Fiscal Affairs

Earlier this week the Legislative Analyst’s Office (LAO) issued its annual Fiscal Outlook. This year’s edition is the gloomiest I’ve read during an economic expansion.

No sooner had Gov. Gavin Newsom spearheaded Proposition 50, the congressional redistricting measure that defuses the bomb tossed by President Donald Trump and Texas Gov. Greg Abbott, than he found himself dealing with two other explosive devices.

Yesterday was the deadline for CA Governor Gavin Newsom to take final action on bills passed by the 2025 Legislature. He signed 794 and vetoed 123. Since taking office in 2019, Newsom has now signed 5,710 bills and $1.942 trillion of budgets. How has California performed since he took office?

The 2025-26 budget Governor Newsom signed into law last Friday takes a terrible toll on the future by issuing debt and draining reserves to close deficits caused by overspending.

GFC President David Crane recently sat down with the State of Gold podcast to discuss the state of California’s governance.

Tomorrow, the California Legislature is expected to pass a 2025-26 budget bill that will take even more from the future than the budget proposed by Governor Newsom.

Last week the news was all about the US House of Representatives passing another budget-busting bill that extends a streak of extraordinary federal spending growth since the pandemic. But California’s spending grew even more —  much more.

While it’s good news that two pension expansion measures (AB 569 and AB 1383) that we opposed will not advance, the bad news is that new unfunded liabilities are still being manufactured every year…

Yesterday I published a note on Substack about a footnote in California’s state budget that cost taxpayers $26 billion. I don’t want to burden your emails with too much technical information so if you’re interested please click on that link.

When the stock market fell earlier this year, some reporters wrote that the decline could lead to higher pension costs. Now that the stock market is rising will we see stories about pension costs not increasing? The answer is that neither story would be on point. Pension costs fall or rise depending on whether pension funds earn less or more than they expected to earn.

As part of an effort to close a $12 billion deficit, on page 67 of his revised budget issued earlier today Governor Newsom proposes to negotiate $767 million of savings on salaries for state employees.

A CA lawmaker under the influence of government unions has proposed yet another bill to expand retirement benefits. AB 1383 would boost pensions for safety employees without requiring sufficient funds to be set aside to meet those promises.

AB 569 would allow California cities to boost pension promises to public employees without requiring sufficient funds to be contributed upfront to guarantee payment of those promises. If it becomes law, AB 569 would set the table for another explosion in unfunded retirement obligations, the costs of which are already crushing California governments.

Governor Newsom’s proposed budget for the next fiscal year includes $45 billion of spending on salaries and benefits for 255,000 state employees, which translates into $177,000 per employee. Questions legislators should be asking include the following…

Earlier this week, a journalist asked me how a stock market decline this year would affect pension spending by California’s cities, schools and the state. He wondered if it “would produce a big or small hit.” The answer is that any decline this year would produce neither.

The California Constitution prohibits the Legislature from creating any debt or liability exceeding $300,000 without a two-thirds vote from both legislative houses and voter approval, except in times of war. However, the Legislature routinely creates millions of dollars in new liabilities without public vote.

Last June, Governor Newsom signed a state budget requiring $4.3 billion in annual efficiencies from State departments, CSU and UC. But in January, Newsom reported that the departments under his control and funded by the General Fund expect to achieve just one quarter of the savings expected from them:

13 years ago voters approved a seven-year increase in the top income tax rate. Sold as an education measure, the real reason was to cover up a tripling in annual school pension costs:

Believe it or not, California’s top income tax rate is scheduled to decrease by three percentage points after 2030 upon the expiration of a temporary tax increase, which started as a seven-year increase passed by voters in 2012 via a ballot measure entitled “Temporary Taxes to Fund Education” and was extended to 2030 by a subsequent ballot measure.

Last year, Governor Newsom and the California Legislature took nearly $5 billion from the Rainy Day Fund to cover excessive spending.

Last week we pointed out that, contrary to his claims, Governor Newsom’s proposed budget is not balanced. Today we examine his claim on page 85 to “government efficiency and cost saving measures” that produce a savings of $618 million from eliminating vacant positions.

