California’s Fiscal Woes Escalate Again

While finalizing the upcoming fiscal year’s state budget back in May 2022, California governor Gavin Newsom boasted of an extraordinary projected surplus: $97 billion. The governor immediately collaborated with an enthusiastic state legislature to spend it all. Of course, new spending on new programs and benefits tends to become permanent.

This has happened repeatedly in California. Between fiscal year 2012–13 and fiscal year 2022–23 (the year with the projected $97 billion surplus), per capita general-fund spending doubled, from just over $3,000 per resident to just under $6,000. (All figures are in 2022 inflation-adjusted dollars.)

Where did the money go?

The state prison system, for example, increased spending by $3.4 billion (29 percent) over the last ten years. But during the same period, the state-prison population dropped, from 168,000 in 2009 to 96,000 in 2022. California’s state prison system in 2022 spent an estimated $159,000 per prisoner.

The spending binge wasn’t limited to prisons. The Department of Developmental Services, for example, more than doubled in that span (up 117 percent), while the Departments of Social Services (up 89 percent) and Health Care Services (87 percent) saw similarly large upticks.

The state’s education spending was particularly profligate in that ten-year span. Per enrolled student, state community-college spending went from $2,181 to $4,286, California State University spending went from $6,226 to $10,796, and UC System spending went from $13,253 to $18,305. In K–12 public schools, per pupil spending exploded from $8,751 to $13,377.

California taxpayers might ask: “What did we get?” Taxpayers in that ten-year span saw state spending double. Did the state see greater educational attainment? More housing and fewer homeless? Less crime? Anything?

Rather than go down that rabbit hole, consider what’s happened since Newsom and his acolytes envisioned such a bright financial future. As columnist and long-time Sacramento observer Dan Walters wrote last October, “within weeks of the budget’s adoption in June 2022, revenues started to fall below Newsom’s rosy assumptions and he was vetoing spending bills that the Legislature had passed in reaction.” Indeed, the governor “presented a 2023–24 budget that dealt with a projected $31.5 billion deficit. Since its passage in June, revenues have continued to fall below estimates.”

Revenues have indeed fallen. To cover its expenses, California relies heavily on personal income taxes. Since the technology sector, which dominates the state’s economy and provides much of the state’s income-tax receipts, is subject to frequent bubbles and corrections, tax revenue often takes a downturn alongside the tech sector. When tax revenue from all sources—individual income tax, corporate tax, sales tax—goes down, surpluses vanish.

The State Office of Legislative Analyst’s latest report projects a $73 billion dollar deficit for the next fiscal year. It won’t be easy to paper over this debt, but the state may use its opaque accounting system to hide the ball.

California’s general-fund budgets are reported on a cash basis. The state’s balance sheet, however, uses “accrual-based accounting.” Without getting too far into the weeds, this is an apples v. oranges situation. Instead of the algebraic perfection of private-sector income statements, balance sheets, and cash flows, government accounting provides no easy way to reconcile what you see on the budget, or income statement, with what you see on the balance sheet.

Government accounting is therefore more vulnerable to a bookkeeper “cooking the books” than is private-sector corporate accounting. This inherently inconsistent accounting method yields tedious and maddeningly convoluted auditor’s reports, which require forensic levels of skill to decipher. This approach overwhelms watchdogs, allowing the state to defer payments, hike debt, and kick the can down the road.

Some watchdogs, however, have succeeded in cracking the code. John Moorlach, one of the only certified public accountants to serve in the California State Senate, just published a review of the state’s fiscal health, focusing on the balance sheet. According to Moorlach, California’s balance sheet is in trouble.

Moorlach declared in a March California Insider interview that the state “now has the largest unrestricted net deficit in the US: $222 Billion.” In plain English, Moorlach is saying that California’s state government accounts have liabilities that exceed assets by $222 billion. No matter how creative Newsom and his financial wizards may be, someday that money will have to be paid.

A remedy that California has turned to over the years and will undoubtedly turn to now is to accumulate additional long-term debt. Emulating the federal government, but lacking its dollar-printing ability, California’s state and local governments and agencies have racked up over a trillion dollars in debt, primarily in bonds and unfunded pension liabilities. These liabilities, too, must be paid. Since that’s all but impossible, the liabilities must be serviced with payments that, just as at the federal level, will eat up more and more of the operating budgets.

The solution to California’s fiscal woes won’t come from creative accounting or more “stimulative” programs and benefits. The solution is deregulation and cost-effective, practical infrastructure investments, both of which lower the cost of living and create jobs. Such changes will, in turn, make it possible to eliminate or sharply reduce expensive government programs by enabling more Californians to support themselves. Unfortunately, the chances of enacting such reforms—much like Newsom’s dreams of state fiscal health—exist only in the realm of fantasy.

This article originally appeared in City Journal.

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