MOORLACH UPDATE — 2016-17 Budget Bill — June 15, 2016

The Senate just voted for next year’s annual budget, on a vote of 27 to 11. I spoke in opposition to the budget and voted "No." This budget process was not pretty. It was not transparent. It was not perfect. It is the largest General Fund Budget in California’s 166-year history, expending $122.5 billion. It is surrounded with multiple trailer bills, some that have nothing to do with the budget. It was rushed through, with minimal public participation. However, if having 72-hours of review time is appropriate, then I’m all wet. Other than that, the budget now moves forward to the Governor’s desk in order to meet the deadline.

My concerns, in my remarks on the Senate Floor, revolved around the rising costs we are forecasting in the years to come. With a growing retiree medical unfunded liability, pension systems that have not met their investment rate assumptions two years in a row, and the rising minimum wage; all combined means a tightening General Fund in the coming years and debts that we’re leaving to our children for which they did not consent to nor will they get any benefit from.

The Orange County Breeze provided its thoughts before this afternoon’s vote in the first piece below. Translating the data shows that the Silicon Valley is providing one-third of California’s growth. But, what goes up . . .

The second piece is my pre-Budget vote e-mail blast. The third piece is from Fox & Hounds and also in the Metropolitan-Enterprise News. It provides some color commentary on the fun. And also addresses what could come down. And the fourth and final piece is my media release for today.

California 2015 fourth quarter economic growth buoyed by information industry

By Shelley Henderson

BUSINESS

Chart showing 2015 Q4 GDP growth by state. Graphic courtest of the BEA.

Despite dire warnings from Governor Jerry Brown, California 2015 fourth quarter economic growth was robust, lead by the information industry.

As the featured photo shows, California enjoyed strong growth during the fourth quarter of 2016. According to a just released report on fourth quarter gross domestic product (GDP) growth by state, the information industry contributed 0.90 percentage points all by itself to the Golden State’s rosy economic news.

That same report states that California’s GDP grew by 2.7 percent for the fourth quarter of last year, and 4.1 percent for the entire year. That compares to 2014 annual growth of 3.1 percent.

California ranked seventh in overall growth, behind Indiana, Ohio, Utah, Colorado, Florida, and Kentucky — and just ahead of Massachusetts.

The other major contributors to economic growth nationwide were construction; and professional, scientific, and technical services.

Mining showed a big decline, falling 10.7 percent overall. The states hardest hit by this fall were Alaska, North Dakota, Oklahoma, and Wyoming.

A report on first quarter GDP by state for 2016 will be released on July 27.

Caution from Governor Brown

In his letter to the California legislature that accompanied his proposed budget for 2016-17, Governor Brown sounded a note of caution regarding expected budget surpluses:

Relative to years past, the state budget is in good shape. Education funding is at its highest level ever,
fifteen million Californians are covered by Medi-Cal or Covered California, the minimum wage has risen to $10 an
hour, and for the first time, the state will provide almost $400 million to low-wage working families through an
earned income tax credit.

Our Rainy Day Fund is growing and the proposed budget for next year will have a healthy surplus even after
spending several billion on long overdue infrastructure investments.

It must never be forgotten, however, that 69.5 percent of our General Fund revenues come from the volatile
personal income tax which, as history shows us, drops precipitously in time of recession — an event not too far
off given the historic pattern of the ten recessions that have occurred since 1945. During a moderate recession,
revenue losses to the General Fund will easily total $55 billion over three years.

That is the nature of our California economy and our state tax system. It’s the reason why the Legislature
unanimously placed Proposition 2 on the ballot and why the people approved it by nearly 70 percent.

Given the wide disparities that exist in our state and the millions who struggle in one form or another,
understandably there will be proposals to fund a variety of worthwhile programs. But it would be short-sighted in
the extreme to now embark upon a host of new spending only to see massive cuts when the next recession hits.