Governor Newsom’s proposed budget includes a paragraph entitled “GOVERNMENT EFFICIENCY AND COST SAVING MEASURES” but the measures mentioned there are a tiny fraction of the inefficiencies and costs added under Newsom.

Last Monday Governor Newsom issued a press release previewing a “balanced” budget for 2025-26 so imagine our surprise when his proposed budget released today disclosed that balance was achieved by transferring $7.1 billion from the Rainy Day Fund.

When we wrote to you last month about our priorities we described the 2026 race for governor as “wide open,” but since then we’ve heard that Kamala Harris may run and that if she does, some candidates would make way for her. We hope the rumors aren’t true.

In early January Governor Newsom will present the Legislature with a proposed budget for the next fiscal year. The last budget dealt with a large deficit caused by excessive spending. To address that deficit, Newsom and the Legislature raided the Rainy Day Fund, borrowed money, shifted funds and deferred spending, steps that should be reserved for deficits caused by recessions, not by excessive spending.

Yesterday marked the 25th anniversary of the California Legislature’s passage of SB 400, a retroactive pension increase for public employees that constituted the largest single issuance of public debt in California history.

Everyone knows the truth. In California it is serious drug addiction that drives homelessness, overdose deaths and retail theft. The solution is mass treatment. Voters took a step in that direction in March by approving Proposition 1, which authorizes Bonds for Mental Health Treatment Facilities. The next step must be taken in November with voter approval of Proposition 36, The Homelessness, Drug Addiction, and Theft Reduction Act that will give judges the tools to require treatment.

The good news is that a tax increase measure has been pulled from the November ballot. The bad news is that Governor Newsom and legislative leaders announced a budget deal that draws from taxpayer reserves and thereby boosts pressure for a tax increase down the road.

Earlier this week a reporter asked me to comment about a bond under discussion in the Legislature. I responded that the costs of past obligations already crowd out spending on current programs…

One of the first things I learned after Governor Schwarzenegger appointed me to the board of the California State Teachers’ Retirement System (CalSTRS) in 2005 is that public employees only contribute to their pensions upfront but taxpayers contribute upfront and are on the hook for 100 percent of any funding deficiencies.

Yesterday the Los Angeles Times published an article entitled Newsom called it a ‘gimmick.’ Now he’s using the trick to lower California’s massive deficit in which the Governor’s spokesperson defends the proposed budget and challenges readers to come up with their own solutions to the deficit. I have five such solutions to propose, all of which pertain to reeling in extraordinary patronage spending on public employees:

SACRAMENTO — With a windfall of cash five years ago, Gov. Gavin Newsom said he was doing away with a state budget “gimmick” one of his predecessors relied on to shave about $800 million off a deficit during the Great Recession.

Yesterday Governor Newsom, Senate President pro Tempore McGuire and Assembly Speaker Rivas confirmed they still intend to close the budget deficit in part by drawing half of the state’s budget reserves when they finalize the budget in June.

I’ve been trying to understand why Governor Newsom has proposed such a reckless budget. The only answer I can come up with is that he hopes to escape California before the consequences of that budget are suffered by being appointed to President Biden’s Cabinet should Mr. Biden be re-elected in November.

Despite a healthy national economy, California has a budget deficit that Governor Newsom proposes to close in the main by drawing on budget reserves, borrowing money, shifting funds, and deferring spending — ie, steps normally taken only during recessions.

Governor Newsom postponed the annual State of the State address scheduled for today, apparently (according to Politico) until the final results of Proposition 1 are known.

State taxpayers got more bad news this week when the State Senate released its proposed early action plan for addressing California’s budget shortfall in which we can find nothing of substance that differs from Governor Newsom’s plan.

Why have corporations, unions and associations put up more than $10 million that Gov. Gavin Newsom is using for state and national advertisements featuring him? The answer is that Newsom has delivered billions of state dollars to them.

Shohei Ohtani is the only major league baseball player who can hit and pitch at an elite level.

Perhaps he should manage California’s state budget, too.

The Newsom Administration is circulating a rebuttal to my criticism of the Governor’s Proposed 2024-25 Budget. As a reminder, that criticism is that Mr. Newsom proposes to draw on the Rainy Day Fund even though the country is not in a recession and doing so would seriously impair the state’s ability to preserve public services in a recession.

