MOORLACH UPDATE — 2020-21 Budget and Cities 289 to 336 — November 21, 2019

LAO Budget Outlook

I was not impressed by Governor Newsom’s press release yesterday on the Legislative Analyst’s Office’s (LAO) outlook on the state budget.  The Governor has to release the 2020-21 State Budget on January 10th.  In anticipation of this requirement, the LAO released a report forecasting a $7 billion surplus for the upcoming budget year. Newsom wrote:

“This budget assessment points to a broader truth. California is now the fifth-largest economy in the world. Our state is proving what big-hearted, progressive governance can look like – all without breaking the bank. President Trump talks a lot about America’s economic growth under his presidency, but when you look behind the numbers, you see that it’s California’s growth that has provided the economic rocket fuel for the nation. 

 “As Washington soaks Americans with a trillion dollars in debt to pay for tax cuts that benefit the wealthy and destroys the social safety net, our state is now doing more than ever before to provide opportunity for all California families, especially those who are not equally sharing in our nation’s prosperity. We are taking important steps so that growth is broadly shared, doing it all while saving record amounts for a rainy day.

 “As our state and nation face uncertain economic headwinds, the federal government would be wise to look to California as a model for how to get its fiscal house in order.”

Let me remind you that California has been the state with the highest Unrestricted Net Deficit in the nation for at least the last two decades.  It just gave up the title to the state of New Jersey, pushing California, appropriately, into 49th place (see MOORLACH UPDATE — California’s and Group 7’s Fiscal Health — September 30, 2019).  With an Unrestricted Net Deficit of $213 billion, or $5,393 per man, woman and child, California is not a model for having its fiscal house in order.  To say so is hubris at its finest.

On a per capita basis, California just moved up to 41st place and that is because other states are doing worse while the Golden State is standing still (also see MOORLACH UPDATE — California’s and Group 7’s Fiscal Health — September 30, 2019).

I like to say that the trend is your friend.  If 2019-20 was $21 billion to the positive, and 2020-21 will be $7 billion to the positive, then 2021-22 may be $7 billion to the negative.  This is not a time to be thumping one’s chest.

The nation is being blessed with continued economic growth, but California is not seeing it as strongly as the rest of the country, as it lags the national average.  So I responded with a series of tweets:

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The Sacramento Bee included them in the piece below.

Cities 289 to 336

We’re down to the 60th percentile group and it includes three Orange County cities:  Garden Grove (#316), La Habra (#325) and Buena Park (#332). This means the OC has a dozen cities below the 70th percentile.

Mountain View (#301) was a participant in the Orange County Investment Pool back in 1994.  It dropped 139 positions; it’s unrestricted net position went from a positive $20.9 million to a negative $42.9 million in one year.  It’s pension liability grew by $21.2 million and adding other post-employment benefits to the balance sheet provided another $31.4 million in liabilities.  Combined, they may represent $52.6 million of the $63.8 million swing.

The city of Brawley (#309) still has not provided its Comprehensive Annual Financial Report for June 30,2018 on its website.

