California's Balanced Budget? Hold the Applause

Article excerpt

California did the impossible, said Gov. Jerry Brown in his recent State of the State address. He was referring to a surge of revenue, stemming from a tax hike and modest economic growth, which enabled the state to avoid harsh new rounds of budget cuts. Two years ago, they were writing our obituary, he concluded. Well it didnt happen. California is back, its budget is balanced, and we are on the move.

An old saying holds that the future happens first in California. Someone from outside the state might thus take the governors speech as a sign of happy days ahead, both for California and the whole country. There is a catch: California is back only in a relative sense.

Although the states condition isnt as horrible as it was in the pit of the Great Recession, its still miserable. California like the federal government will have to make some hard choices going forward.

Take the balanced budget, for instance. The state may be breaking even for the year, but as the governor has acknowledged, it faces a $28 billion wall of debt left over from previous years. And last autumn, an independent group of fiscal experts explained that this figure omits such items as unfunded pension obligations. Add those debts to the total, they found, and the real burden is anywhere between $167 billion and $335 billion.

Just as California will have to face the looming liability of unfunded pensions, Washington will have to tackle entitlement reform to keep Social Security and Medicare solvent for the next generation.

In California, debt has created a good news/bad news joke. The good news is that California has a better credit rating than Illinois. The bad news is that it has a worse credit rating than the 48 other states.

Decades ago, California could count on population growth to get it through tough economic times. A steady influx of young newcomers from other states translated into flourishing businesses and bulging government coffers. In recent years, however, California has been sending more people to other states than it has been getting from them. Immigration has kept the total population from shrinking, but the boom days are over. After the 2010 census, California gained no seats in the US House of Representatives for the first time since statehood in 1850.

Moreover, the states birth rate is plunging. In the near term, this trend will ease some of the pressure on California schools, but in the longer run, it will mean fewer people entering the workforce just as baby boomers are retiring from it.

One could pile on additional data about poverty and unemployment. The key point is that population and economic growth have slowed. And because the state is so large, bad times in California could affect the nation as a whole.

Like the federal government and many other states, California will have to curb additional spending and debt. To his credit, the governor spoke in his State of the State about preparing for the leaner times that will surely come. That same speech, though, raised serious doubts about whether he really meant it. He proudly noted that California is going forward with a huge high-speed rail project, even though critics across the political spectrum have pointed out that it is ridiculously unnecessary, exorbitantly expensive, and environmentally harmful. …