Newsom’s big-spending, pro-union course will run into a fiscal iceberg
Gavin Newsom was inaugurated as California’s 40th governor on 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 large surplus and a rainy day fund that is nearly full. As an added plus, the economy is humming though an erratic stock market points to storm clouds on the horizon.
The big question is whether Newsom will heed Brown’s advice – 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 speech – and many of his early high-level administrative appointments – the safe money is on the latter.
Newsom wants to spend big. He spelled it out clearly on Monday. 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 already has been 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 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 to which few would object. But his ideas for implementing them, such as his 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 their tuition “free” 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.
But each of the new governor’s proposals to spend more will be limited by this reality: California’s financial foundation might be built less on rock than sand.
There’s more to a budget than the size of the budget surplus and rainy day fund. In a comprehensive new California Policy Center report, Edward Ring and Marc Joffe point out, “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, hailed as major, was in fact, 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 seems unlikely to fiddle with pensions. 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. Furthermore, 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.
California’s most notorious public-policy disasters have come, counterintuitively, 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 instead added hundreds of billions of dollars in taxpayer-backed liabilities. Likewise, after California solved its 2012 budget crisis (with huge tax increases, and thanks to a booming economy), Gov. Jerry Brown doubled down on his plan to spend $100 billion on a high-speed rail boondoggle and $15 billion more on a Delta tunnel project. When money is plentiful, California officials love to spend it. By contrast, it took that budget crisis to force the state to even modestly address its pension system and cut back on the kind of spending that was driving it toward fiscal ruin.
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 supermajorities 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.
Steven Greenhut is Western region director for the R Street Institute. Write to him at firstname.lastname@example.org.