MOORLACH UPDATE — Facing Fiscal Realities — October 30, 2018

Since I submitted this piece, Cal State Fullerton economists have also predicted an economic cooling down on the horizon. But, Sacramento cannot afford a leveling off or a downward economic trend with the growing fiscal obligations it will be facing.

I provide my take on what lies ahead for California’s next Governor in the CalMatters submission below.

And, it’s not only the next Governor who will be facing a potential financial squeeze. It will be all of those elected to Orange County’s local governing bodies as well (see MOORLACH UPDATE — Trick or Treat? — October 26, 2018).

My turn: Next governor will face hard fiscal realities

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By John M. W. Moorlach, Special to CALmatters

As next Tuesday’s election approaches, here’s something disconcerting that all candidates should keep in mind: the California economy.

It has been a juggernaut of growth since 2013, but now is slowing while the national economy is expanding. Let’s review some of the ominous signs publicly available data portend.

California’s annual growth rate has dropped to 2 percent, from more than 3 percent from 2013 to mid-2016, according to a new forecast by California Lutheran University’s Center for Economic Research and Forecasting. The Center for Economic Research and Forecasting projects 2.9 percent national growth for the next two years.

One key indicator is accelerating domestic out-migration—163,000 more California citizens are expected to leave for other states in 2018 than those expected to come here for the sun and fun, and the accompanying high taxes and regulations. In 2014, the net out-migration number was only 117,000. The trend is getting worse.

The Center for Economic Research and Forecasting report indicates culprits include increased onerous taxes and regulations of all sorts. California’s gasoline taxes lag only Hawaii.

The state’s sales tax is ninth highest, at 8.55 percent, just a shade less than the highest rate, 9.46 percent, in Tennessee. California’s top income tax rate is the nation’s highest, 13.3 percent.

If voters approve Propositions 1, 3 and 4 on Nov. 6, expect more strain on the state’s general fund budget. Those are bonds for, respectively, housing, water, and hospitals. And the debt payments will need to be made over decades.

If the majority votes for Proposition 10, cities could impose much more stringent rent control. Cal Lutheran notes San Francisco’s 1994 expansion of rent control cut the supply of rental properties by 15 percent. It’s Economics 101: cut supply and the price must rise, which would not be helpful in San Francisco where the average rent is $3,520 per month.

Another gigantic fiscal threat driving down the highway is public-employees’ defined-benefit pension liabilities.

I have issued fiscal rankings of the 50 U.S. states and every California city, county, school district, and university system. My latest, “Financial Soundness Rankings for California’s Public School Districts, Colleges & Universities,” scored two-thirds of these public school districts and all three college and higher education systems to be in fiscal distress, largely due to the burgeoning pension crisis.

Full employment is a solution. But while Silicon Valley and most coastal areas of the state are booming, other areas of California are not doing as well. Six of the 10 worst U.S. job markets are in California, with unemployment numbers that range from 6.6 percent in Fresno to 20 percent in El Centro.

Not everybody in California is a Silicon Valley internet millionaire. But California state finances depend too much on the most volatile tax sources, those derived from income and capital gains. Even a blip downward in the stock market could evaporate recent state surpluses.

Gov. Jerry Brown’s final report for the “California State Budget 2018-19,” which began on July 1, estimated a shocking 9.2 percent increase in spending from the previous fiscal year, nearly double the 5 percent average increases of his previous seven budgets.

Although the rainy day fund will be filled at $13.8 billion, that would vanish fast in one economic down cycle. Budgets are crucial because, lacking sound finances, all the nice things candidates propose can’t happen: more health care, better schools, modern roads, even tax cuts.

Whether he likes it or not, the next governor will spend most of his time dealing with the financial crises forming off the coast like a tsunami. Jerry Brown will scoot out in the nick of time. His successor will face the vice grip of a slowing economy and rising costs for pension-plan contributions and more bond payments.

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