State faces pensions, budget, fires after COVID-19

No state is better positioned for success than California. We’ve built world-class universities that made California the global innovation leader. Our companies drive the world’s imagination and have created job growth and the tax base for a $215 billion budget that is the envy of nations.

But as the COVID-19 pandemic drives the global economy into recession, Californians would be smart to start thinking now about how to solve challenging problems looming on our horizon. That includes the state budget, public employee pension costs and fire protection.

Experiencing the longest growth period in stock market history, California lawmakers expanded the state budget at an equally torrid pace, from $146 billion in 2008 to $215 billion in 2020. Yet our health care systems appear understaffed to deal with the coronavirus — just as our firefighters were overwhelmed by the historic fires we faced last fall.

Because of the recession, the state’s budget is likely to drop by 20% next year making it even harder to provide basic social services including health care. Facing a recession, and already having one of the highest state tax rates in the country, new taxes will likely be off the table. It’s clearly time for an honest assessment of our spending priorities.

Nobody likes to think about pensions because they’re complicated, boring and operate on a generational timeline. For legislators and constitutional officers, if things don’t work out, it will likely be someone else’s problem. California’s three main pension funds — CalPERS, CalSTRS and the UC Retirement Plan — manage over $700 billion. But, given the global market downturn, those three funds may soon be short by over 40% of what they should have.

If there is a pension shortfall, local governments and California taxpayers are responsible for paying the obligation. A 40% shortfall is more than the entire annual state budget.

No one is suggesting that the state renege on commitments to retired state workers. But the state should have the ability to reevaluate future accruals for new and current employees to ensure the long-term solvency of the fund. Today, an arcane California Supreme Court ruling called the “California Rule” prevents the state from being able to manage its future pension commitments.

The Supreme Court on Tuesday heard arguments in a case that could lead to reevaluation of the California Rule. There are no easy answers here, but the governor and the pension boards need to start making tough decisions now about how to stabilize pensions, while protecting public services in the future.

Deficits and unfunded liabilities are only part of the challenge ahead. While reduced carbon emissions are a silver lining of this pandemic, California is still looking at a serious drought this fall, one that will likely lead to even larger fires this October.

Because this is the new normal in California, we need to readjust our budget priorities to invest more in fire protection technology and staffing, including directing our utilities to place more lines underground, especially in high-risk fire zones. It won’t be cheap — and will almost certainly be passed onto taxpayers, ratepayers or developers.

But San Diego Gas and Electric began doing so in its territory and has largely avoided the size and scope of fires that Southern California Edison and PG&E have faced. As we contemplate a smaller state budget and increasingly pension obligations, we need to remember our commitment to providing safe, stable power to the world’s fifthlargest economy.

The COVID-19 virus has created a global crisis, but we know how to solve it. By closing schools, having people work from home and increasing testing, we can slow the virus. But bigger, man-made problems will determine our future. One thing we can learn from the coronavirus is that if we face up to our problems sooner, we can keep them from becoming tragic ones later.

Steve Westly served as California state controller from 2003-7. He is a former vice president with eBay, former Tesla board member and founder of The Westly Group, a sustainability venture capital firm.