It’s election season. Citizens looking for questions to ask of candidates or state officials might consider the following two.

Lieutenant Governor Eleni Kounalakis and every other candidate for governor in 2026 should be paying very close attention to the Multiyear Forecast in Governor Newsom’s Proposed Budget.

Next week my students will start reading through Governor Newsom’s proposed state budget for the next fiscal year, which was released today. Before they do, I’ll be sending them a 2019 column from the LA Times entitled, “The one-day, $1-billion California budget gimmick that has lasted for almost a decade,” which is about a budgetary maneuver employed in 2009.

Last month, I wrote about the unique opportunity Governor Newsom has with his next budget to “reinvent government” as he called for in his 2014 book, Citizenville. Next week we will learn if he plans to do so.

Last week the Orange County Register published a lengthy article about California’s skyrocketing spending and budget deficit that included some comments from the Department of Finance and Legislative Analyst’s Office that might lead readers to conclude incorrectly that the governor and legislators don’t have authority over much spending. Some of the comments are non-controversial but some incorrectly imply a lack of authority over statutory spending, some are imprecise about funding sources, and some are striking in their omissions.

In 2013, then-Lieutenant-Governor Gavin Newsom published a book entitled “Citizenville” in which he argued for a government that kept pace with changes elsewhere in society. Asserting that “we must inject a more innovative, entrepreneurial mind-set into government,” Mr. Newsom wrote that “we simply cannot have a government that relies on bureaucracy and maintaining the status quo.” I hoped his vision would be realized. But a decade later, half of which Mr. Newsom has presided over as governor, California’s bureaucracy is bigger than ever, residents would be hard-pressed to point to a single innovation, and the status quo is still the status quo.

General Fund Expenditures Per Capita have climbed 63.9% since Governor Newsom took office, growing at more than twice the annual rate at which those expenditures grew under Governor Brown (10.4% vs. 4.7%):

Last Wednesday, the Commerce Department reported U.S. GDP grew at a 5.2% clip in the third quarter. The next day, Governor Newsom told a debate audience that the economy is “booming.” But Friday, California’s Legislative Analyst’s Office said that state tax revenues are falling far short of forecasts. When combined with General Fund spending that has grown more than 50 percent over the last five years, the drop in revenues portends another large budget deficit for California.

When launching GFC in 2011 it was my hope that we would see meaningful pension reform by 2020, but we have failed to achieve that objective and the negative consequences for public services and taxpayers have been enormous. As evidence, just look at the four-fold explosion in annual pension spending by the Los Angeles Unified School District this year compared to ten years ago:

Govern For California issues statement on proposed CCPOA Contract (Bargaining Unit 6)

As of June 30, 2018, California’s prisons (CDCR) incarcerated 130,317 inmates supervised by 56,538 correctional employees paid $4,985,455,000 in salaries.

The OC Register cited Govern For California in a recent editorial about cynical games being played by the Legislature and Governor in awarding excessive compensation to state prison guards.

In 2015 the City of Glendale took advantage of Obamacare to dramatically reduce its spending on health insurance for retired employees and free up funds for spending on active employees and public services.

Dear Legislators,

This week the Biden Administration announced that personal income rose 0.4% in April, consumers increased spending sharply, U.S. economic activity is at its highest pace in more than a year, and the unemployment rate is at an envious 3.4 percent.

Yesterday the Legislative Analyst’s Office (LAO) released its Multiyear Budget Outlook through fiscal year 2026-27, forecasting $52 billion of deficits over that period.

Dear State Legislators,

Last year we wrote to you about the alarming $500 million per year salary increase you granted to state prison guards under a contract extension executed in June 2021 and the state’s failure to comply with Subsection (c) of Gov. Code Section 19826, which requires a study of salaries of employees in comparable occupations before awarding a new contract. Because you did not commission such a study, we did, and the results were shocking. In our note, we implored you to hold the line in the next contract, which will come into effect upon the expiration of the current contract on July 2 — just six weeks from now.

We couldn’t agree more with Legislative Analyst Gabe Petek that it’s best to solve the deficit without using reserves, which are already woefully short of the amounts needed to protect essential services in the event of a recession.

