San Francisco Chronicle: Four shadows fall across California’s budget

California’s budget is not fixed. As proof, ask yourself what would happen to the budget if the stock market dipped in 2015 as it did in 2008, yielding much lower tax revenue from capital gains. The answer is that Gov. Jerry Brown would find himself in then-Gov. Arnold Schwarzenegger’s shoes, reporting a big deficit.

Actually, Brown would find himself in tougher shoes. That’s because, since Brown took office in 2011, the state has added more than $40 billion of pension and other retirement obligations, boosted Medi-Cal’s (California’s Medicaid system) share of the budget by 50 percent, imposed more than $150 billion of pension payments on school districts, and become even more dependent on capital gains for tax revenues.

Though it may feel as if the budget is fixed, that’s a mirage created by a stock market that’s up more than 60 percent since Brown took office. A market drop of any meaningful size would crush California’s budget, even with the state’s new “rainy day fund,” only half of which is available for revenue shortfalls and all of which can be invaded under other circumstances. The reality is that California’s budget will not be fixed until four fundamental problems are addressed: a capital-gains-dependent tax system, unfunded pension obligations, unfunded state retiree health care obligations and explosive growth in Medi-Cal spending.

Brown and the Legislature didn’t address the Fundamental Four during Brown’s last term, choosing instead to ride a hot stock market and temporary tax increases to higher revenues. But even higher revenues didn’t improve public services for most citizens, in part because Brown, to his credit, insisted that some of the revenue be used to reduce short-term debt, but mostly because of increases in spending on pensions, retiree health care and Medi-Cal. Despite higher taxes, fees and revenues, the state is spending less on education now than in 2008. Worse, less money is getting to classrooms because school districts and universities are spending more on retirement debts of their own. Public assistance and courts are also getting less money.

In other words, citizens are paying more but getting less, and because of the growth in retirement and health care obligations, they will get even less going forward — and all that is true even if the market keeps going up. When the stock market declines and the state reports deficits, Californians will feel as if they are on a roller coaster without a seat belt. Even extension of the temporary tax increases won’t help because — you guessed it — more money will go to additional spending on pensions, retiree health benefits and Medi-Cal. That’s simply the unavoidable outcome when elected officials choose to make enormous unfunded retirement promises to government employees and to provide health care for one-third of the state’s citizens.

To repeat, California’s budget cannot be fixed until the Fundamental Four are fixed.

As legendary investor Warren Buffett puts it, you only find out who has been swimming naked when the tide goes out. It’s just a matter of time until the next stock market decline exposes the naked truth about California’s budget. When that happens, Californians will be hurt if the state hasn’t addressed the Fundamental Four by then.

No one is more appropriate than Brown to do exactly that. He has acknowledged a disappointing fiscal legacy from his first tenure as governor in the 1970s when he and the Legislature failed to enact tax reforms that might have prevented Proposition 13, the voter initiative that gutted local government revenues, and then, after its passage, chose to bail out local governments and consolidate power in Sacramento. Upon retaking office in 2011, Brown criticized that consolidation, noting that, “After that, the state started dictating what we did,” including expansions in retirement benefits and health care and greater dependence on capital gains for tax revenues. To his credit, Brown took some steps during his third term to reverse that consolidation, but devolution without fixing the budget imposes even greater pressure on schools, services and taxpayers. Given Brown’s legacy, it would be poetic for him to use his fourth term to fix the Fundamental Four.

The good news is that these problems can be fixed if citizens hold their leaders accountable for doing so. When Brown delivers his next budget, there will be four elephants in the room. He must ask the Legislature to address them, and then they must succeed in doing just that.

Link to original article: http://www.sfgate.com/opinion/article/Four-shadows-fall-across-California-s-budget-5990848.php