California – Awash in Prosperity

If you pay close attention to the Public Policy Institute of California (PPIC), an independent nonpartisan non-profit research institution based in San Francisco, you’ll be informed California’s 2018-19 State Budget reflects significant economic growth for the state, will effectively provide support for working Californians, will greatly aid those beset by homelessness, while at the same time continue to build budget reserves for future economic downturns.

Most assuredly the institute’s prominent board of directors, which includes Linda Griego, a former President Clinton appointee, Edward K. Hamilton, deputy mayor to New York City Mayor John Lindsey and former California State Senator Gary K. Hart, can be assured of providing unbiased and nonpartisan analyses of the many subjects they review.

It’s been nearly six months since outgoing Governor Jerry Brown signed the Budget Act, authorizing $201.4 billion in spending. This includes General Fund appropriations totaling $138.7 billion, constituting an increase of $11.6 billion (or 9.2 percent) over the prior year. A brief review of general fund authorizations during the eight years of the Brown incumbency reveals significant growth, with the total expenditures since 2011-12 rising by 61.5 percent. These increases, however, seem acceptable to PPIC, by their summary: “… the Rainy Day Fund would reach $13.8 billion by July 2019.

In addition, the new Safety Net Reserve Fund will have $200 million to help pay for future health and welfare programs during the next recession. Both new reserve accounts have fewer restrictions than the Rainy Day Fund, giving the state more flexibility.”

Even though we’re assured by a prestigious research organization of California’s sound economic future, I’m nonetheless inclined to snoop around a little to see whether there may be evidence some unforeseen events might cause us to run into troubles we don’t anticipate. The first hint well-being may never be taken for granted is a Dec. 14 editorial in my local newspaper with the byline reading: “In Sacramento, the talk is all about big budget surpluses – and big new spending.

But across the state, signs of an economic downturn are strengthening.” The fact presented is the Golden State’s fortunes may have peaked for the present, the reality of ever slower job growth caused by an aging workforce and near full employment. The probability most new jobs added will come at the bottom end of the wage scale does not speak well for the future.

Perhaps the most foreboding prospect is the source of California’s funding. Much of it comes from the income tax, where wealthy taxpayers contribute a disproportionate share. With the state’s top marginal rate now the highest in the nation at 13.3 percent, with no preferential capital gains rate as given by the federal government, and with a stock market now approaching a ten-year bull run, we could see a bear market cause a massive drop in receipts at any time. For these reasons we should long ago have reduced our expenditures and increased our reserves. Despite this, our governor and his legislative leaders enacted a gas tax to pay for aging infrastructure, increased our involvement in the healthcare marketplace, and are now considering coverage for undocumented immigrants.

Another sign all may not be well concerns what are referred to as unfunded liabilities. The most onerous of these is pension reform, requiring legislative rescission of the many untenable retirement packages granted to government employees over the past decades. With the public employee unions literally financing the Democratic Party, and with that party now dominant at every level in this state, it becomes politically hazardous for the legislature to try to buck the unions by reducing future retirement benefits.

Unfortunately, without lightening the pension burden on public treasuries, retiree costs will effectively devour the state and local tax dollars which should be funding government services such as healthcare, education and the many other services the citizenry is entitled to receive.

How critical is pension reform here at the conclusion of 2018? Simply stated, the state’s two largest pension systems are grossly underfunded. These are the California Public Employees’ Retirement System (CALPERS), and the teacher’s pension fund, CalSTRS. CALPERS’ unfunded liabilities, based on available 2016 data totals $136 billion.

The projected red ink for CalSTRS is $87 billion. If you total the unfunded liabilities of all state and local public pension systems, the projected debt comes to about $333 billion … there are, however, estimated costs, based upon official reports, suggesting the total unfunded liabilities may be approaching $1 trillion.

In summarizing the public pension debacle-in-the-making, it’s clear these costs will overwhelm every other item in the budget, making the contractual benefits inherently unsustainable. Eventually the so-called California Rule, guaranteeing a public employee’s pension benefit can never be reduced, must come to an end.

And while discussing something which must come to an end, there’s a fair likelihood,  upon the termination of Governor Brown’s tenure at the end of the year, his foremost plaything – the California High Speed Rail Project – will also come to an end. More popularly known as the Bullet Train, the project, approved in 2008 with the issuance of $9 billion in bonds, was planned to connect the cities of Los Angeles, and San Francisco with an 800-mile rail route designed to transport passengers between the two metropolitan areas in 2 hours and 40 minutes at a total price of $35 billion.

The project is now hopelessly mired in conflict and corruption, years behind in every phase, with a price estimate currently pegged at $100 billion and growing with each successive estimate.

Whether or not Governor-elect Gavin Newsom will now embrace the Bullet Train so to placate the unions is uncertain. If he does, you may add that indiscernible cost to our unfunded liabilities.

Despite the many potential expenses possibly turning California’s vaunted surplus into a backbreaking deficit, many legislators are already taking aim at how the $8.8 billion surplus deserves to be spent. Three state senators, Scott Wiener of San Francisco, Nancy Skinner of Berkeley and Jim Beall of San Jose, believe $5 billion of it is rightfully designated to combat homelessness.

Another cadre of office holders consider much of it suitable as state funding for universities and colleges, so tens of thousands of high school students from low income families can attend California State University or the University of California. Two other state senators, Patricia Bates of Laguna Niguel and Jim Nielson of Tehama, want to see sizeable sums devoted to track and seize illegal guns from felons and the mentally ill. Irrespective of the differing views of the officeholders on how the surplus might properly be dissipated, one thing is certain: Virtually all incumbent politicians consider accessible taxpayer funds as money to be spent.

This is, of course, the fundamental difference between privately held assets as opposed to those publicly held. When the money belongs to you, it’s something to be safeguarded and respected, but when it belongs to the community, it can be indiscriminately blown.

For a final view of how California’s surplus will be preserved, let’s tune in to the comments of a man who’ll command a major say on this – Assemblyman Phil Ting, the San Francisco Democrat who chairs the Assembly Budget Committee: “We have a very different approach. Our focus, the people who we think need tax relief, are the working Californians who are making less than $25,000. That’s where we want to spend our money, making sure they have money to pay rent, to pay for food … [this, rather than giving out] huge corporate tax breaks and a huge tax break for the wealthiest in this country.”

Assemblyman Ting’s list of intended projects includes an increased earned income tax credit for the disadvantaged, expanded Medi-Cal to include all undocumented immigrants, enhanced preschool benefits for 4-year-olds, increased college aid and provision of social services for ex-convicts. Though I fully understand where his interests lie, and acknowledge such expenditures might successfully harvest certain votes, I question whether they’ll benefit the state’s economy.

Al Jacobs, a professional investor for nearly a half-century, issues weekly financial articles in which he shares his financial knowledge and experience. You may view it on http://www.roadwaytoprosperity.com

al@beachcomber.news