simply because of the difference in interest rates.

In terms of spending, the budget uses $1.2 billion in new revenues from the state’s recently passed tax increase on tobacco to help pay for growing costs to Medi-Cal, the state health program for low-income residents. But about half of those new revenues will be earmarked to health care providers and to family-planning entities like Planned Parenthood. It expands spending on the state’s K-14 educational system.

The budget also expands spending for both of the state’s university systems (the University of California and California State University), but the nearly $300 million combined in increased higher education spending comes with some conditions. The plan withholds $50 million from the University of California until the Office of the President fulfills the recommendations made earlier this year by a state auditor. It also requires California State University officials to “find space for students denied entry to their preferred campus or program,” according to the Sacramento Bee.

The budget increases spending on subsidized affordable-housing programs by $400 million. The budget also will allow more people to take advantage of the state-level Earned Income Tax Credit. Under new criteria, low-income people earning up to $22,000 a year will qualify for state EITC payments, up nearly $8,000 from previous standards. The new eligibility standards also apply to people who work for ridesharing companies or are involved in other forms of self-employment, according to various news sources. The budget doesn’t include an extension of the cap-and-trade system, although the system is likely to be extended in separate legislation.

Furthermore, the budget spends $100 million to set up a new agency to deal with the legalization of recreational marijuana sales, including the creation of a tax office along the Redwood Coast in the heart of marijuana-growing country.

The whole budget, which includes all spending (from bonds, etc.) totals $183.2 billion. But the biggest controversies are not around the amount of money the state will spend. The Legislature used the trailer-bill process – normally reserved for technical amendments to budget matters – to pass some controversial, nonbudget-related matters.

For instance, Democrats are fighting a recall measure against state Sen. Josh Newman of Fullerton. Republicans targeted him because of his vote on the recently passed gas-tax increase. One trailer bill in the budget would extend the timelines for the recall, making it more likely that the election would be put on a regularly scheduled ballot timeframe that would be more favorable to the Democratic incumbent. Another trailer bill would reduce the power of elected officials in the state Board of Equalization, a tax board. Yet another creates new dam-safety rules, following problems at the Oroville Dam spillway last winter.

Still, what Democrats described as responsible drew some rebuke from Republicans, who note that general-fund spending is nearly $40 billion higher in this budget than it was six years ago. Balanced and progressive or out of control? It depends on which side of the aisle one sits on. But everyone at least agrees that it’s basically in balance.

Steven Greenhut is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.

This article was originally published by CalWatchdog.com

CA Budget & Fiscal Policy is Unsustainable

May Revise 2017While the governor’s leadership has been the key to keeping California in the black and paying down debt, the Legislature continues to grow permanent spending based on an increasingly volatile revenue stream. The Legislature’s highest priority for environmental policy is sustainability. Yet today their highest priority for budget and fiscal policy is unsustainability.

Since the economic recovery began in 2010, taxpayers and the business community have grown the General Fund by $41 billion and special funds by $28 billion, representing an overall revenue increase of $69 billion or 63 percent. In addition, we have also grown local property tax revenues for Prop. 98 more than $10 billion, which is equal to a 72 percent increase.

While California is already the highest taxed state in the nation, the Legislature introduced bills to authorize more than $370 billion in new taxes and fees in 2017 — more than double the state revenues contained in the budget bill.  For example:

  • During this same period in 2017, state funding for K-12 education is set to grow $17 billion, or roughly 50 percent, while state employee pension and health benefit payments are set to nearly double to more than $14 billion.
  • There also is considerable growth in spending for health care and social services expansion.  Since 2009-10, Medi-Cal spending has increased by $9 billion in the General Fund and by $64 billion in state and federal funds.  California is committed, even under existing federal law, to picking up an increasing share of the federal portion.
  • In 2022, the hastily approved minimum wage increase of 2015 will be at full implementation, impacting General Fund costs by $3 billion and all funds by $10 billion.
  • The series of labor agreements approved this year-to-date commit the state to another $4 billion in permanent spending increases.

