California gets an ‘F’ on its fiscal health report card, ranks 42nd in nation, study says

California gets a big, fat “F.”

Louisiana is fiscally fitter. So are Mississippi, Alabama, West Virginia and South Carolina — the poorest states in the nation, according to the latest “State of the States” analysis by the nonprofit Truth In Accounting.

California tanked, ranking 42nd of the 50 states on the weight of its long-term taxpayer burdens. That makes it a “Sinkhole State,” meaning it owes billions more than what it has, thanks primarily to generous pension obligations and health care promises made to retirees.

And, to add injury to insult, the Golden State is extremely late in releasing its audited financial statements, a particular problem for transparency and accountability, according to TIA.

“How is the governor of California getting away with saying he has a surplus?” asked Sheila Weinberg, founder and CEO of Truth in Accounting. “You guys are making tax and policy decisions based upon that ‘surplus.’ But you’re not working with the right numbers. The Securities and Exchange Commission has anti-fraud provisions — the SEC needs to step in here. It’s so outrageous.”

According to TIA’s analysis, California is $264.5 billion short of what it needs to pay its long-term bills, which calculates out to $21,100 per taxpayer. Experts at Stanford University include the pension debt of local governments and conclude that total debt is far higher, at $352.5 billion in the best-case scenario ($27,187 per household) and more than $1 trillion in a worst-case scenario ($81,634 per household).

Meanwhile, the governor has touted a budget surplus exceeding $75 million, while the Legislative Analyst’s Office has pegged the budget surplus at about $38 million.

How can all of these things be true?

Now and later

California’s coffers have, indeed, swelled with income tax receipts from high earners who did well despite the pandemic. It  also has received billions in pandemic relief from the federal government over the past year.

But the budget surplus is the difference between expenses and revenue over a single year. It doesn’t include the total long-term debt lurking in the distance, like those pension and retiree health care obligations.

In contrast, TIA’s analysis looks far beyond a single year’s budget, at the state’s total financial obligations over time. That’s found not in budgets, but in audited financial statements.

“This ‘surplus’ — it’s the equivalent to me saying my checking account balance at the end of the year is higher than my checking account balance at the beginning of the year, and completely ignoring my credit card debt,” Weinberg said.

H.D. Palmer, spokesman for the California Department of Finance, said the surplus is real and the state is well-positioned to fulfill its long-term obligations.

It’s making extra pension payments — on top of its required payments — to reduce its unfunded liability, he said. This year’s budget includes $1.9 billion in one-time funding for the retirement system for most state employees and $584 million for teachers. That’s in addition to more than $10 billion in additional pension payments over the past four years, which will save the state billions in the long run, he said.

“The facts are that with a growing economy and a strong and widely recognized surplus, California continues to balance its budget, continues to pay down its long-term liabilities, and continues to build record reserves — even in the face of a worldwide recession brought on by COVID,” he said by email. “That’s not just our opinion.”

Palmer quoted from two of the nation’s big bond rating agencies, “each of which know California’s fully disclosed balance sheet in infinitely greater detail.”

Standard & Poor’s said, “We believe spending revenues above trend for one-time uses and long-term liability paydowns help offset California’s historically volatile income tax receipts,” it said on Sept. 2.

A few days earlier, the credit agency Fitch said, “The state’s strong budget management during the extended period of economic expansion and revenue growth following the Great Recession allowed the state to materially improve its financial position and enhance its ability to address future fiscal challenges. The state eliminated budgetary liabilities, built a rainy day fund, (and) enacted on-time, structurally balanced budgets.”

“We’ll continue to put our stock in the professional analysts on Wall Street who actually have an in-depth understanding of California’s finances,” Palmer said.

Weinberg waved off Wall Street defenses. “The rating agencies are there to protect the people who buy bonds,” she said. “Who’s there to protect the taxpayers?”

It’s taxpayers who’ll be left holding the bag if there’s not enough money to fulfill California’s long-term obligations down the road. California, and everyone else, should use FACT-based budgeting and accounting — “full accrual calculations and techniques” — which moves beyond cash-basis budgeting and accounting to provide a more accurate and truthful financial picture, she said.

Digging the hole

It was exactly 22 years ago that then-Gov. Gray Davis signed the bill that allowed California to dig the debt hole it’s currently stuck in.

Everything was booming in 1999, and the California Public Employees Retirement System was super-funded — meaning it had more money in the bank than was owed to retirees.

So CalPERS sponsored, and the Legislature approved, SB 400, which created a more generous pension formula for most state workers (2% of pay for each year worked, starting at age 55, up from 2% at 60), and for California Highway Patrol officers (3% at 50, up from 2% at 50).

CalPERS told legislators that state costs would not rise above the previous year’s rate for a decade. Officials then urged CalPERS’ more than 1,500 local government members to boost pension formulas for their workers as well.

“Senate Bill 400 granted a retroactive pension increase to CA state employees that amounted to the largest non-voter-approved issuance of debt in state history,” wrote David Crane, an adviser to then-Gov. Arnold Schwarzenegger, president of Govern For California and lecturer at Stanford.

“One result has been a nearly 10-fold increase in pension contributions. Another has been a shift of tax revenues from programs to pensions.”

Crane’s numbers don’t include the steep and growing costs of health care that the state has promised to employees in their retirement. That liability — on top of the hundreds of millions to fulfill pension promises —has grown to $95.19 billion, up from $91.93 billion a year earlier, according to a new analysis by State Controller Betty T. Yee.

Where this was once a pay-as-you-go situation, the state and its workers now set money aside to prefund these benefits, much as they do for pensions. But health benefits can be negotiated down, while pension benefits are considered sacrosanct and can only go up.

Sunshine, sinkhole

California is not exactly alone. TIA’s analysis found that 39 states didn’t have enough money to pay all of their bills.

“This means that to balance the budget — as is required by law in 49 states — elected officials have not included the true costs of the government in their budget calculations and have pushed costs onto future taxpayers,” its report said.

The total debt of the 50 states amounted to $1.5 trillion, not including debt related to capital assets. For 2020, pension debt was $926.3 billion, and other post-employment benefits, mainly retiree health care, totaled $638.7 billion.

Top five “Sunshine States” — those with a surplus — were Alaska, North Dakota, Wyoming, Utah and South Dakota. The bottom five “Sinkhole States” — those with the biggest liabilities — were Hawaii, Massachusetts, Illinois, New Jersey and Connecticut.

“A representative form of government depends on an informed electorate, but due to current practices in both accounting and budgeting, the true financial health of a state is usually obscured and citizens are deceived, or at best misled,” the report said. “Without access to truthful, timely, and transparent information, how can citizens be knowledgeable participants in their governments?”

That’s an especially acute issue in California, the only state in the nation that has yet to release even preliminary financial statements for 2020, which TIA considers a serious transgression.

“Citizens don’t have the information they need to participate and make informed decisions,” said TIA’s Weinberg. “They don’t know what’s going on. It’s creating cynicism and distrust and hurting our representative form of government.”

Source: Orange County Register