City Journal Autumn 2014

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Autumn 2014
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California

Steven Greenhut
Fat Times Again?
California’s budget marks a return to the status quo.
20 June 2013

California’s Democrats and their media allies often depict the state’s small band of fiscal conservatives as tightwads, unconcerned about the suffering that shrinking budgets impose on the downtrodden. Yet it’s not so easy to dismiss conservatives’ true point. Whenever legislators get their hands on any new revenue stream, they set about spending it in questionable ways. Since returning to the governor’s office in 2011, Jerry Brown had campaigned non-stop for a large increase in sales and income taxes, which voters approved last November. His theme, echoed by Democratic legislators and the union activists who championed Proposition 30, was that California’s fiscal problems couldn’t be solved without more revenue.

Voters complied. Now, with new money pouring into the state treasury and the economy beginning, at least, to show signs of recovery, the just-passed budget—based, surprisingly, on Brown’s more conservative revenue estimates rather than legislators’ more optimistic projections—reflects a small surplus. Right on cue, the state’s powerful Service Employees International Union Local 1000 demanded a return to the same type of policies that caused the last budget crisis. In short order, the union secured a tentative agreement for $734.8 million in new compensation over the next three years. As the Sacramento Bee’s Jon Ortiz reported, “The state’s average cost per employee would increase under the proposal by roughly $7,700—$210 per month from July 2013 through June 2016.” The SEIU, for what it’s worth, isn’t satisfied with the raise, which amounts to 4.5 percent. But the governor’s human-resources office claims that the deal will save taxpayers nearly $2.8 million, thanks to Brown’s pension reforms, which require higher contributions from new state employees. In reality, of course, the higher salaries will increase the state’s pension obligations and thus its debt burden.

Predicated on continued rosy revenue numbers, the raises would take effect in 2014. But Californians should realize that this is only the start of a new round of pay increases. The SEIU isn’t the only powerful public-employee union in the state. Unions representing police and firefighters will no doubt seek new pay levels, dwarfing the SEIU’s demands. Republicans see the union offensive as payback for their support of Prop. 30, but the deal really reflects the return of the status quo. The impetus for governmental reform, slim as it was in Sacramento, is gone. Democratic legislators are already arguing that it’s time to start “investing” again in new government services. “Rank-and-file Democratic lawmakers say they are agreeing to less spending than they wanted so they could pass the budget on time, although they will push for funding pet projects next year,” reported the San Mateo Daily Journal. “That’s when they expect the state’s tax revenue will be coming in higher than the Brown administration projects.”

If past behavior is any indication, Democrats will seek spending increases even if that revenue doesn’t come in. The Bee’s Dan Walters noted that the budget trailer bills already are moving forward—most of them crafted secretly and pushed through without debate. Many legislators are calling for new taxes to pay for the anticipated spending spree. “It’s a mullet budget,” Republican assemblyman Jeff Gorrell of Camarillo told the Los Angeles Times. “It’s conservative up front, but it’s liberal in the back.” He points to higher welfare benefits, expanded dental coverage for the poor, pay raises for state workers, and other spending hikes based on the Prop. 30 tax increases. The benefit increases will be permanent, though the tax hikes are supposed to expire in six years. Don’t be surprised if they wind up having a much longer life span.

For all the austerity talk, the Brown administration is ignoring unfunded liabilities and other debts run up in the previous decade to cover the rapidly escalating costs of retirement and medical benefits for public employees. Sure, the budget is balanced—if one ignores those items, just as your personal budget may be balanced if you ignore credit-card debt and student loans.

The new taxes will also bolster teacher pensions, according to Governor Arnold Schwarzenegger’s former pension adviser, David Crane. “The California State Teachers Retirement System is now so far behind its forecast that the stock market would have to be almost 2.5 times higher than it is today in order for the system to meet that forecast, and from that point would have to double every nine years to keep pace,” Crane writes. “As a result, 6 million schoolchildren will get no benefit from the proposed tax increase. Worse, unless accompanied by a systemic solution, the tax increase will simply mask the problem and enable it to grow.” That last point applies more broadly. Good revenue news is allowing state officials to conceal the state’s wall of debt and pretend that California is back. It’s not true: California’s fundamental fiscal problems will only grow, making them that much tougher to address in the future.

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