California

New California Governor's Spending Plans Will Run Up Against Fiscal Reality

California's fiscal foundation is built on rock, says Gov. Gavin Newsom, but it's really more like sand.

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Gavin Newsom was inaugurated as California's 40th governor last Monday, taking over a general-fund budget that is flush with cash and a state government that is in remarkably good shape—at least superficially—from a fiscal perspective. For all his flaws, outgoing Gov. Jerry Brown left Newsom with a $15 billion surplus and a rainy day fund that is nearly full. As an added plus, the economy that is humming along even though an erratic stock market points to storm clouds on the horizon.

The big question is whether Newsom will heed Brown's advice and govern as if there's always a recession around the corner—or ignore the former governor's warnings about Democratic lawmakers who always say "yes" to any "harebrained" spending scheme. Unfortunately, based on Newsom's inaugural words, initial budget and many of his early high-level administrative appointments, the safe money is on the latter. Newsom wants to spend big.

One need not read between the lines in Newsom's introductory words. He spelled it out clearly. Newsom pointed to Brown's inaugural address, which quoted from the Sermon on the Mount. There was the foolish man who built a house on sand and the wise man who built it on rock. "For eight years, California has built a foundation of rock," Newsom said. "Our job now is not to rest on that foundation. It is to build our house upon it."

So now that the state is on solid financial footing, the new governor envisions a rapid expansion of government social programs. "We will support parents so they can give their kids the love and care they need, especially in those critical early years when so much development occurs," Newsom said. That speaks to the $1.8 billion in early childhood programs that the new governor is touting. The term "we," of course, refers to California's taxpayers.

"We will launch a Marshall Plan for affordable housing and lift up the fight against homelessness from a local matter to a state-wide mission," he added. The term "Marshall Plan" is not subtle. That was the American financial assistance program to help Western Europe rebuild after the devastation of World War II, at a cost of $100 billion in current dollars.

Continuing the metaphor of California as a home, Newsom added that "In our home, every person should have access to quality, affordable health care." He has long advocated for some type of universal healthcare coverage (although not necessarily the single-payer system that failed to make it through the Legislature in 2017), and some of his most noteworthy aides have a background in promoting government healthcare programs.

"Everyone in California should have a good job with fair pay," he said. "Every child should have a great school and a teacher who is supported and respected. Every young person should be able to go to college without crushing debt or to get the training they need to compete and succeed. And every senior should be able to retire with security and live at home with dignity." Those are vague, feel-good ideas that would garner few objections. But his ideas for implementing them, such as his bidget plan for free community college, will come with a hefty price tag.

There will be plenty of time to dissect the specific policy proposals that will move forward as the legislative session gets under way. For instance, the community college idea is a particularly bad one. California community colleges already are inexpensive. Making the second year of tuition "free" (the first year already is free for first-time California students) will only clog up the classrooms with free riders, thus making it tougher for those students who are serious about getting an education to get classes and improve their job prospects.

However, the main purpose of this article is to provide a warning amid the exuberance of a new gubernatorial administration. Basically, that financial foundation might be built less on rock and more on sand than many of us would like to believe.

There's no complaining about the size of the budget surplus and rainy day fund, but there's more to a budget than those items. As a comprehensive new California Policy Center report from Ed Ring and Marc Joffe points out, "We estimate that California's total state and local government debt as of 6/30/2017 totaled just over $1.5 trillion. That total includes all outstanding bonds, loans, and other long-term liabilities, along with the officially reported unfunded liability for other post-employment benefits (primarily retiree healthcare), as well as unfunded pension liabilities." That's a 15-percent increase from two years ago—and a number that equals 54 percent of the gross state product.

The Brown administration had done little to deal with the unfunded liabilities. Its one major pension reform law, the Public Employees' Pension Reform Act, was exceedingly modest. In the waning days of his administration, Brown's attorneys argued before the state Supreme Court for changes in the "California Rule," which restricts the ability of governments to reduce pension benefits going forward. That's still unresolved and Newsom already has made clear his opposition to changes in pensions—and one of his top aides comes out of the California Labor Federation.

Bottom line: Just because the general-fund budget is in good shape does not mean that California's overall fiscal picture is all that bright. A responsible new administration would attempt to fix those problems, which are crowding out public services at the local and state level, before engaging in a spending spree that will add to the state burden. Newsom's early budget hits $209 billion overall and includes a grabbag of new programs, although he does send money to pay off some pension debt and is bolstering the rainy day fund.

The outgoing governor increased taxes early and often. It's unwise to add new burdens on taxpayers, especially given that economic boom times always are followed by a bust and many Californians continue to flee the state's high tax burden. Newsom already is proposing new fees on water and 911 service.

California's most notorious public-policy disasters have come, counter-intuitively, during the best fiscal times, when revenues were swelling and budgets were flush with cash. The best example came in 1999, when Gov. Gray Davis signed a law that caused a pension-hiking frenzy and led directly to the state's debt crisis. The stock market was riding high and the California Public Employees' Retirement System (CalPERS) promised that increasing pensions by 50 percent retroactively wouldn't cost taxpayers a dime because market returns would cover the costs.

