What do Discovery Channel’s daredevil Nik Wallenda, the man who crossed the Grand Canyon on a tightrope this weekend, and California Governor Jerry Brown have in common? The success of their continued careers rely on one word: balance.
Brown giddily projected a budget surplus of $1.2 billion in May, much to the delight of the New York Times, which released a story last month titled “California Faces a New Quandary, Too Much Money.” But a short-term surplus may still mean a long-term loss for the state, which faces hidden obligations, unfunded liabilities, and an extreme vulnerability to market uncertainty.
This month, California agreed on a budget that did not include spending cuts for the first time in years. In fact, the budget introduced new spending on Obamacare requirements, and increased spending on dental programs for the poor, mental health services, assistance for veterans, and education spending for impoverished areas with high percentages of English-learners. It also includes a $1 billion reserve fund.
Brown, who campaigned on a platform of fiscal pragmatism, orchestrated his balancing act with two years of spending cuts and increased taxes. Propositions 30 and 39 retroactively raised the income tax on the wealthy, increased the sales tax, and closed a corporate-tax loophole. Yet despite The Golden State’s sunny prospects, a debt wall is looming.
A report by CBS revealed actual debt numbers for California between $848 billion and $1.1 trillion. The report accounted for debt from K-12 public schools, city government, county government and special districts debt, unfunded pension and retiree healthcare liabilities, and the interest on those liabilities. Furthermore, California owes the federal government over $10 billion in unemployment-insurance payments.
According to Moody’s Investors Service, California’s long-term debt is still well above the national median by all indicators considered. Per capita debt is over double the national average of $1,074. Debt as a percentage of personal income and debt as a percentage of GDP are both above five percent, also double the national average.
California is particularly vulnerable to downturns in the business cycle because a large percentage of the state income relies on income and capital gains tax revenue from the wealthy. Sixty-three percent of general-fund revenues come from the richest one percent of Californians. The income-tax rise has exacerbated this dependency on the one percent.
The private sector will continue to have to pay for the bloated public sector as the gnarly wave of promised pensions crashes onto the shore. The shrinking birth rate and the increase in the population of retired baby boomers means that the pension problem is the real “quandary” facing California. For example, the pension fund of the teacher’s union alone requires $4.5 billion more a year. That’s the entire budget surplus right there.
Furthermore, the Prop 30 sales tax hike and income tax increase are set to expire in 2016 and 2018 respectively. The federal payroll-tax cut is also scheduled to expire soon, which will hinder consumer spending and shrink the projected sales-tax revenues.
Long-term debt projections show that while California is temporarily back in the black, they are still on the highway to fiscal hell.
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