California’s 2019–20 State Budget

Today the legislature passed AB 74, the state budget for the 2019–20 fiscal year, which starts July 1. Governor Newsom is expected to sign it. Here’s our summary view:

The Good: The legislature adopted the essence of Governor Newsom’s Revised Budget Proposal. As we expressed in our review of that proposal in May, to his great credit Governor Newsom proposed deploying most of a projected $21 billion “surplus” (it’s not really a surplus; see * below) to paying down debt, building reserves, and one-time or short-term expenditures. It is a greater political achievement than many people realize for an overwhelmingly Democratic legislature in the country’s leading left-leaning state to choose to save rather than to spend.

The Bad: The budget does not address expensive insurance subsidies provided to retired employees or improve the performance of state-operated-enterprises such as K-12 and Medi-Cal, which receive ~ $200 billion per year and are critical to their markets (Medi-Cal covers ~33 percent of Californians, K-12 serves ~90 percent of school-age kids) but produce unsatisfactory outcomes for 20 million customers. For a state known for innovation and effectiveness in the private sector, California’s state-operated enterprises are perversely uninnovative and ineffective.

The Ugly: All budgets contain “pork,” which is spending on local pet projects to please select legislators, and the 2019–20 budget is no exception as $60 million is directed to pet projects and we expect more to follow in “trailer bills.” But that one-time spending is nothing compared to the salary increase granted to prison guards, their fifth since 2010. Annual spending on salaries and benefits for 57,000 prison system employees supervising 127,000 inmates will now approach $9 billion, ~4x the revenues of the largest private prison corporation, ~3x spending on the Judicial Branch, >2x spending on each of UC and CSU, and 1.5x spending on Community Colleges. Needless to say, ratios like those don’t seem fitting for a state that characterizes itself as progressive.

*The state is projecting a fictitious $21 billion surplus in the next fiscal year by understating expenses through the use of cash-basis budgeting and high discount rates, as illustrated in a four-part series published in 2017 that may be found here, here, here and here. California is not unique among states in using cash-basis budgeting and high discount rates.

Originally appeared on Medium, 6/13/19.