Rank City Pop. UNP 2018 (Thousands) UNP/ Capita 2017 Rank Rank Change
289 Selma 24,742 ($11,605) ($469) 292 3
290 Reedley 26,390 ($12,448) ($472) 269 -21
291 La Mesa 61,261 ($29,042) ($474) 271 -20
292 Willits 5,128 ($2,482) ($484) 347 55
293 Grover Beach 13,560 ($6,662) ($491) 387 94
294 Turlock 74,730 ($37,109) ($497) 301 7
295 Taft 9,482 ($4,749) ($501) 246 -49
296 Rolling Hills Estates 8,111 ($4,090) ($504) 359 63
297 Campbell 42,696 ($21,605) ($506) 293 -4
298 Pleasant Hill 35,068 ($17,751) ($506) 340 42
299 Ridgecrest 28,822 ($14,913) ($517) 313 14
300 Bakersfield 386,839 ($200,715) ($519) 289 -11
301 Mountain View 81,527 ($42,935) ($527) 162 -139
302 Indio 87,883 ($46,940) ($534) 339 37
303 National City 62,257 ($33,784) ($543) 327 24
304 Desert Hot Springs 29,742 ($16,185) ($544) 331 27
305 Sutter Creek 2,479 ($1,354) ($546) 336 31
306 Clovis 113,883 ($63,435) ($557) 332 26
307 Cloverdale 9,134 ($5,149) ($564) 364 57
308 Merced 86,750 ($49,026) ($565) 352 44
309 Brawley 27,417 ($15,649) ($571) 308 -1
310 Santa Paula 31,138 ($18,377) ($590) 343 33
311 Novato 54,551 ($32,241) ($591) 314 3
312 Susanville 14,954 ($8,921) ($597) 353 41
313 Red Bluff 13,858 ($8,505) ($614) 324 11
314 San Marino 13,272 ($8,208) ($618) 334 20
315 Pleasanton 79,201 ($49,676) ($627) 274 -41
316 Garden Grove 176,896 ($111,538) ($631) 330 14
317 Morro Bay 10,503 ($6,626) ($631) 341 24
318 Hermosa Beach 19,673 ($12,637) ($642) 360 42
319 Avalon 3,867 ($2,490) ($644) 192 -127
320 Gilroy 55,615 ($36,193) ($651) 316 -4
321 Lynwood 72,015 ($47,075) ($654) 335 14
322 Colusa 6,241 ($4,103) ($657) 295 -27
323 Rialto 107,041 ($70,806) ($661) 329 6
324 Antioch 113,061 ($75,016) ($664) 294 -30
325 La Habra 62,850 ($41,738) ($664) 315 -10
326 Manteca 81,345 ($54,265) ($667) 345 19
327 Fort Bragg 7,512 ($5,115) ($681) 273 -54
328 Auburn 14,611 ($9,968) ($682) 381 53
329 Simi Valley 128,760 ($88,047) ($684) 311 -18
330 Fairfax 7,534 ($5,157) ($684) 342 12
331 Lindsay 13,162 ($9,064) ($689) 206 -125
332 Buena Park 83,995 ($58,567) ($697) 302 -30
333 Union City 72,991 ($52,112) ($714) 307 -26
334 Napa 80,403 ($57,495) ($715) 337 3
335 Sunnyvale 153,389 ($109,823) ($716) 235 -100
336 La Verne 33,260 ($24,270) ($730) 338 2

25th Anniversary Look Back

The Moorlach Memo continues with Chapter 7.  In this segment I address borrowing to invest, which many municipalities and school districts were doing back in 1994.  This scheme would earn the moniker of “casino” bonds.

For more on Irvine Ranch Water District, see MOORLACH UPDATE — Lonely Republicans — July 24, 2019.  For more on the phrase “Democrat leverage artist,” see MOORLACH UPDATE — Housing and Banking — July 4, 2019.

For the introduction and first six chapters, see:

Intro — Context — MOORLACH UPDATE — Constitutionally Flawed Legislation — November 5, 2019.

Chapter 1 — Introduction — MOORLACH UPDATE — Business, Electricity and Top 48 Cities — November 7, 2019

Chapter 2 — Hold to Maturity — MOORLACH UPDATE — 3P, Cities 49 to 96 and Holding to Maturity — November 12, 2019

Chapter 3 — We Do Not Mark To Market — MOORLACH UPDATE — Measuring Insincerity and Cities 97 to 144 — November 13, 2019

Chapter 4 — Prognosis — MOORLACH UPDATE — Officers, Audits, CIRM and Cities 145 to 192 — November 14, 2019

Chapter 5 — Current Media Revelations — MOORLACH UPDATE — SB 640 and Cities 193 to 240 — November 18, 2019

Chapter 6 — Scaring Credit Markets — MOORLACH UPDATE — PSPS and Cities 241 to 288 — November 19, 2019

BORROWING TO INVEST

Mr. Swan is a trustee for the Irvine Ranch Water District (IRWD), which is a $400 million participant in Citron’s portfolio.  Accordingly, in spite of his being a Republican activist, he had to defend our nationally known “Democrat leverage artist.”

