Is California’s Fi$cal Health Cause for Worry?

While California’s elected politicians are waging a legal and media war on the Trump administration, has the state’s economic status improved under Trump’s economic policies, or are California’s high taxes and restrictive regulations still chilling the economy?

The state unemployment rate has dropped to 4.1 percent from 4.3 in March. Sacramento’s unemployment was 4.2 percent in March, dipped down to 3.1 in May, and jumped back up to 4.0 percent in July. Los Angeles unemployment is 4.7 percent; San Diego’s is 3.6; San Francisco is 2.4; Fresno unemployment is 7.3 percent – down from 9.3 in March.

How Do Big Metro Areas Rank?

Business Insider looked at five measures of labor market and overall economic health for the 30 metropolitan areas with the largest populations: the unemployment rate, job-growth rate, per capita GDP, GDP growth, and average weekly wages, to get an overall sense of economic health in the metro areas.

Sacramento came in at number 15 of big cities with the weakest economies, ranked from best to worst:

#15: Sacramento, California: The job growth rate of 2.4% was tied for ninth-highest among the big metro areas, but the GDP per capita of $46,860 was the sixth lowest.

“America’s big cities have an outsized role in the country’s economic engine, but some urban areas are struggling when compared to their peers,” Business Insider said.

They also ranked every state’s economy from worst to best, in 2019:

9. California’s average weekly wage of $1,131 was the fourth best among the states and DC, but its unemployment rate of 4.2% was tied for tenth worst.

Yet, last week, the Sacramento Bee reported positive economic news:

The median household income in the Sacramento region rose to a historic high last year as unemployment remained low, according to new census data.

The median household income – the middle income in a ranked list – was $73,142 in 2018, up from $69,664 in 2017, after adjusting for inflation. That’s the highest the median income has been in at least three decades, census figures show. Household incomes also rose statewide. The increases were statistically significant, according to the census bureau.

The most comprehensive ranking comes from the Mercatus Center at George Mason University, which ranks on the basis of solvency in five separate categories.

“California ranks 42nd among the US states for fiscal health,” Mercatus reported in fall 2018.

“California has between 0.82 and 1.62 times the cash needed to cover short-term obligations, well below the US average. Revenues exceed expenses by 4 percent, with an improving net position of $271 per capita. In the long run, California’s negative net asset ratio of 0.57 points to the use of debt and large unfunded obligations. Long-term liabilities are higher than the national average, at 92 percent of total assets, or $5,642 per capita. Total unfunded pension liabilities that are guaranteed to be paid are $1,190.84 billion, or 54 percent of state personal income. OPEB are $106.06 billion, or 5 percent of state personal income.”

Mercatus also notes the state has an overregulation problem that’s contributing to the housing affordability crisis. “California is a leader in regulating just about everything — including insurance carriers, public utilities and housing construction,” Mercatus said. “If California’s regulatory code underwent some serious spring cleaning, it could help the state at least make a dent in its housing affordability crisis.

“The residential housing subsection alone has nearly 24,000 restrictions.”

In a California Globe op-ed, Sen. John Moorlach warned back in February, “Financial solutions must come first because, if there’s no money, there’s no way to pay for existing programs, let alone solutions to problems.”

Moorlach is the only CPA currently serving in the California State Legislature.

Moorlach continues to caution that the unfunded liabilities of the state as well as of local governments, specifically pension and retiree medical care, must be addressed. “Gov. Jerry Brown worked out a partial reform with the Public Employees’ Pension Reform Act of 2013, called PEPRA. It was a valiant, but meager attempt and did little to bring down immediate costs,” Moorlach said.

In June, Moorlach reported:

“It’s May 30 and we haven’t received the CAFR for California,” said Sen. John Moorlach, R-Costa Mesa, Thursday during the state’s joint Senate and Assembly budget conference committee hearing. “Will we receive it before we approve the budget?”

Moorlach pointed out that the state’s Department of Finance has reported a $21.5 billion surplus, but the most recent CAFR for year-end June 30, 2017 showed an unrestricted net deficit of $168.5 billion and up a $91 billion in unfunded retiree medical liability benefits for state employee, teachers and judges.

“That’s a quarter-trillion dollars,” said Moorlach.

“The great state of California remains a wonderful place to live, but has been stymied by governmental overreach and planning,” Moorlach said. “The state will be much better once alternatives which allow for more freedom and prosperity are implemented to address these and other problems.”

Mercatus ranking categories:

• Cash solvency measures whether a state has enough cash to cover its short-term bills, which include accounts payable, vouchers, warrants, and short-term debt. (California ranks 45th.)
• Budget solvency measures whether a state can cover its fiscal year spending using current revenues. Did it run a shortfall during the year? (California ranks 17th.)
• Long-run solvency measures whether a state has a hedge against large long-term liabilities. Are enough assets available to cushion the state from potential shocks or long-term fiscal risks? (California ranks 45th.)
• Service-level solvency measures how high taxes, revenues, and spending are when compared to state personal income. Do states have enough “fiscal slack”? If spending commitments demand more revenues, are states in a good position to increase taxes without harming the economy? Is spending high or low relative to the tax base? (California ranks 28th.)
• Trust fund solvency measures how much debt a state has. How large are unfunded pension liabilities and OPEB liabilities compared to the state personal income? (California ranks 41st.)