Before anyone in Sacramento breaks out champagne to celebrate the state legislative analyst’s forecast multibillion state operating surpluses in coming years, consider his caveats.
Analyst Mac Taylor last week kicked off the debate over the fiscal year 2013-14 budget by announcing that the state Legislature and Gov. Jerry Brown must close a $1.9 billion shortfall. He called it a “dramatic turnaround,” a comment that appeared in news stories across the state. In the myopic world of state budgeting, he’s right. When one considers his office’s annual projections from the past five years of $10 billion to $28 billion deficits, this year’s $1.9 billion looks pretty darn good.
Then, when Taylor projected that by 2017-18 the state would have an operating surplus of more than $9 billion, one could see the needles on the spending tachometers reach the red zone as lawmakers revved their engines.
Let’s hope they notice that Taylor was also waving a huge caution flag.
For starters, while a $1.9 billion deficit seems relatively small compared to past years’ shortfalls, it’s still a negative number. Without additional cuts or revenues, the state will spend more money than it takes in.
That’s even after voters this month passed Proposition 30 to raise sales and income tax rates, and after savings from the Legislature’s so-called pension “reform,” which was actually closer to a tweak.
Many lawmakers will downplay the 2013-14 deficit and focus on the surpluses projected for the following four fiscal years. Moreover, they will ignore Taylor’s warnings that all those numbers assume:
Steady growth in the economy and stock prices. Without that, tax revenues will be less. If state revenues grow one-third slower than forecast, 80 percent of the surplus projected for 2017-18 would be eliminated.
No rainy day fund, contrary to the promise made to voters in 2004 when they also approved $15 billion of one-time borrowing. Recall that the money and the accompanying requirement for a responsible budget reserve were supposed to solve our state fiscal crisis and ensure it wouldn’t return. (How well did that work out?) Funding the reserve as promised would eat away nearly 40 percent of the projected 2017-18 surplus.
In most cases, no inflation adjustments after current labor contracts expire. It’s not likely the politically powerful state unions will go along with that. Adding in a cost-of-living factor would wipe out more than 20 percent of the 2017-18 surplus.
In other words, without those three assumptions, we’re looking at a deficit, not a surplus, in 2017-18.
Now let’s add in three other caveats:
The $9 billion surplus for 2017-18 assumes nearly $6 billion in revenues from the higher income tax rates just approved by voters under Proposition 30. Those higher rates will expire beginning in 2018-19. So, even if all the other assumptions hold, most of the projected surplus will disappear.
The forecast surplus assumes almost no spending to reduce the state’s debt for pension and retiree health programs. Let’s give this some scale: While the state might have a $9 billion surplus in 2017-18, the retirement programs for which the state is responsible are underfunded by well over $150 billion — and growing. As Taylor notes, if there is a surplus, this should be a top priority.
The forecast surplus assumes the pension systems will attain their aggressive future earnings projections. If, for example, the California Public Employees’ Retirement System fails to reach its forecast 7.5 percent annual return, yearly state pension payments will go up, and the surplus will go down. The $150 billion-plus retirement debt will also grow.
Despite all the caveats, this is an improvement over recent years. But that’s a very low bar. The governor tried to put a positive spin on the analyst’s report while reminding legislators of the problems ahead: “California is now on the path for a fair and sustainable budget as long as we continue to exercise fiscal discipline and pay down debt.”
What he might have said is, “Drivers, shut your engines.”
Daniel Borenstein is a columnist and editorial writer for the Contra Costa Times.