Where did this small water district obtain $400 million?  It issued bonds to buy bonds! What a financial maniac! Borrowing to invest, or “arbitrage,” is considered risky by most and even immoral by some, especially when done with public dollars.  But, in the bond market as interest rates go up this strategy backfires! As I’ve diagrammed, you still owe the debt but the value of your investments have decreased.

The IRWD’s strategy is to take advantage of the higher returns that Citron has been achieving.  Most sophisticated investment advisors would tell you, if one bond fund is out-performing its competitors by even half of one percent, then be cautious about the risks that the higher performing fund is taking.  Swan took that caution to the wind and encumbered the residents of his district by over $4,600 per registered voter! Just to squeeze out a few interest points!

So now we have a small water district, juggling funds equivalent to a significant portion of our state’s budget short-fall, in a major bet that rates will stay level or go down.  They haven’t. And, if the value is down 17 percent, Irvine has lost 50 percent of its value!

California is on track for a $7 billion budget surplus. Where will the money go?

BY SOPHIA BOLLAG

https://www.sacbee.com/news/politics-government/capitol-alert/article237555229.html

California’s long economic expansionis projected to continue into next year, giving Gov. Gavin Newsom and lawmakers another surplus as theymap out a new state budget.

Legislative Analyst Gabriel Petek released a report Wednesday projecting the state will bring in a $7 billion surplus in the 2020-21 budget year.

That’s far less than the $21.5 billion surplus California is collecting this year, but it still reflects a positive outlook for the state’s economy.

“The budget picture is strong and favorable. Full stop,” Petek told reporters Wednesday.

As much $3 billion could be available for ongoing expenses, while the rest could dry up in an economic downturn, according to the report. But the analyst’s office recommends the Legislature allocate no more than $1 billion of the surplus to ongoing expenses to avoid having to cut programs during a recession.

Analysts also found the state has enough saved in reserves to weather a typical recession, but recommend the state use much of the projected surplus to pay debts and boost reserves.

Last year, lawmakers approved a $215 billion budget boosted by record surpluses that accommodated new spending on health care, early childhood programs and housing construction. Lawmakers also socked away billions of dollars in reserves, giving the state $19 billion in separate savings accounts.

Newsom has warned that next year’s budget likely won’t be so flush.

In October, Newsom told reporters he’s seeing a slowdown in state tax revenue, indicating a recession is on the horizon after a decade of economic growth.

The analyst’s office still painted a positive picture of the upcoming year in its report, projecting the economy will continue to grow in coming years, although at a slowing pace.

“Withmore than a decade of economic expansion, coupled with deliberate legislative action to put the budget on better footing, the California budget is in good condition,” analysts wrote, although they noted the prospect of a recession still looms.

The analyst’s office predicts California will continue adding jobs and that the housing market will improve somewhat after declining in 2019.

The report also outlines several areas of uncertainty, most notably surrounding a policy reauthorized by California lawmakers this year to offset some health care costs in the budget known as the managed care organization — or MCO — tax. That policy requires federal approval, which the analyst’s office projection assumes will happen. About $900 million is at stake.

Newsom boasted about the positive outlook Wednesday.

“Our state is now doing more than ever before to provide opportunity for all California families, especially those who are not equally sharing in our nation’s prosperity,”he said in a written statement. “We are taking important steps so that growth is broadly shared, doing it all while saving record amounts for a rainy day.”

Sen. John Moorlach, R-Costa Mesa, said the outlook showed “California continues to benefit from a booming national economy,” but cautioned that state and local governments are carrying hundreds of billions of dollars in debt that could become especially problematic in a financial downturn.

Newsom in this year’s budget nodded to those debts, providing $9 billion in optional payments to the state’s underfunded CalPERS and CalSTRS pension plans.

“Let’s hope the governor allocates the $7 billion to address increasing state unfunded liabilities. Not doing so is intergenerational theft leaving Californians saddled with these debts on their backs,” Moorlach, who sits on the Senate Budget Committee, wrote on Twitter.

Newsom must propose a plan for the 2020-21 budget in January, kicking off negotiations with the Legislature, which must approve a final plan by June 15 in time for the July 1 start of the state’s fiscal year.

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