Dan Walters

Opinion: A big debt omitted from ‘wall’

Gov. Jerry Brown releases his revised budget plan for the fiscal year that begins July 1st on Thursday, May 15, 2015 in Sacramento.
Gov. Jerry Brown releases his revised budget plan for the fiscal year that begins July 1st on Thursday, May 15, 2015 in Sacramento. rpench@sacbee.com

Three years ago, Gov. Jerry Brown added “wall of debt” to the political lexicon.

As he defined it, the wall was $33 billion in debt that the state had accumulated over the previous half-decade to cover state budget deficits and still had not repaid.

The biggest chunk, $13.8 billion, was owed to schools and community colleges – underpayments and deferrals of constitutionally mandated state aid.

Other debts included money borrowed via state budget bonds, loans from state special funds, and deferred payments to local governments.

To his credit, Brown has relentlessly hammered away at the wall, particularly the school debts, with much help from a temporary tax increase and an improving economy. His 2015-16 budget would not erase the remaining debts, but come close.

It would, for instance, repay $300 million that had been borrowed from the Motor Vehicle Fund – and not a moment too soon, because the MVF is flirting with red ink, primarily due to rising expenditures for California Highway Patrol salary increases.

There was, however, a curious omission from the “wall of debt” three years ago – $10 billion in loans from the federal government to prop up the state’s Unemployment Insurance Fund that, like the budget as a whole, was battered by the Great Recession.

As unemployment climbed during the recession, the UIF was hit hard, and its relatively small reserve was quickly exhausted, making it insolvent. The reserve was scant largely because in 2001, the Legislature and then-Gov. Gray Davis nearly doubled benefits, financing them from what was then a $6.5 billion UIF reserve rather than raising taxes on employers.

It exemplified the irresponsible, spend-now-pay-later attitude that prevailed in the Davis era, undermining the state budget and public pension systems.

Just as the state had to borrow money to prop up its budgets and just as unfunded pension debts soared, the UIF was kept afloat only with massive loans from the federal government.

Eventually the state had to start paying interest on the debt and the feds raised payroll taxes on California employers to pay it down.

The debt was still $8.6 billion at the end of 2014, according to the Employment Development Department, and is likely to drop to $7 billion this year.

Meanwhile, the UIF gets about $6 billion in payroll taxes this year and will pay out about $6 billion in benefits, meaning it is not rebuilding its reserves. Therefore, any economic downturn could force the state to once again go begging to Uncle Sam.

It’s not a healthy situation, but its politics are tricky and only desultory efforts have been made to correct it. Employers resist raising state UIF taxes without some tightening of benefits, while labor unions want another benefit increase.

Brown has largely ignored it, but he should apply the same vigorous engagement he’s shown on the state’s other massive debts.

  Comments