MOORLACH UPDATE — Optimistic Budget or Not? — November 18, 2018

The Legislative Analyst’s Office (LAO) for the state of California, in a report issued this past week, is predicting the growth in personal income tax revenues will continue (see https://lao.ca.gov/Publications/Report/3718). It is also predicting sales and use tax and corporate tax revenues will be flat.

Higher personal income tax revenues, with no commensurate increase in sales tax revenues, may indicate that more individual earnings are being directed toward the cost of housing and its related expenditures.

The report provides an optimistic forecast for the next year, barring a recession. The LAO’s report will be the foundational document the Senate Budget and Fiscal Review Committee, on which I currently sit, will use as it works with the next Governor and the Department of Finance after the proposed budget for fiscal year 2018-2019, which begins on July 1, is released on January 10th. Consequently, the first proposed budget will set the tone for the next four to eight years.

To start the budget discussion, I provided a press release that was picked up by California Political Review, with commentary, and is provided in the piece below. As someone who enjoyed his role as a County Supervisor, one big take away is that Sacramento will take reserves from cities and counties when it runs out of money in a down economic cycle. Accordingly, maybe the Capitol should consider going the other direction when it enjoys a bumper crop? Especially with negotiated promises, like retiree medical and pensions, putting on their ugly squeeze (a concern that even the LAO report raises) on government agencies at all levels. Because, when the economy does cool down, it may be too late for the state to assist.

Sen. John Moorlach Cautions Legislature on Projected Surplus

By Stephen Frank

http://www.capoliticalreview.com/capoliticalnewsandviews/sen-john-moorlach-cautions-legislature-on-projected-surplus/

Jerry Brown, and economists believe California will go into a recession in the Spring of 2019. With Newsom as Governor and the Democrats not needing any Republicans to raise taxes, pass single payer, create more big spending programs, like free college tuition, free universal pre-kindergarten, plus $200 billion for the choo choo to nowhere, the plans to blow up the surplus will be laid in January, 2019 with the introduction of legislation.

Add to that the Split Roll destruction of Prop. 13 has qualifies for the November, 2020, killing the value of industrial and commercial property—when business realizes that the PPIC poll show this destruction of the California economy would pass with 58% of the vote, we then immediate fall into a recession.

“As I detailed in my October report on all 944 public school districts in the state, only about one-third of them enjoy positive balance sheets. Some of the worst balance sheets are in the largest districts. Los Angeles Unified School District is the worst, with a negative $10.9 billion balance sheet, followed by San Diego Unified at negative $1.5 billion; Fresno Unified at negative $849 million; and Santa Ana Unified at negative $485 million.

Under AB 1200 from 1991, the state is required to put severely distressed school districts into receivership, including taking over their finances. If that happens to these major school districts – and many smaller ones – the state could be hit for $15 billion or more in new liabilities. We need to figure out how to assist these mismanaged school districts in a fiscally prudent way.

In addition to the school districts, I have prepared financial reports on all 482 California cities, 58 counties, the three higher education systems and the state itself. The picture is ugly and, when retiree medical liabilities are added in the next few months, will get even worse. Sacramento should not swim in massive surpluses while its subsidiaries are drowning in deficits.”

Moorlach is right—we are in dangerous territory. Thanks to AB 1200, the surplus is already gone, if we abide by that law. If we don’t the school districts are bankrupt. Note the mainstream media has not said a word about this impending economic disaster.

Sen. John Moorlach Cautions Legislature on Projected Surplus

Senator John Moorlach, 11/16/18

Sen. John M.W. Moorlach, R-Costa Mesa, comments on the Legislative Analyst’s (LAO) new report, “The 2019-20 Budget: California’s Fiscal Outlook”:

The LAO is optimistic about nearly $15 billion in additional resources to allocate after putting another $15 billion into the Rainy Day fund. The report concedes its November 2000 projection of a $10.3 billion estimated surplus for 2001-02 was crushed by the dot-com bust and ensuing recession. We know how that ended.

As I detailed in my October report on all 944 public school districts in the state, only about one-third of them enjoy positive balance sheets. Some of the worst balance sheets are in the largest districts. Los Angeles Unified School District is the worst, with a negative $10.9 billion balance sheet, followed by San Diego Unified at negative $1.5 billion; Fresno Unified at negative $849 million; and Santa Ana Unified at negative $485 million.

Under AB 1200 from 1991, the state is required to put severely distressed school districts into receivership, including taking over their finances. If that happens to these major school districts – and many smaller ones – the state could be hit for $15 billion or more in new liabilities. We need to figure out how to assist these mismanaged school districts in a fiscally prudent way.

In addition to the school districts, I have prepared financial reports on all 482 California cities, 58 counties, the three higher education systems and the state itself. The picture is ugly and, when retiree medical liabilities are added in the next few months, will get even worse. Sacramento should not swim in massive surpluses while its subsidiaries are drowning in deficits.

The LAO report does not anticipate any leveling in the rising stock market, a product of President Donald Trump’s economic policies. But tech stocks, vital to California’s tax receipts from income and capital gains, have declined sharply since October 1, with Apple down nearly 20 percent.

If California really does have a surplus, then why did the Legislature put even one bond on the ballot? It will cost twice the bond’s principal when adding all the interest costs and debt payments. Why not pay cash for essential, one-time projects and save our children and grandchildren billions of dollars in unnecessary financing costs?

Will the Capital also continue to shortchange the homeless and leave certain neighborhoods victims to electric utility-caused wildfires?

Of course, the likelihood of the Legislature not spending most of this forecasted money is zero. If this unexpected surplus is spent right away, I hope at least the money will go to the critical areas I’ve mentioned, including:

  • Infrastructure projects such as fire mitigation – something obvious as large parts of the state burn down.
  • Funding back to cities and counties to alleviate their fiscal calamities during a season when Sacramento is enjoying a bumper crop.

The Public School System Stabilization Account, which was established by Proposition 2 to cover school finances in a recession. As the LAO notes, there currently is no money in the account.

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