The Fool’s Golden State

by Kevin D. Williamson
On fiscal reform, Jerry Brown should listen to Jerry Brown.

Some years ago, when the English pop singer Morrissey was preparing to revive his musical career, a reporter asked the famously lank man if he was still thin. “In a crowd, yes,” he answered, “a crowd of very heavy people.” Governor Jerry Brown, another 1980s revival act, is developing a reputation for fiscal uprightness, and the man does indeed stand tall — in a crowd of Californians.

Though he is a son of San Francisco, Governor Brown has always had a talent for annoying the bits of the state between Carmel and Clearlake: The Dead Kennedys denounced him as a “Zen fascist” way back in 1979’s “California Über Alles.” And the trans-Brownian Left is once again annoyed with the governor, who, in a fit of genuine fiscal conservatism during what has been a largely phony budget-reform campaign, has found some money that he does not wish to spend.

Specifically, Governor Brown has suggested a reform measure that would level out capital-gains receipts, which are a very large source of revenue for the state. Capital-gains revenues are volatile everywhere, but especially so in California, where everything from Silicon Valley IPOs to a goofy real-estate market makes capital gains a feast-or-famine proposition. In 2006, when the first of the Google insiders began cashing out their shares following the company’s initial public offering, California’s 9.3 percent capital-gains tax produced almost $10 billion in revenue — but it produced only $3 billion just a few years later.

Rather than ride this revenue rollercoaster, Governor Brown proposes to calculate a running average of capital-gains receipts trailing back several years. In particularly fat years, any capital-gains revenue over the average would be used to pay down debt rather than being made available for general spending. The proposal has twin virtues: The first is that it introduces an element of predictability into the revenue side of the equation, and the second — and more important — is that it acts as a brake on spending, since boom-year surpluses are diverted away from political enthusiasms that permanently raise the spending baseline.

The proposal is an excellent one, and one that the federal government would have done well to adopt back during the dot-com boom. That’s because our national fiscal dynamic works a great deal like California’s: In the good years, we act like the boom will go on forever, raising spending and cutting taxes; in the bad years, we declare an economic emergency, raising spending and cutting taxes. If George W. Bush et al. had fought for that policy in 2001 instead of temporary tax cuts, the country would be in appreciably better fiscal shape than it is today. The policy would not be as effective at the national level as it is at the state level, because the federal government enjoys an effectively unlimited ability to borrow money or to summon it from the vasty deep via Federal Reserve action, but its virtues would nonetheless be appreciable.

As Henry Dubroff of the Pacific Coast Business Times argues, Governor Brown’s preference for forward-looking fiscal policy over the right-here-right-now model that prevails among his legislative colleagues in Sacramento is in effect a move away from cash accounting and toward accrual accounting. Cash accounting means that California (and the United States) only need look at this year’s revenue and liabilities, whereas accrual accounting means taking into account expected future revenue and liabilities. The problem for Governor Brown is that if you apply that analysis to the overall situation of government in California, then his vaunted miracle recovery mostly evaporates.

California currently is enjoying a budget surplus — on a cash-accounting basis. That surplus was made possible in no small part by putting off payments to the nation’s two largest pension plans, the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS). Those two pension funds already have something north of $300 billion in unfunded liabilities between the two of them, and they need billions of dollars every year in additional funding just to avoid going even deeper underwater. California is predicting a $3.2 billion surplus for 2014–15, but the state needs to put at least $5 billion into its pensions to stay even. It is not doing so, which means that all Governor Brown has accomplished is to push today’s pain into the future, when it will be endured with interest.

There’s one guy in California who really gets that: Governor Jerry Brown, who earlier this year dropped the hammer on CalPERS, which has been systematically undercharging both the state government and the local governments it serves. Brown demanded that its board raise contribution rates: “No one likes to pay more for pensions, but ignoring their true costs for two more years will only burden the system and cost more in the long run,” he wrote. CalPERS complied, and for that sermon I give the Right Reverend Moonbeam a hearty “Amen!” However, as bad as CalPERS is, the teachers’ pension fund is in even worse shape — and it, unlike CalPERS, is under the control of the governor and the legislature. While Governor Brown is patting himself on the back about the phantom surplus, the state’s real liabilities are piling up. But Governor Brown does not seem inclined to milk that sacred cow.

And it’s worse than it seems: Californians inflicted a large tax increase on themselves with Proposition 30 in 2012, but every dime of the tax money allocated to education is being consumed by pensions. In fact, although California’s taxes and spending are both at all-time highs, money allocated to such basic services as schools and parks is down, and down significantly — more than 20 percent, in the estimate of Govern California’s David Crane. Spending on programs for the poor, on California’s highly regarded university system, and on law enforcement are down, while what’s up is government workers’ salaries and pensions, their health-care costs, and, thanks to Sacramento’s with-friends-like-these in Washington, Medicaid. Californians are paying more for less, which is one reason why so many of them are packing up their Toyotas and moving to Texas — and why Toyota is following them.

Governor Brown is right to push his colleagues in the direction of fiscal responsibility. If only he would heed his own advice.

— Kevin D. Williamson is roving correspondent for National Review.