The Legislative Analyst’s Office (LAO) has forecast a budget shortfall of $25 billion for Fiscal 2023-24 even if a recession does not occur.

We scratched our heads Friday when — despite a steep fall-off in the stock market and a first quarter contraction of the US economy — we learned the May Revision of the Governor’s Proposed Budget expects rosy tax revenues for the 2022-23 fiscal year commencing July 1. After reading the document, we learned how that happened:

West Contra Costa County Unified School District has received a “lack of going concern” determination from its county board of education. That means the district is unable to meet its financial obligations. But 60 percent of its deficit is accounted for by spending on an unnecessary insurance subsidy for retired employees known as “OPEB” (Other Post-Employment Benefits) that drains classrooms of resources while federal subsidies go unused.

Dear Legislators,

At $7.3 billion, current year salary spending on Corrections employees is 33% higher than forecast by last year’s budget and nearly 50% more than the prior year.

Earlier this week DOF released the Governor’s Proposed Budget for the fiscal year starting July 1. At 400 pages it takes time, a process we have now completed. Some initial thoughts follow:

Tomorrow the CA Department of Finance will release the “Governor’s Proposed Budget” for the 2022-23 fiscal year that commences July 1. At nearly 300 pages, it is one of two documents providing deep insight into the state government.* I’ve been reading them for nearly two decades now and offer a few tips:

This report examines the compensation of California state correctional officers relative to several other groups. It examines wages in detail because of the richness of available data. It examines benefits in less depth because available data are far less comparable and detailed.

Last June, the governor and legislature granted a $500 million salary increase to state correctional officers without complying with Subsection (c) of Gov. Code Section 19826, which requires the state to produce a study of salaries of employees in comparable occupations before awarding a new contract. So Govern For California commissioned such a study, an advance copy of which is being made available to you in your capacity as a member of a Budget or Public Safety Committee. Its conclusions are stark:

In January, the 2022-23 Governor’s Budget will be made public, after which public hearings will commence, followed by public distribution of the May Revision to the Governor’s Budget and public enactment of the budget by June 30. Guess what’s not public during that period? Political donations from beneficiaries of budget spending.

Dear Legislators,

We enjoyed reading the Senate Budget Plan and Assembly Budget Blueprint for 2022-23. These items stood out to us:

San Francisco Unified School District spends up to 250% more than the average CA school district on OPEB, which are insurance subsidies for retired employees.

Dear Legislators,

In January the Department Of Finance will issue the Governor’s Budget for 2022-23. No section will be more important than the Stress Test, which forecasts revenue losses in the event of a stock market decline such as in 2001-3 and 2008-9.

Dear Legislators,

The Legislative Analyst’s Office is filled with talented people who occasionally take on impossible tasks. Take LAO’s recent Fiscal Outlook for Schools in which it boldly predicts that “capital gains revenue [will be] strong in 2022‑23.” I can’t predict the stock market next week much less next year but unlike the state I’m not depending on it to finance schools that require stable annual funding. If I did, I’d keep loads of cash on hand. That’s because the annual performance of stock markets looks like this:

California needs at least $100 billion of reserves. Don’t take our word for it. See page 245 of the Governor’s Budget:

From January through June last year, the California Legislature held hearings about a proposed budget for the 2021-22 fiscal year that allocated the majority of $300 billion of spending to healthcare corporations and government employees who — during that very same period — made political donations to lawmakers that weren’t disclosed until July 31, a month after the budget had been signed into law.

Under SEC rules, investment advisors who do work for state and local pension funds can be disqualified if they make political contributions at certain levels to elected officials or candidates for those offices who have a say in the public pension decisions to contract with investment advisors. That’s a good thing because public pension funds such as CalPERS and CalSTRS enter into money management contracts the objectives of which should be to protect pension beneficiaries and taxpayers, not to enrich Wall Street.

In June the governor and legislature quietly granted an unwarranted $500 million per year salary increase to state prison guards using a loophole inserted into state code in 1981.

CA Gov. Code Section 19826 deals with “Administration of Salaries” amounting to $20 billion per year.

Today marks the date by which third quarter estimated income tax payments are due in California. Some of the money will go to a $500 million per year salary increase awarded in June to prison guards by the Legislature and Governor without complying with state law.