The passage of these spending priorities required the state to pass $5 billion in new taxes to fund critically needed road and infrastructure repair. Now it is time to prioritize major structural reforms that create long-term economic stability before another recession occurs, the impacts of which could be even more devastating than what we witnessed during the economic downturns in either 2001 or 2008. We must work towards a budget that better protects all Californians and our economy for our long-term future.

resident, California Business Roundtable

This piece was originally published by Fox and Hounds Daily

Why California’s Finances Could Derail Their Energy Plans

Energy power linesAccording to State Senator John Moorlach, R-Costa Mesa, California has real financial problems that need to be immediately addressed. A self-described Truman Democrat, Joel Kotkin, in a recent syndicated article echoes the same sentiments. Some of the problems are California has the highest taxes overall in the nation, worst roads, underperforming schools, and the recent budget has at least a $1.6 billion shortfall.

Moreover, depending on how the numbers are analyzed California has either a $1.3 or a $2.8 trillion outstanding debt. This is before counting the maintenance work needed for infrastructure, particularly roads, bridges and water systems. Yet tax increases aren’t covering these obligations, and even the bullet train project, which held so much promise when it was passed are now billions over budget.

However, the financial strain also has California’s net financial position running a $169 billion deficit according to the Comprehensive Annual Financial Report, which puts California ranked last in the nation. Deferred maintenance on our state roads and highways is roughly $59 billion. Estimates of California’s unfunded pension liabilities – assuming a rate of return – above 5% has CalPERS at $114.5 billion, CalSTRS at $76.2 billion and UC Pension at $12.1 billion.

California in addition has the highest unfunded retiree medical liability in the nation, second highest gas taxes when cap and trade is added, highest corporate and individual income taxes, and lastly has the worst business competitive environment in the U.S. as well.

Our biggest issue of all could be that our nation’s unfunded pension liabilities have reached upwards of $5.6 trillion with California’s share at $956 billion. These above-mentioned sobering assessments of our state’s financial and societal health are reasons to question why California has become an outlier of progressive policies – particularly when it comes to energy – with renewable energy being at the forefront of our overall energy portfolio.

At one time California was the leader in sensible environmental, education, manufacturing and cultural polices, but those days have seemingly passed. As the country moved to the right during the recent election, California has entrenched itself as the stronghold of the left-leaning, progressive movement. Nowhere has this played itself out than in California’s embrace of global warming with AB 32 and SB 32. Both energy policies are known to restrict economic growth, and make all forms of energy more expensive. Whether you believe or not in global warming and climate change, California’s embrace of the fundamental tool for economic growth – affordable, scalable energy – has now become harder than ever to achieve with the voters, California legislature and Governor’s full embrace of these policies.

At this time California isn’t creating middle or upper middle class jobs, except in the northern California region. With San Francisco leading the way. Apple just announced they are creating 2,000 jobs in Arizona with firms such as Toyota, Tesla and Carl’s Jr., having followed suit the last few years. Recent labor announcements about California creating 21,600 private sector jobs in December turned out to be a false narrative.

According to payroll processing company Automatic Data Processing Inc. working with Moody’s Analytics Inc., put the figure at only 2,400 “goods producing types of jobs.” Meaning that nine out of ten jobs created were service sector, minimum wage paying levels jobs.

With this type of employment opportunities being created how are Californians expected to pay for an energy portfolio that strongly relies on renewable energy? This could be turned around with great paying careers that the oil and gas industry provides. As an example, according to Russell Gold’s book “The Boom,” page 62, the average oil-field worker made $91,400.

Renewable energy at this time doesn’t work on the type of basis that could power neighborhoods, cities, counties, or this state. Additionally, renewable’s technology hasn’t solved a number of key issues for energy security, reliability and scaling at a cost effective measure to reach all California markets.

These main problems are: 1) storage of excess energy, 2) intermittent weather issues when using wind and solar, 3) generous tax credits needed for profits (Tesla as an example), and 4) modernizing the grid needs to take place, because renewable energy causes surges that California’s grid isn’t able to handle from over 38 million Californians.

As California relishes its role fighting the new President, it is hard to imagine his administration doing anything to assist California lowering its energy costs. It’s not hard to imagine that if you live in Los Angeles, San Francisco or other expensive coastal enclaves that a $200,000 a year salary isn’t enough once taxes are paid. Therefore, why is California nudging the new President towards confrontation?

