Published: March 5, 2011
Updated: March 6, 2011 1:47 a.m.

Mark Landsbaum: California's triple whammyBy MARK LANDSBAUM
Register columnist
mlandsbaum


The latest Golden State gift to America might be called the California triple whammy. It's an ongoing, ever-growing fiscal perfect storm that may be coming to a state near you.

For Californians what follows is an explanation of how you've turned gold into dust.

For out-of-staters, it's how to avoid triple whammy fever where you live.

The first stage of the California triple whammy required spendaholics at government's helm running up perpetual double-digit, billion-dollar annual budget deficits papered over in the current year, to be fretted over in the next.

Following close behind was an addictive need to issue billions in government bonds, which are nothing more than drawing cash on a promise to pay it back.

MCT Illustration
The final, maybe in more ways than one, stage of the triple whammy is to amass a monumental debt dwarfing the first two obligations, as more government employees qualify for more grossly inflated pension and retirement health benefits without enough money to pay them.

All of this has been experienced in lesser degrees around the nation, prompting what columnist Michael Barone says is "anger at those unfairly getting rich – at the taxpayers' expense... . It allows well-positioned insiders to game the system for private gain. It bails out the improvident and sticks those who made prudent decisions with the bill."


It may be widespread, but California sets the pace. Its annual budget deficit is far larger than other states'. California's is $25.4 billion, almost as much as runners-up Illinois' $15 billion and Texas' $13 billion combined.


Its substantially lower bond ratings than comparably sized states mean it must pay more interest to sell bonds to raise money to spend.

The unfunded liabilities for public pensions and retiree health care benefits are greater than all other states, vastly greater than most. California's is $121 billion compared to New Jersey's $102 billion and Illinois' $94 billion, according to the Pew Center on the States.

These grotesque realities contribute substantially to California's limping economy. Money squandered by government cannot be used to start up businesses, to give private workers pay raises or by families to save for down payments on home purchases.


Consequently, California workers saw no net improvement in job creation last year, making it the nation's third worst state for employment growth, according to a Gallup Job Creation Index. California has made Gallup's notorious worst job creation list three years running.



It's likely that distinction has something to do with this distinction: compensation for California public employees at all levels has soared since the year 2000, despite huge state budget deficits in recent years. California public employees' pay and benefits average $7,977 more than private workers', according to a USA Today analysis.



How can this be? The Los Angeles Times reported recently that "after a 10-year borrowing binge, the upcoming [state] budget is expected to spend more on debt than [on] public universities or parks."

Even though unable to pay its ongoing bills, the state continued to borrow to get more money to spend. Consequently, state Treasurer Bill Lockyer reported in December 2009 that California's bond ratings had hit bottom, the lowest of all 50 states, which he said results in paying a "significant penalty" in interest to bond buyers, costing 21 percent more than states with top ratings.

That sad condition was when California had $83.5 billion in outstanding long-term debt to pay off. There is about another $58 billion in voter-authorized and Legislature-approved bonds that can yet be sold.

"What's the big deal about running up the credit cards?" one might ask. State government's annual debt service increased 143 percent from 1999 through 2009 – almost seven times greater than the increase in revenue. The payment on California's credit cards was nearly 7 percent of budget expenditures in December 2009, compared to only 3 percent in 1999, on its way to a projected 10.98 percent by 2013, and even higher if revenue doesn't increase.


California is about to use a dime of every dollar it spends just to pay its credit cards – money that can't pay for core government services.


It takes a long time to run a state the size of California into a ditch.


But California's been working on its triple whammy a long time. In 1979 the state's bond rating was AAA, as high as ratings go. Today, it's A1, about as close to non-investment grade as it is to the top.



Perfecting the California triple whammy required the help of weightlifting movie star Arnold Schwarzenegger, who may have brought to the governor's office all the fiscal acuity that can be gleaned on movie sets and in gymnasiums. Schwarzenegger promised to "cut up the credit cards." Under his stewardship, California instead added another $42 billion of bonded debt, and extended operating deficits to the end of his term and beyond.

Will his successor, Jerry Brown, do better? Ask Willie Brown, arguably one of California's most notorious tax-and-spend Democrats during his 30 years in the Assembly, including 15 years as its speaker.

"No one knows the power of [public] unions in California better than Gov. Jerry Brown," the former assemblyman recently wrote. "He knows good and well what the California Teachers Association can do for him – or against him – in an election. And this year, he needs the union's help to pass his tax extensions."


Why are more taxes needed? "Brown, in a previous incarnation as governor, signed legislation granting government workers collective bargaining rights," explained Jon Coupal of the Howard Jarvis Taxpayers Association. How did collective bargaining contribute to the California triple whammy?

According to Brown, the former assembly speaker, it's because he and others in government agreed through collective bargaining with government worker unions to provide them "guaranteed fixed-amount pensions and health care packages without take-backs that would have been triggered if the economy went bad."

The economy has gone bad, helped along a lot by the developing fiscal perfect storm. Now rather than taking back, taxpayers are asked to pay much more – five more years of the highest tax increase ever imposed on Californians. That's Gov. Brown's solution. He wants to put tax increases on the June ballot. Gov. Brown has bills to pay, and more coming due. His proposed budget would like to spend $86 billion. Unfortunately, that's about $25 billion more than can be expected from those who pay the bill, when including the previous year's deficit.


Meanwhile, a growing portion of the budget for years into the future must include credit card payments on what already has been borrowed and will yet be borrowed. Those payments amount to about as much as the governor's entire hoped-for budget, and take priority under the state constitution.

Then there's the monumental time bomb of unfunded liabilities to cover retirees' benefits. Estimates vary, but responsible projections put the total at several times the total annual general fund operating budget.


Most California families know it's difficult to make do when a large chunk of family income goes to credit card debt. But most families discipline themselves to stop running up more debts so they can pay for the groceries.

That's not how California's triple whammy works. Entrenched interest groups, many created by government enacting contrived tax-funded programs that never before existed, demand the state spend more, borrow more and become more indebted.


Other states can avoid their own triple whammy by keeping government on a pay-as-you-go basis, limiting borrowing to small amounts that can be repaid quickly and not empowering government workers as virtual monopolies by collective bargaining.


Contact the writer: mlandsbaum@ocregister.comor 714-796-5025



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