The Real State of the State: California 2019

When he gives his State of the State address today, Gov. Gavin Newsom understandably will paint a largely rosy picture of California, with some problem areas needing to be fixed. I’m hoping to work with him on options that improve the state and, in particular, prevent it from falling into insolvency. Let’s discuss a few key areas where our Governor may focus.

Unfunded Actuarial Accrued Liabilities

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. The two gigantic downturns of recent decades, the dot-com bust of 2000-01 and the Great Recession of 2007-09, hammered state and local budgets. Major budget cuts, in particular to education, precluded anything but survival.

So the primary items to be addressed are the unfunded liabilities of the state as well as of local governments, specifically pension and retiree medical care. 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.

Gov. Newsom’s budget proposal for fiscal year 2019-20 scored $257 billion in unfunded liabilities for retiree pensions and medical care.

Commendably, the budget dedicated “all of the Proposition 2 debt payments – $1.8 billion in 2019-20 – toward paying down the state’s retiree health and unfunded pension liabilities,” including $1.1 billion in the current budget year. And it included $1.8 billion extra to pay down CalSTRS’ unfunded liability.

Savings are estimated to be $7.4 billion over the next three decades from a $1.8 billion earlier payment investment if actuarial assumptions are actually achieved. But that’s only 1.75 percent of the $103 billion liability for teachers’ pensions. Just think what a 3.5 percent or more reduction of this high interest obligation could generate in future savings. California clearly needs to work more on comprehensive pension reform or it will see higher contributions crowding out other budgeted programs.

Education

Then there are the liabilities for the university and public-school systems, which I analyzed in my recent report, “Financial Soundness Rankings for California’s Public School Districts, Colleges & Universities.” The key number for each is the Unrestricted Net Position, or UNP, which comes from each Comprehensive Annual Financial Report, or CAFR.

For the University of California, the UNP is a negative $18.9 billion, or a burden of $478 for each Californian for fiscal year 2017-18. That’s what $9.8 billion in pension and $18.9 billion in retiree health liabilities can do to a balance sheet.

Cal State’s equivalent numbers are a negative UNP of $3.66 billion for June 30, 2017, or $122 per capita, if shared equally by every resident.

Of the 72 community colleges, only one is in positive territory, South Orange County with a positive UNP of $83 million, or $141 per capita. The worst is Santa Monica at a negative $180 million, or a negative $2,391 per capita.

For public schools, the financial woes of the Los Angeles Unified School District were publicized during the recent teachers’ strike. My own analysis came in a December 27 op-ed, “Can we prevent the LAUSD budget crisis from taking down the California state budget?” Based on the district’s CAFR released a few days earlier, it tallied a negative UNP of $19.6 billion, or $4,180 per capita for those living within the district’s borders.

As I noted, if the state has to take over the school district to straighten out its finances, the cost could include a loan somewhere up to $19.6 billion. Where will that money come from?

Other school districts in bad shape include negative UNPs of $1.5 billion for San Diego Unified, $849 million for Fresno Unified and $770 million for San Francisco Unified.

Oakland Unified, also in the news after its teachers authorized by a 95 percent vote a strike that could hit on February 15, had a negative UNP of $427 million, or $1,001 per capita.

Overall, of 944 school districts in California, about two thirds are in negative territory.

These negative numbers are caused by a number of factors, including pension and retiree medical liabilities. If the related debt payments are not controlled, they could devour state and local budgets like a plague of locusts.

Homelessness

I’m a fiscal conservative. But government does provide essential services. And it needs money to deal with an ongoing crises. Housing is among the greatest of these now, which is somewhat correlated with the epidemic of homelessness.

In his Inaugural Address, Gov. Newsom commendably called for a Marshall Plan to end homelessness in California. After World War II, the Marshall Plan helped Europe rebuild itself from wartime devastation. I have supported such reforms as Assembly Bill 448, which establishes a Joint Powers Authority in Orange County to provide long-term housing for the homeless.

Any funding will depend on getting the state’s fiscal house in order, as outlined above.

Also crucial is reform of the California Environmental Quality Act, or CEQA, to allow for more speedy approval of housing developments, not just for the homeless or those with low incomes, but for everybody. As an editorial in the San Diego Union-Tribune noted, it shouldn’t be only sports stadiums for teams owned by billionaires that are green-lighted quickly “by requiring that all environmental lawsuits, including appeals, be done within nine months.”

The same nine-month rule should be applied to all housing in California until the crisis has improved.

Unfortunately, Kate Gordon, the governor’s director of the Office of Planning and Research, poured ice on the CEQA reform flame. “I don’t see us doing a giant overhaul anytime soon,” she said recently. “I do think that CEQA is going to come into play as we’re thinking through these big crises: the affordability crisis and wildfire crisis.” 

Perhaps the governor can clarify his administration’s stance on CEQA reform in his address.

I also have to bring up that the wrong way to deal with homelessness is a heavy-handed intervention in cities, such as Huntington Beach, that are grappling with the crisis. That is why, as I have explained, I objected to the governor working with Attorney General Xavier Becerra in a lawsuit against Surf City. This and other cities need to be given time to advance housing construction before being hit with lawsuits.

Wildfires

Seeing large sections of California burn down was shocking. Many of the fires were caused by sparks from downed power lines. I authored two bills in 2016 and 2018, both numbered Senate Bill 1463 and described here, to mitigate wildfires by undergrounding power lines and using cap-and-trade funds for undergounding and other efforts to reduce the causes of wildfires. Neither bill became law.

But the cap-and-trade idea was incorporated into Senate Bill 901 by state Sen. Bill Dodd, D-Napa, which I supported. It included $200 million in cap-and-trade funds for mitigating wildfires. This year, I am working on new legislation to extend this idea to other revenue streams not being utilized for their intended purpose.

Such an approach is crucial because the 2018 wildfires generated greenhouse gases equivalent to that of a year’s worth of electricity, according to a new study by the U.S. Department of the Interior.

Securing Voting Rights

There are many more issues I could highlight that affect California. But let me stress one more, voting rights. The right to vote is sacred in our democracy. But that includes securing the integrity of the voting process.

The motor-voter law, passed in 2014, has turned out to be a disaster. The DMV, which has numerous other problems, just wasn’t prepared to implement signing citizens up to vote right when they were given drivers’ licenses.

As the Sacramento Bee recently reported, “As California prepared to launch its new Motor Voter program last year, top elections officials say they asked Secretary of State Alex Padilla to hold off on the roll-out.” He went ahead anyway.

Gov. Newsom has created a DMV Strike Team to fix a bureaucracy that has so many problems it’s like an old Yugo barely able to run downhill. Until the DMV itself is fixed, motor-voter should be delayed.

In summary, the great state of California remains a wonderful place to live, but has been stymied by governmental overreach and planning. The state will be much better once alternatives which allow for more freedom and prosperity are implemented to address these and other problems. The warnings of disaster are there for all to see. Yet the right spirit of cooperation – not government coercion – can be a driver for the right kind of change.