Gun control, immigration, and even snubbing him at his inauguration, members of the California Congressional delegation are playing a dangerous game. Joel Kotkin has many times called California’s energy policy an amalgamation of “green clergy, or a clerisy.” Trump also has control over federal dollars. California is expected to receive $105 billion this year, with $78 billion going to health and human services programs. Likewise Trump has nominated pro-fossil fuel advocates to the Departments of State, Energy, Interior and the EPA. It doesn’t seem wise for California to not want to work with the Trump administration on opening up parts of California to energy exploration to assist with politically disagreeable problems now in the mix.

California has billions of gallons of oil and trillions of cubic feet of natural gas sitting off our coastlines and in the Monterrey shale. Jobs aren’t being created that can sustain working families, infrastructure is lagging and our energy portfolio isn’t functioning correctly to contain costs.  Our high-energy costs are one of the biggest factors why companies and CEOs are leaving California.

Many astute energy observers believe California will need to cut 100,000 jobs and increase energy prices to meet our ambitious climate goals. These goals could be met with moving towards natural gas and nuclear-powered plants.

A desirable goal for the new year would be for voters to begin considering voting for moderate, business-friendly Democrats, and sensible environmental Republicans who believe in an all-of-the-above approach when it comes to energy policy.

This perfect amalgamation of animosity rapidly approaching California could be mitigated with sensible, low-cost energy policies that benefit all of California.

Todd Royal is a geopolitical risk and energy consultant based in Los Angeles.

Will Taxpayers Be Mugged by Sacramento?

TaxesGovernor Brown has just released his spending proposal for 2017-18 and taxpayers should not be blamed if they feel like they are walking down a dark alley in a high-crime neighborhood.

While the governor’s proposed budget has been described as austere, it still represents a spending boost of 5 percent, a rate of increase only slightly smaller than last year’s 6 percent. Because the state is in the process of rewarding its employees with generous pay increases and covering an expanding requirement to fund their pensions — pensions that are currently subsidized by six percent of the general fund budget — more spending does not represent an increase in the quantity or quality of services for average Californians.

The Brown budget contains no major program increases except for transportation. But the kicker is that this would be contingent on higher taxes on gasoline and car registration. So, while state workers will be kept snug and comfortable, if commuters want those pot holes repaired, they must pay extra.

However, the governor’s budget should not be regarded as anything more than a place holder, as the ability to fund it is threatened from all directions. The new administration in Washington, as well as a majority of both houses of Congress, have made it clear that Obamacare is on the verge of elimination. There can be little doubt that federal funding for California’s massive expansion of Medicaid is in jeopardy. Because, to paraphrase Ronald Reagan, a government program is the nearest thing to eternal life we’ll ever see on this earth, no one will be surprised when Sacramento looks to average taxpayers to make up the nearly $16 billion-dollar difference.

Then there is uncertain tax revenue. The extension of the nation’s highest income tax rates renders California highly vulnerable to economic fluctuations. Although growth had been tepid, we have experienced 90 months of economic expansion and financial experts warn us to be prepared for the next downturn.

As if these threats were not enough, Brown will have to contend with elements in his own party who believe in the axiom of former Senate leader, David Roberti, “When you’ve got it, spend it,” to which they would add the corollary, “If you don’t have it, spend it anyway.”

Chairman of the Assembly Budget Committee, Phil Ting, has already made it clear that he does not want to budget assuming the worst, that the Legislature must continue “investing in California,” a budgetary approach akin to Admiral David Farragut’s at the battle of Mobile Bay, “Damn the torpedoes, full speed ahead.” While Farragut was successful, is it appropriate to put California taxpayers at dire risk through imprudent spending?

In May, the governor will issue a revised budget, no doubt with major changes, in advance of the June 15 deadline for final passage. If revenue is down, taxpayers may be treated to the spectacle of a cage match between those committed to spending, backed by their special interest allies, and those who advocate a slightly more cautious approach.

In Sacramento, fiscal sanity is relative. Ironically, our eccentric governor who thinks nothing of lavishing nearly $100 billion on a bullet train, may be the dwindling middle class’s best hope to fend off major increases to their already staggering tax burden.

Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.

This article was originally published by HJTA.org