The LAO vs. Sacramento Spin
Yesterday, Governor Newsom released his revised state budget, required annually by May 14th. In what promises to be a challenging budget process due to rising state costs, the Governor and legislature will have to grapple with the consequences of poor budget management in order to pass a budget by the June 15 deadline.
While serving in the California State Senate, I had the privilege of serving on the Senate Budget and Fiscal Review Committee. I was also one of the two Senators on the Joint Budget Committee, which reconciled the budget differences between both the Assembly and the Senate, and would keep me in Sacramento over weekends in late May and early June.
I started my career as a Certified Public Accountant, and would also obtain my Certified Financial Planner license, so I was in my element. Having served as the elected County Treasurer-Tax Collector and Supervisor for the County of Orange, I was no stranger to budgets running in the billions of dollars.
While serving as County Treasurer, I would fly to San Francisco to meet with Standard & Poor’s to garner the highest rating possible for short-term bonds. Who did I meet with from S&P? None other than Gabriel Petek, who now serves as the Legislative Analyst. It was an honor to work with an old friend while I served in Sacramento. And I appreciated his objectivity, even when the news was not pleasant.
On April 28th, LAO Petek published “Understanding $100 Billion in Spending Growth: Causes and Fiscal Implications.” True to form, he and his staff were matter of fact and straightforward.
The Executive Summary starts off with the reality that structural deficits of $20 to $30 billion annually lie in Sacramento’s future. Why? Because when Governor Newsom had budget surpluses, he made two mistakes. The first was to initiate new programs. The second was to not pay down or pay off existing debts.
When a household receives a cash bonus, it’s best to pay down credit card balances and sock a little aside, not put a down payment on a new car with high monthly loan or lease payments. But this is what Newsom did, increasing annual spending by more than $100 billion and increasing programs by 43 percent! Consequently, he is leaving California in much worse shape than when he assumed office in 2018, 41st place, and the audited financial statements for 2023 prove this, dropping the once Golden State to 44th place.
The report provides the true reasons for the cost increases. It’s for public employee salary and employee benefit increases that are on auto-pilot and were negotiated with a generous Governor who needs public employee union campaign funding for his presidential aspirations.
“Automatic growth to sustain the state’s service level accounts for most – nearly two-thirds — of the total growth in local assistance spending,” Petek writes in the LAO analysis. “Discretionary decisions that sustain existing service levels account for 15 percent. Discretionary decisions that expand or create new services or supports account for about 20 percent of growth. External sources of growth—such as federal actions and voter-approved measures—account for less than 5 percent.”
No wonder Petek concludes by noting that “difficult decisions” are in the Capitol’s future. Frankly put, “the state’s spending commitments and revenues” are “not sustainable.” To quote from the movie Titanic, “Iceberg dead ahead.”
Now you can appreciate why the gubernatorial candidates in the June Primary are so mediocre. Qualified potential candidates with strong name ID and experience just don’t want a turnaround position that has to deal with an incompetent supermajority legislature comprising public employee union puppets.
The LAO makes a logical recommendation: “These deficits will likely require at least some – if not significant – spending reductions.” Good luck with that. Public employee union-controlled municipalities do not make cuts or layoffs or pursue downsizing initiatives. Do you need proof? Newsom is supposedly holding back nearly $4 billion in what is known as Proposition 98 funding from the state’s schools. It’s a budget gimmick that creates another debt.
The public employee unions will demand higher tax revenues. With Sacramento highly dependent on income tax revenues, and demands that billionaires get out of Dodge, don’t expect revenues to hold steady or increase. The middle class will be left holding the bag as the smart money has already left the building. And the next Governor will inherit a fiscal calamity.
At least the LAO, Gabriel Petek, was brave enough to state the obvious. The next few weeks should provide amazing entertainment for number-crunchers like me. One hopes that the reality check will sink in with the Legislature, but we’re not holding our breath. If only the numerous public employee unions that actually control the Legislature would come to the conclusion the LAO is sincerely trying to provide a proper course of action.
John Moorlach is a senior fellow and director of CPC’s Center for Public Accountability. He served from 2015 to 2020 as the State senator for the 37th Senate district.