In view of the $27 billion deficit of just five years ago and the much larger one in 2009, it is clear that fiscal
restraint must be the order of the day. It also goes without saying that we should be chipping away at the
$72 billion unfunded liability that weighs down our retiree health system.

Another item for taxpayers to keep in mind is that State legislators have already expressed a desire to retain the temporary sales tax increase, passed by voters to bail the state out of a sea of red ink.

Finally, everyone should keep in mind the State’s enormous unfunded pension liability. Last April, State Senator John Moorlach issued the following statement on that topic:

“I’ve always believed that in both the private and public sector, a reasonable retirement plan can and should be part of a total compensation package.

“As an Accountant trained as Certified Financial Planner and Certified Public Accountant, I strongly believe we want to give people more opportunity to save and prepare for retirement. I have affirmed this position numerous times over the last 21 years of my public service, both as a locally elected official in Orange County and now as a State Senator.

“The problem arises when larger than sustainable pension benefits are granted retroactively or prospectively, and there has not been funding set aside by either the employer or employee to cover the increased cost. It’s these unfunded liabilities that have swamped our state with debt.

“In Orange County, I’m in the pension system granted to all County employees. When the Supervisors voted in 2004 to increase that pension, I strongly opposed that move, arguing that it would create substantial unfunded liabilities. I also worked for years to deal with both the challenges of reciprocity, as well as the lost talent of experienced individuals who are forced to retire even though they want to continue in public service.

“Seeing recent reports of how out-of-line our unfunded liabilities are, I take no pleasure in being right about the concerns I started raising some 16 years ago. We need to work together with our public employees and our lawmakers to gain control of pension costs and create a long term solution that fixes these unsustainable retirement problems.”

The bottom line:

· the budget should not be constructed to rely on revenue raised through the temporary tax increase;

· the temporary tax increase should be allowed to expire, as promised;

· new spending should not be considered until pension liabilities are funded.

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Senator Moorlach’s Notes on SB 826: Budget Act of 2016
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“California has a $170 billion unrestricted net deficit, an increase of $54 billion since last year, the LARGEST net deficit of all 50 states. This deficit severely threatens California’s short and long term financial health.

"While Governor Brown has been watching the state’s spending, he only has two years left in this position. The next governor is going to have an interesting predicament to deal with if the legislature doesn’t pay attention now."
-Senator John Moorlach

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Here are 5 key metrics you need to know about the status of our state’s fiscal house as we anticipate tomorrow’s vote on SB 826:
1. Tax Rates
· California has the nation’s HIGHEST income, sales and gas taxes (when cap and trade is included).

· California also has the highest corporate tax in the western United States and the fourteenth highest property tax. According to the Tax Foundation’s 2015 Facts and Figures, that puts California fourth in overall tax burden on a per capita basis.

2. Unfunded Pension Obligations
· The Legislative Analyst’s Office estimates current CalPERS, CalSTRS and UC Pension unfunded liabilities at approximately $180 billion.

· The Pew Charitable Foundation found that, according to 2013 data, California is ranked highest in the nation for unfunded public employee pension obligations at $169.6 billion.

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3. Unfunded Retiree Medical Obligations
California has the nation’s HIGHEST unfunded retiree medical liability at $80.3 billion(this figure INCREASED by $6.3 billion since last year’s report).
4. Deferred Infrastructure Maintenance
· California has 31,827 miles of major roads and at least 34 percent of these are rated in ‘poor’ condition, costing motorists $703 a year in additional fees.

· The Reason Foundation’s Adrian Moore recently pegged the unfunded road maintenance number at $59 billion.

· California spends 3 times the national average on maintenance per mile of roadway, yet California’s roads rate among the nation’s WORST in pavement condition and congestion.

5. Unrestricted Net Assets/Deficits
California’s most recent Comprehensive Annual Financial Report (CAFR) shows an unrestricted net deficit of $170 billion.

NOTE: The unrestricted net asset (or deficit) is a summary of the state’s available assets after removing from the balance sheet fixed assets (buildings, parks, roads, etc.) minus outstanding debt obligations for these fixed assets. This commonly used fiscal health indicator should be positive for healthy organizations.

