San Francisco Chronicle, 1/21/11.
Joe Nation and David Crane, both experts on California’s finances, answered readers’ questions on Wednesday during an hourlong online chat sponsored by The Chronicle and SFGate.com. The hosts’ concern is that Californians have no idea what the state owes – and that the state obscures that knowledge.
John Diaz: Your pieces in (Wednesday’s) Chronicle were excellent – and a bit disturbing. We also had an editorial Monday on the obvious smoke and mirrors in the state budget passed by legislators last fall and signed by Gov. (Arnold) Schwarzenegger. Is there any (legal) way to stop a budget that contains absurdly unrealistic assumptions? It makes a mockery of the state’s balanced budget requirement. …
Crane: (New York Lt. Gov.) Dick Ravitch and I are convinced that the only solution is to require accrual-basis (rather than cash-basis) accounting.
Marshall Kilduff: Does Gov. (Jerry) Brown’s mix of budget cuts and new or extended taxes make sense? Or do either of you think it still conceals financial problems that you set out in your columns?
Nation: I think Brown has been much more transparent, but still has much more to do. I do think the mix of revenues and tax extensions makes sense.
Crane: In my view, California needs a revenue increase, but it should happen only in connection with reforms to the three areas that lead to the structural deficit (volatile revenue and accelerating health care and compensation costs).
Jay Johnson: Is there any legal requirement for the state to fully report its debt obligation? If not, why not?
Nation: The state does have legal requirements, but the way they report obligations is, IMHO, just wrong. The rules for government accounting are far more generous than those for the private sector.
Lois Kazakoff: Californians see the state as a service provider but also as a potential, and reliable, employer. How does the state balance those two roles?
Nation: They are clearly roles that the state should play. The more important question is whether the state can do that efficiently. The recent auditor’s report suggests we’ve got a lot more work to do there.
Crane: The issue isn’t so much excessive benefits for employees as it is politicians promising those benefits and then not funding those promises. If, for example, the 1999 pension increase had been accompanied by an increase in pension contributions, we would not have the problems we have today.
Reader: Is there any truth to a rumor that the president and Congress are considering an amendment to the bankruptcy laws to permit states to file bankruptcy?
Crane: My understanding is that some in Congress are looking at that route, but I have seen no legislation in that regard.
Reader: How can government accounting get tightened up? By executive order, possibly?
Nation: Government accounting is ruled by GASB (the General Accounting Standards Board), which is run by the same government accountants who generally support these less-than-honest rules. So we probably need to work around GASB with separate state rules.
Kazakoff: State spending is largely investments in training a future workforce. Does cash basis accounting make sense for that kind of an investment? We can’t tell this generation we don’t have enough money to educate them.
Crane: Lois makes a very good point, and one made often by Mayor (Michael) Bloomberg and others. Governments need to distinguish capital budgets from operations budgets.
Reader: How much is the average state employee retirement package worth?
Nation: Average assets are equal to about $900K at retirement. Average for a comparable person in the private sector is about $180K, if I recall correctly.
Reader: Should some of the voter-approved bonds that have not yet been sold be reconsidered? For example, the $10 billion high-speed rail bond, other transportation bonds and water bonds that, perhaps, could be funded from user fees or other direct taxes? Should there be a cap on general fund bond debt as a percentage of, say, a three-year moving average of total general fund revenues?
Nation: Given that we are No. 2 only to New York in terms of our bond problem, I think slowing things a bit should be considered. Remember that adding in pensions and retiree health care puts our debt off the charts.
Crane: I think voter-approved debt probably requires less of a cap than does non-voter-approved debt. If anything, there could be a cap on the amount of the state budget that goes to service debt that isn’t voter-approved.
Reader: My perception is that general fund bonds seem “free” to the public – if bonds for capital facilities, which serve specific needs where user fees or specific taxes are feasible, had to be backed by such fees or taxes, perhaps the public would be more focused on the appropriateness of the investments?
Crane: I agree. That’s one of the consequences of having only 15 million contributors to the general fund in a state of 38 million people.
Reader: Are you saying that 15 million out of 38 million residents pay California taxes?
Crane: Right, there are 15 million filers.
Reader: Who will pay for the shortfall in the funding of existing pension obligations? Will holders of State of California debt lose income or principal?
Crane: Likely no risk to bondholders because they are so senior. Bondholders get paid right after K-14 education and retirees.
Nation: Other programs (higher ed, health care, parks, etc.) will pay.
Reader: I am in CalPERS (pension fund for state employees). When the real estate market comes back, won’t CalPERS be OK again?
Nation: Investments in most funds will have to earn 13 percent per year for about the next 10 to 15 years to get back on track. That’s unlikely. From 1900-1999, U.S. capital markets returned 6.2 percent.
Join the conversation
What: The Chronicle and SFGate.com will host the last online chat of our series about the future of California on this question: How do you – as a California resident, voter, taxpayer – affect the state budget?
When: noon Wednesday.
Who: Bob Hertzberg, former Assembly speaker and currently co-chairman of California Forward, a reform organization, will host the chat.
To read the full transcripts: Go to www.sfgate.com/blogs/opinionshop. Look for the category “budget crisis.”
Link to full article: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2011/01/21/EDG61HC5CE.DTL