Editorial: Taking the voodoo out of the state’s budgeting process — finally.
State budgeting sounds like a dry topic, but it’s incredibly important for taxpayer trust and a state’s priorities. Also, nearly every state in the union is doing it incorrectly.
That’s the message from a new report by the Volcker Alliance, a nonpartisan group launched in 2013 by former Federal Reserve Board Chairman Paul Volcker.
The report studies three states in depth, including California. Volcker’s focus is on trying to make states be honest about their budgeting, instead of using magic tricks to push expenses off to future generations.
It’s not going to be an easy task. Nearly every state has some kind of “balanced budget” requirement, Volcker notes, yet “many states resort to short-term sleight of hand to make it appear that spending does not exceed revenue,” he writes.
“The techniques include shifting the timing of receipts and expenditures across fiscal years; borrowing long term to fund current expenditures; employing nonrecurring revenue sources to cover recurring costs; and delaying funding of public worker pension obligations and other post-employment benefits, principally retiree health care.”
If any of that sounds familiar, it’s because California was once the poster child for employing all of those techniques.
It wasn’t that long ago, either. It’s easy to forget in these times of plenty, but before the Great Recession, California seemed to be in permanent budget crisis. The state budget was always late, often by many months. Governors and the Legislature raided special funds and promised (sometimes falsely) to pay them back. The state was tied with Illinois for the lowest general obligation credit rating in the country.
Volcker dates improvement to 2010 — current with Gov. Jerry Brown’s election and the shift in the budget approval process to a majority vote of the Legislature, rather than the two-thirds requirement that kept the state in perpetual crisis. Propositions 30 and 39 — the temporary increases in personal income tax, sales tax and corporate income tax — along with Proposition 2, the rainy-day fund stabilization initiative, have all helped California use fewer budget tricks.
Most of the gains from this change won’t be felt for years to come, but there is one big victory we can claim right now — our bond rating has improved substantially, making it cheaper for us to borrow money and service debt. California has had four upgrades of our general obligation credit rating since 2013 by all of the major ratings bureaus.
California’s gotten a big assist from postrecession and tech economy growth, but both the Legislature and Brown deserve a pat on the back — “The recovery and the renewed focus on fiscal reforms have allowed California to attack its ‘wall of debt,’ Brown’s term for the borrowings, deferrals, and budgetary obligations accumulated over the previous decade,” Volcker writes.
California’s reduced its debt obligations from $34.7 billion at the end of fiscal 2011 to $24.9 billion at the end of fiscal 2014. That’s the kind of reduction that will give the state a cushion in the event of another downturn. Still, this is no time for Sacramento to slack off. California’s made big progress in terms of being more honest about its budget, but it still has a huge challenge in the form of $131.1 billion worth of unfunded pension liabilities and $64.6 billion worth of unfunded retiree health benefits.
“That is equivalent to about $1,700 per capita, 68 percent above the median for all 50 states,” Volcker writes.
California also needs to do a better job of revenue forecasting — we tend to get it wrong, especially during recessionary times — and of rebalancing the state’s tax structure so it’s not so dependent on the highly volatile income tax revenue of the state’s highest earners.
Most of these recommendations have been made over the years by other economic experts. The big surprise of the Volcker report is that California has actually started to take the advice — and that it’s working. If the governor can keep holding the line on spending, California will eventually see big rewards.