State Budgets

State of the State: California

The economic pain inflicted by Golden State government has induced more than a million Californians (in just the past decade) to seek better opportunities elsewhere.

“When California does well, America does well. And when California hurts, America hurts,” proclaimed Governor Jerry Brown during his annual State of the State Address. In actuality, the economic pain inflicted by Golden State government has induced more than a million Californians in just the past decade to seek better opportunities elsewhere. Nothing in the governor’s remarks indicated any inclination to reduce the highest personal income tax rates in the nation (13.3 percent including local taxes) or the 11th highest corporate income tax rates in the nation at 8.84 percent.

The state may be “known the world over for the actions we have taken to encourage renewable energy and combat climate change.” That’s not a positive when a state resorts to big government and excessive new regulations in the name of protecting the environment. The governor praised California’s “voluntary agreement” through the “Under Two M.O.U.” to control greenhouse gas emissions, but California’s participation is little more than an expensive feel-good PR stunt that will suppress economic activity while doing little to mitigate the risks of climate change. In fact, California’s track record of big government action masquerading as environmental stewardship creates more carbon emissions and air pollution globally as economic activity is forced to shift elsewhere globally.

Californians bear the economic costs-diminished growth and costlier goods and services of this agenda hijacked by ideologues who care more about growing the size of government than human health and the environment. The big government approach to environmental protection embraced by California is ironically shuttering one of the state’s nuclear plants, a zero emissions energy source. Meanwhile, other carbon regulations mean gasoline in the state is 30 percent higher than the national average, second only to Hawaii in price. Residential electricity costs 51 percent more than the national average with industrial electricity costing 63 percent more, making manufacturing less competitive.

But wait! There’s more!

The governor vowed a fight with the federal government over the potential Obamacare repeal, in addition to opposing the Trump Administration’s environmental reform. Given “over five million people now enjoy its [Obamacare] benefits,” the governor claimed the state budget would be “possibly devastated” if “any of that [federal dollars for funding] be taken away.” Unfortunately, the governor completely ignored the skyrocketing premiums for health insurance coverage thanks to Obamacare. Premiums for Covered California—the state’s Obamacare health insurance exchange—were set to increase by an average of 13.2 percent this year, with the increase in some counties approaching 30 percent.

The governor spoke approvingly of President Trump’s “firm intention to build and build big” on infrastructure. Amusingly, Brown mentioned “we have…even a dam that the President could help us with.” Oddly enough, the last time a new dam was constructed by the State of California was in 1959, thanks to regulatory hurdles and environmental lawsuits, although some facilities have been constructed by other entities during this time. The state failed miserably to adequately increase water storage capacities as the population surged. This delinquency exacerbated the impact of the recent five year regional drought. Unfortunately, although months of deluges have completely quenched the drought across most of the state, the state lacks the capacity to take full advantage of the welcomed rain. Trillions of gallons of water flow to the sea due to lack of new reservoirs.

The governor seems to desire federal funding of this water storage capacity. But it’s not as if the state lacks infrastructure resources. Billions have been squandered on Brown’s vision for a high speed train line. As former California assemblyman Chuck DeVore notes, the project “is seven years behind schedule on the easiest-to-build Central Valley segment.” The California High-Speed Rail Authority has already spent $2.2 billion of $2.5 in federal grant funds, and California voters also approved $10 billion in bonds funding for the estimated $64 billion project. This dream is not going so well. The Los Angeles Times obtained a confidential copy of a Federal Railroad Administration risk analysis showing that the “bullet train could cost taxpayers 50% more than estimated…And that’s just for…the easiest part of the route between Los Angeles and San Francisco.”

The most glaring problem facing California earned no mention in the address: unfunded pension liabilities. California’s legislature has consistently underfunded public pension plans for years. The ALEC report Unaccountable and Unaffordable 2016 estimates the funded ratio at just 35.6 percent, using a risk-free rate of return of 2.344 percent (the average of the 10 and 20 year U.S. Treasury bond yields from March 2015 to March 2016). Using this risk-free rate, the nearly $1 trillion in unfunded pension liabilities exceeds $24,400 per capita—the 8th highest in the nation.

Commendably, the governor’s budget does increase state contributions to its various pension funds. But the system requires structural changes in order to honor promises to public sector retirees without further burdening taxpayers or shifting resources away from essential services. Lowering the assumed rate of return for CALPERS from 7.5 percent to 7 percent is another step in right direction. But this still optimistic assumption continues to fully embrace the likelihood of lower returns.

The governor is right: we cannot “construct some alternate universe of non-facts that we find more pleasing.” California’s economic outlook currently ranks 46th nationally, according to Rich States, Poor States. Ignoring the impending fiscal collapse due to unfunded pension liabilities, failing to reduce the onerous tax burden, and pretending that a state carbon emissions crackdown will alter global climate only will force others to flee Governor Brown’s version of such a universe.

In Depth: State Budgets

Smart budgeting is vital to a state’s financial health. The ALEC State Budget Reform Toolkit offers more than 20 policy ideas for addressing today’s shortfalls in a forthright manner, without resorting to budget gimmicks or damaging tax increases. One way to stabilize budgets over time is to embrace…

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