Good News Is Bad News in California
Steven Greenhut
by
Sai Chan/Shutterstock.com

California’s economy is slowing, and it couldn’t come at a better time. Don’t get me wrong — as a worker, investor, and property investor, I’d love to see the economic good times go on forever. But as someone who has covered the state’s public-policy battles for more than 20 years, I realize this immutable truth: The only thing that restrains the state’s progressive lawmakers is financial hard times. When coffers are full, they spend like crazy and plot far-reaching new programs.

The economy still is growing in California and the state’s general fund has a $21 billion surplus, but the warning signs are everywhere. In August, the well-respected Legislative Analyst’s Office found that declines in the state’s fiscal health index “of this magnitude have not been observed since the last recession. Weakness appears most pronounced in housing. Building and sales have slowed consistently over the last year, while prices have stagnated.”

The LAO also reported that new car sales, which provide insight into consumer spending, “have shown a pattern of decline throughout most of 2019. Most other indicators, while not outright declining, have stagnated. While a three-month trend is not enough to draw firm conclusions, each additional month of decline in index increases the risk that an economic slowdown is on the horizon.” Other sources note that prices are deflating in some major housing markets.

The economic slowing has continued since August. The Orange County Register’s business columnist, Jonathan Lansner, used St. Louis Federal Reserve data this week to analyze various economic indexes. Compared to last year, growth in hiring is down, personal income is flat, home prices have cooled, tax collections have slowed, and business starts and exports are slowing. The economy still is growing in these metrics, but at a slower rate than before. Growth, he reported, is at a three-year low.

The UCLA Anderson Forecast released last week finds a similar trend: a slowing California economy this year. “Indeed, in the second half of 2020 growth is expected to decline to 0.4 percent — not quite a recession — but pretty close,” according to the report.

Many trends are tied to national economic conditions, of course, but the impact in California could be particularly severe. That’s because our policymakers have largely ignored the state’s pension crisis and continue to behave as if the good times will go on forever. Those long-term debts will become a problem in recession, because it becomes harder to kick the can down the road.

Let’s flash back to 2010, when California was facing budget deficits of $25 billion. During the crisis, the state did some foolish things, such as approving a major ballot initiative that raised taxes, but it also, by necessity, cut back on school spending, resisted the push to create ongoing programs, shuttered its tax-sapping redevelopment agencies, and even passed a significant, albeit modest, pension-reform law. Local voters approved pension reforms also, but they were gutted one by one as the economy recovered and unions succeeded in the courtroom.

“Too often, discussions of California’s budget situation are framed in extreme terms: the state about to go ‘bankrupt,’ debt-service payments hypothetically poised to default, the state government on the verge of collapse. None of these scenarios is remotely likely to occur,” the LAO reported at the time. Of course, the agency was correct. Many conservatives thought that day of reckoning would come but forgot about the myriad ways to patch together temporary fixes (taxes, borrowing, creative accounting).

They got by until the economy improved and until the state’s coffers filled up again. “The state faces a basic choice: begin to address today’s huge, frustrating budget problems now … or defer the state’s budgetary and policy problems to future Californians,” the 2010 report added. You won’t be surprised to realize that California lawmakers chose the second option.

In the ensuing decade, the Legislature has pretended that the pension crisis — hundreds of billions of dollars in unfunded liabilities to pay for the six-figure pensions that are lavished on the state’s gilded class of public employees — doesn’t exist. The new budget diverts additional dollars to the pension funds, but there’s been no serious effort to fix the underlying problem or to rein in the growing debts to pay for public-retiree medical care.

After years of record-setting stock returns, the pension-fund behemoth, the California Public Employees’ Retirement System, or CalPERS, is only 70 percent funded. “If there is a 15 percent drop in pension fund assets, and the new projected earnings percentage is lowered from 7.0 percent to 6.0 percent, the normal contribution will increase by $2.6 billion per year, and the unfunded contribution will increase by $19.9 billion,” according to the California Policy Center’s Edward Ring. “Total annual pension contributions will increase from the currently estimated $31 billion to $68.5 billion.”

Those additional contributions will come from localities — and their taxpayers, of course — that already are struggling to make ends meet. Cities have been slashing public services and raising taxes even during flush times. I don’t feel sorry for them. Most city officials went all-in for the pension-hiking game, and they now pretend that they are victims. But their travails during flush times give a hint of what might come during tough times. Some cities have even bandied about the word “bankruptcy.”

Now imagine what will happen if another recession takes place, or housing prices burst as they did after the 2008 bubble and property tax proceeds fall precipitously. Some analysts suggest that if pension funds fall below 50-percent funding levels, there will be no way to ever climb out of the hole short of a massive tax infusion.

Meanwhile, Sacramento pols are as oblivious as ever. The governor recently signed Assembly Bill 5, which essentially bans companies from using contractors rather than permanent employees as their workforce. Unions are triumphant now, but companies aren’t going to suddenly go on a hiring binge. They are going to cut back, which will have the most impact on the gig economy companies that provide the bulk of the state’s capital gains-dependent revenues. The Legislature even has sent to the governor’s desk a bill that would largely re-create those redevelopment agencies, which would become another long-term sap on the general fund.

The good news is that bad times will once again force the state to make tough decisions. That’s looking like the most promising scenario given that, with the current political makeup in the Capitol, California can’t afford many more boom years.

Steven Greenhut is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.

Steven Greenhut
Steven Greenhut
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Steven Greenhut is a senior fellow and Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.
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