It didn't cost a dime, but cost billions of dollars annually in general-fund payments and added hundreds of billions of dollars in taxpayer-backed liabilities. The biggest danger to California is now a governor who believes that the state is in such great financial shape that he can start spending with wild abandon. He will not be restrained by the Legislature, which now has strong Democratic super-majorities that are itching to spend money. We don't want to wish for an economic downturn, a stock-market crash or another busted housing bubble, but that appears to be the only hope right now to derail the coming spending train.

This column was first published by the California Policy Center.

Steven Greenhut is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.

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  1. Luckily for Commifornia, pensions dont count as liabilities that need to be considered in a budget.

    1. Lucky in the short term. In the long term? Shitstorm.

  2. New California Governor’s Spending Plans Will Run Up Against Fiscal Reality: New at Reason

    Why haven’t any of the old spending plans run up against fiscal reality?

    1. Yeah, that was my very first thought. Why today, of all days?

      None of it matters anyway. California will inevitably be bailed out by the Fed’s when the chickens come home to roost.

      1. Hrm. Constitutional amendment prohibiting the bailing out of states when they implode?

    2. Probably because the “New” is referring to the governor and not the spending plan.

  3. Newsom is not one to sweat the details, like how much something costs.
    His major concern is locating the nearest camera or mic; that’s his goal when he gets up in the morning and it does not change.

    1. So you’re saying he’s a real outlier.

  4. He sees the state as able to pay for all fantasies; how can you disagree with his feelings?
    You must be a horrible person, perhaps even a conservative.

  5. Random thought when leaving the site –
    Why can’t the California pension programs see all recipient as women, and pay the smaller amount? Then see all recipients a men, and claim they died earlier? Save money on both sides.

  6. For all his flaws, outgoing Gov. Jerry Brown left Newsom with a $15 billion surplus and a rainy day fund that is nearly full.

    Sure, if you don’t count the unfunded liabilities.

  7. I actually do fuck children. And I was Sparky/Crusty the whole time you fucking morons.

      1. You guys have a really wierd pedo undercurrent here that needs done away with.

        1. I’m referring to Cathy L. She seems crazy, and I have a thing for the crazy.

            1. No it doesn’t, I presume Cathy is a nutty cougar… from Cleveland. No pedo undercurrent there.

              1. That is a very specific fetish you have there Diane.

                1. Cleveland only. No Dayton.

          1. But you’re right, the owner of the Cathy sock is mental.

    1. IT NEVER USED THE TERM TOXIC MASCULINITY!!! “MY BAD” IS TOO AN APOLOGY!!!

  8. Unnamed sources say Gov. Gavin Newsom is a gay transgender bi-sexual lesbian communist who has a secret desire to tongue fuck Nancy Pelosi while Hillary Clinton masterbates.

    1. Great. Now I have that image in my head.

      1. *twitches*

  9. People are underestimating California. They have studied our Federal government and have a plan. First succeed from the Union of the United States. Second set up their own National Mint. Third start printing money. Fiscal reality problems solved.

  10. But his efforts often worked against his own party which, as he added, “only know(s) how to say ‘yes,’ even to harebrained schemes.”

    Reminds me of that scene from “The Cradle Will Rock” when the Federal Theater Project bureaucrat is giving approval to fund every single play that’s presented to her, no matter how inane the concept really is or whether people will want to go see it.

    1. It’s not like her paycheck was any different either way.

  11. I’ve heard about countries where government builds the housing…wonder why Little Gavin thinks it is this one

  12. For eight years, California has built a foundation of rock

    This rock?
    LINK

  13. There hasn’t been “fiscal reality” in CA’s gov’t since at least the Deukmanian administration.

  14. Every child should have a great school

    If every school is great then none are great. Great means above average, but if they are all “great” then they are all just average, and those with money or additional resources will apply them to make their child’s above the new average, thus starting this whole cycle all over again

  15. Well Gov. Gavin Newsom of California spending plans should run head long into fiscal reality but it will not in his time as governor. Now the next governor of California will have the headache that Newsum creates to solve. But it may be put off for a while by raising taxes California. Not only income taxes but also sale taxes and property taxes. Now this may have quite an effect on the relationship between California and Mexico when all the illegals that have come north now return back south and stop in Mexico. But there may be US citizens joining the exodus of the south of the border illegals going back south and thus become ILLEGAL immigrants entering Mexico.
    The reason for the US citizens illegally immigrating to Mexico is because even though they are getting entitlements these entitlements will not be enough to live in the state. This reverse immigration would help out California two ways. First it would lower the number of people who would be receiving these promises the state made and two reduce the pressure on the housing market.
    But sooner or later as the taxes goes up in California (and especially if these taxes claimed not as deduction on federal tax forms) more and more Californians will find that it is more profitable for them to move to a loser tax state even though they will make much less salary. When that happens then California’s governor will have to find a way to pay for all the giveaway that it is giving.

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