Here’s a recent history of the net unrestricted assets for California:

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Click to Watch
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IN MY OPINION

Budget Deception: Weird Accounting Diminishes Accountability

By JON COUPAL

This week, after reaching agreement with Governor Brown, the California Legislature will pass the state budget for the 2016-17 fiscal year. In so doing, it will meet its Constitutional deadline of June 15th.

A few weeks ago, this column attempted to provide some clarity to ordinary citizen taxpayers on basic state budget issues. This included an explanation of the difference between “general fund” expenditures and “special fund” expenditures.

The column also reviewed California’s higher than average level of taxation and its legendary wasteful practices.

Those budget issues are confusing enough but there is something else going on that confounds even those of us who have at least some familiarity with government finance. Specifically, California has manipulated accounting rules that are, at best, confusing and, at worse, intended to conceal the true condition of state finances.

For most folks, figuring out the family finances isn’t all that difficult. Most people have a relatively stable and predictable amount of income they can spend and, on the flip side, they have a pretty good grasp of their expenses. Of course, even the best laid plans can be thrown off with the layoff of a breadwinner or, on the positive side, an unexpected bonus or inheritance.

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But with government, predicting revenue can be tricky. Given this unpredictability, one would think that the state would want to base its accounting decisions on best practices. But that isn’t the case at all. Without going into all the wonkish details, the Department of Finance uses various “accrual” techniques to attribute revenue, not to the year in which it was received, but rather to a previous or future fiscal year depending on what political ends the administration seeks to achieve. Venerable Sacramento Bee columnist Dan Walters calls this “hide the pea” accounting and even the Legislature’s own Legislative Analyst has criticized the practice.

For all the funky accounting on the revenue side, it is much worse on the spending side. Here, under proper “accrual” rules, California should be counting the massive amount of debt we’re racking up differently. But with manipulative accounting, the state can actually spend more money than it receives in a given year and still report a budget surplus. This debt, as it relates to public employee pension obligations, is nothing more than spending tomorrow’s money today. But if it is spending money today, it should be counted as such.

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David Crane is a Lecturer in Public Policy at Stanford University and President of Govern For California who has written extensively on California’s deceptive accounting practices. He points out that proper accounting could have stopped the largest non-voter-approved debt issuance in California history. That 1999 debt was not a bond. Rather, it was retroactive pension increase for state employees. Had that cost been “booked” the way businesses account for future liabilities, the legislature may very well have thought twice about undertaking such a huge financial burden.

The good news is that the days of deceptive government accounting may be numbered. The Governmental Accounting Standards Board (GASB) has, for the last several years, been forcing government entities to finally begin reporting pension obligations and “Other Post-Employment Benefits” (OPEBs) in a way that is both more honest and transparent. Also, the California Legislature now has as a member Senator John Moorlach, a no-nonsense accountant who predicted the Orange County bankruptcy several years ago. He, like Crane, is shining a light on California’s budgetary shenanigans. With a looming downturn in the economy, this enhanced transparency will be critical.

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FOR IMMEDIATE RELEASE Contact: Lance Christensen (916) 651.4037
Wednesday, June 15, 2016 Lance.Christensen
Sen. Moorlach Responds To Budget Discussions
SACRAMENTO, CA — "The Legislature voted to enact another record-setting budget. Unfortunately, transportation priorities are being neglected in favor of high-speed rail.

Consequently, California residents will be asked to chip in more as vehicle registration and cell phone fees are increased.

This budget does not position the state for forecasted cost increases in salaries and pension contributions. Sacramento’s willingness to increase California’s unfunded liabilities at the detriment of future generations has to be halted.

With an Unrestricted Net Deficit of $170 billion, California must stop mortgaging its future and prepare for the next economic recession by paying down debt and putting even more money away in the rainy day fund."

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This e-mail has been sent by California State Senator John M. W. Moorlach, 37th District.

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