CA’s Next Budget Will Not Tell The Truth

On January 10 Governor Jerry Brown will present his proposed budget for the 2018–19 fiscal year. That budget will not reflect financial reality. That’s because state and local governments operate under accounting rules that enable untruthful financial reporting. For example, Brown’s last proposed budget in January 2017 ignored expenses of $16 billion, as explained here, here, here and here. Those unreported expenses magically became debt, none of which was presented to citizens for their approval.

$100 billion of such debt has been created since Brown was re-elected to office in 2010, $40 billion alone burdening K-12 education (see fourth column below). The results are pernicious. San Francisco Unified School District cut the share of its budget allocated to teacher salaries to 29 percent to make room for debt service that grew 106 percent over the last five years, as explained here. Several other school districts are in similar distress, as described here.

Page 134, 2016–17 Comprehensive Annual Report, California State Teachers Retirement System

Brown is not alone in publishing untruthful budgets. Every governor makes liberal use of lax financial reporting rules to help meet balanced budget requirements. But governors aren’t limited to the accounting rules. They could tell the truth. But doing so would mean reporting an unbalanced budget. That would force a governor to propose tax increases and/or service cuts. Doing that would require a very courageous politician.

In the meantime, citizens lose out as their services get crowded out by rising payments on debt they didn’t approve. That’s not as much of a problem during economic expansions when there’s enough tax revenue to fund both public services and debt payments. But it’s fatal during economic contractions. That’s because California’s revenues are tidal in nature — they are correlated with the stock market, which has more than doubled since Brown took office — and debt service gets paid before public services get funded. As a result, the next stock market correction will force big cuts in public services, as explained here and here. Some services are already being squeezed despite the current economic expansion, as explained here and here. Likewise the retirement security of some local employees, as described here.

Financial reporting is not a sexy subject but its consequences are immense. Truthful reporting protects citizens while untruthful reporting enables thefts of the public purse, sometimes without the knowledge of the victims for decades. Governors should tell the truth. Whether or not they do so, state legislators must understand the truth and legislate accordingly.

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