Our View Of The May Revision to the Governor’s 2021-22 Budget

Dear Legislators,

We have reviewed the May Revision to the Governor’s Proposed Budget for the 2021-22 fiscal year, which starts July 1. Our views are summarized below:

Unreliable Revenue Projections.Just seven months after the May Revision a year ago, the Department of Finance revised its projections for General Fund revenues for the current (2020-21) fiscal year up 23 percent, and five months after that, another 16 percent. Don’t blame DOF — that’s just the nature of CA’s tax revenues, which are linked to inherently unpredictable investment markets. No one can project CA’s tax revenues with any reliability. That’s why sufficient Reserves are so important and new programs requiring ongoing spending should not be enacted without saving money elsewhere. Spending one-time federal dollars is one thing; crowding out state funding for recurring programs quite another.

Insufficient Reserves. After DOF’s May Revision last year projected a 19% drop in revenues from the January Proposed Budget, you passed a budget employing Reserves for only 16% of the solutions to the resulting deficit, solving the balance with cuts, deferrals, borrowings, new revenues and federal funds. Yet the latest May Revision proposes increasing Reserves by only 15% even though the same percentage decline in revenues today would produce a 30% greater need for cash. With CA’s tax revenues more dependent than ever on volatile capital gains and state programs as dependent as ever on non-volatile funding, CA needs much larger reserves. As a start, you should reserve billions more for the General Fund rather than invest billions more in pension funds as proposed by the Revision (see * below).

Execution Risk. Homelessness is a big target in the Revision, which proposes an additional $12 billion on 29 programs:

But in February the State Auditor issued a report about poor execution of $13 billion of existing spending on Homelessness. Adding another $12 billion spread over 29 programs doesn’t seem like a recipe for success without someone being in charge. During World War I President Wilson appointed Herbert Hoover as a “Food Czar.” Credited by all with great success, we think something similar should be adopted in California. The buck has to stop with someone. We have the same concern about execution of a plan laid out in the Revision to offer a behavioral health system under which “all children and youth are routinely screened, supported, and served for emerging and existing behavioral health needs.” That’s a wonderful sounding idea but it’s results that matter.

Results-Oriented Government:We are pleased by the Revision’s expression of intent to make CA’s state government results oriented, but count us skeptical until political donations are banned from all corporations, unions and associations whose shareholders, employees or members receive money under agreements with the state to provide services. Results will improve when residents, not suppliers, are the only customers being served by lawmakers.

K-12: Meet the New Boss; Same as the Old Boss. The state’s K-12 system performed poorly before the pandemic despite huge increases in funding yet the Revision imports nothing innovative (much less “transformative,” a word deployed often in the Revision) into that staid system. Worse, the Revision proposes to expand school-employee-union dominion over Pre-Kindergarten. We love Pre-K but not if operated with the same institutional sclerosis that infects K-12. We would prefer a Medicare-style approach in which parents, like Medicare enrollees, get to choose among providers. That would free families from the hostage-taking they experienced from school-employee unions during the pandemic.

Medi-Cal.We are pleased to see the Revision propose to cover undocumented seniors. We would be more pleased if all undocumented residents were covered and even more pleased if that coverage was paid for by reforming extravagant coverages unnecessarily being provided retired government employees. All undocumented residents could be covered for just one-third of the $10 billion cost the state and subdivisions shamefully incur each year providing excess coverage to retired employees who already have Medicare and the ACA.

College Savings, Cleanliness, Courts, UC, CSU and Prisons. We are excited with the notion of college savings accounts (but only if families won’t get whipsawed when revenues decline — see Reserves above), cleaner streets and highways (but see Execution Risk above), fuller funding for courts, UC and CSU (long crowded out by fast-growing spending on retirement costs), and importation of the Norwegian experiment to Valley State Prison and closure of one prison. We would be even more excited if you would finally attack CDCR compensation and benefits costs. What does it say about our state that the returns to prison guard unions dwarf those of private prison operators?

Equity. “Equity” is another word deployed frequently in the Revision, which is sadly ironic given that CA’s unemployment exceeds the national rate by a substantial margin, unemployment insurance continues to be terribly executed, schools were kept closed longer in California than in any other state, ever-increasing shares of school, local and state budgets are being diverted to retired employees, and the populations most adversely affected by all those factors are overwhelmingly blue-collar. In our view, far more beneficial to equity than a smorgasbord of new programs (that also pick some winners along the way) would be better execution by the state of existing programs, especially schools, that overwhelmingly serve such populations.

*The Revision proposes adding $11.3 billion to state pension funds over the next three years, on top of regular retirement spending of $13+ billion per year. The extra investment would not pay down pension obligations but rather boost pension assets invested on Wall Street (and thereby confer an accounting benefit by reducing “Unfunded Liabilities,” which is the difference between pension assets and liabilities). While that would save some money over the long term, that $11.3 billion would be much more valuable to residents if added to Reserves that could be accessed by the General Fund when revenues decline. Rising pension costs should be addressed by suspending automatic increases and reducing benefit levels relating to years not yet worked.