California Forum

Two red flags that California’s economy isn’t as healthy as we think

California Governor Jerry Brown speaks to members of the press about the current state budget at the state Capitol in Sacramento on Jan. 10, 2018.
California Governor Jerry Brown speaks to members of the press about the current state budget at the state Capitol in Sacramento on Jan. 10, 2018.

Two recent financial tremors should caution California and its municipalities that they had better get their financial houses in order. The first came from Controller Betty Yee in her update on the state’s retiree health care liabilities.

On January 31, she reported “the state’s cost for retiree health and dental benefits” has grown to $92 billion, up from last year’s $77 billion.

This is only the second year she has issued this report, following the standards issued by the Governmental Accounting Standards Board. But it was a $15 billion increase.

Let’s hope this spike is an anomaly and not a trend.

Yet Yee warned the liability “will be unpredictable and will remain a paramount fiscal challenge over the next three decades.”

This $92 billion becomes the second largest number in the state’s list of outstanding liabilities. Even larger, as Gov. Jerry Brown itemized in his January 10 budget proposal for fiscal year 2018-19, is the $176 billion owed for underfunded pensions.

Add in $3.28 billion for several lesser liabilities, such as loans from special funds, and $19.3 billion for University of California retirees’ health care, and the total comes to $290 billion. This means every man, woman and child in California owes $7,300 to pay this balance off.

The Brown budget proposes paying down only $1.5 billion of that. The rest is left to his successors to tackle.

The second tremor came on Feb. 5 with the massive stock market drop, the beginning of the worst week for investors since 2008.

Turbulence and volatility are now the concern. With some indicators showing inflation rising again, the New York Times reported a week and a half later that “nearly all mainstream economists agree that at some point, higher interest rates and inflation hurt stock prices.”

My purpose here is to simply reiterate that the state and its counties and cities need to get their financial cards in a row. Even if the stock market continues moving up, a $290 billion unfunded liability simply isn’t sustainable. And if the market crashes, and stays crashed, then what?

I’ve been here before. In 1994, I warned that Orange County’s cash investment strategy was unsustainable because of “interest rate risk.” I was running, but lost that June, against longtime county Treasurer-Tax Collector Bob Citron, whose Midas touch with investments seemed to be invincible – until it wasn’t.

When Government Fails: The Orange County Bankruptcy,” published in 1998 by Mark Baldassare, president and CEO of the Public Policy Institute of California, recounted what happened. He cited a May 31, 1994 letter I sent to then-Supervisor Tom Riley, warning that the fund had lost $1.2 billion since interest rates started rising in February 1994.

Baldassare explained how I explained Citron’s approach would work “only if there were declining interest rates over several years, which was impossible to predict” – a situation eerily similar to 2018. Riley “dismissed” the warning based on the advice of “financial experts.”

Orange County filed for Chapter 9 bankruptcy protection that December in what then was the largest municipal bankruptcy in American history, with losses totaling $1.6 billion. In addition to Baldassare’s, dozens of books have been written quoting my warnings as a cautionary tale for today’s fiscal stewards.

What people do with their own money is their business. What government officials do with the people’s money is everybody’s business.

Elected officials need to encourage an emphasis on building cash reserves, cutting fluff and focusing on debt management, before their debts define who manages their municipalities.

Sen. John Moorlach, R-Costa Mesa, represents the 37th District in the California Senate;