Featured Column: What's the Future of Bad Budgeting?

Published October 10, 2013

By Controller John Chiang

Government debt is in the news. Again. Recent national headlines range in tone from the breathless to cataclysmic. First, Detroit asked Christie’s auction house to value its museum collection, should the city need to pay creditors with its Rembrandts and Cezannes. Then, President Obama told “This Week” that he would not negotiate with Congress over raising the debt ceiling — even as the chair of the House Republican study group, Rep. Steve Scalise (R-La.), linked Congressional action on debt to an unrelated domestic policy issue, NPR’s Adam Davidson wrote in The New York Times Magazine that a debt impasse would, in all likelihood, make everyone on the globe — not just Americans — poorer.

What are we to make of this? Are these stories exaggerations borne of our cynicism about leadership and general despair about the future? Are local, state and federal policies so tattered that our cultural patrimony is bartered away? If our global enterprise is at stake, can the president and Congress be seriously contemplating inaction?

For my part, I don’t think these issues can be written off as inspired exaggeration, fiscal indifference or political posturing. A new fiscal responsibility is needed. Millennial students, like those entering UC Berkeley this fall, appreciate what’s at stake for them. We ought to heed their concerns. State law directs my office to inform the public of annual financial transactions and accounting practices of local governments. In the past, the discussion concentrated on annual budgets. With increasing urgency, public finance experts have encouraged a focus on broader measures of “fiscal responsibility.” Not only should governments manage their 12-month budgets, but they should monitor future costs, such as the expenses of providing health care for current and future retired state workers. Other experts argue for ensuring “intergenerational” balance and sustainability in order to keep present taxpayers from shifting their costs to future taxpayers.

Too often in recent years, in the rush to balance the annual budget, the state deferred costs and billed future taxpayers. For example, facing a troubled economy and budget shortages, former Gov. Arnold Schwarzenegger urged California voters to authorize a loan for financing carryover deficits in 2004. The deficits emerged during the 2000-2003 recession and reflected the cost of services that were provided but not yet paid. Sympathetic to a multiyear financing schedule, voters approved the issuance of deficit-retirement bonds. The State then issued deficit bonds with principal of about $14 billion and earmarked a portion of the sales tax to pay down that debt. Since then, the State has made regular interest and principal payments but still owes more than $5 billion on the bonds and will make annual payments of about $500 million for each of the next 10 years, with a final payment in 2024.

Consider this: For the Cal class admitted in 2021, a portion of the sales tax on textbooks bought while at Berkeley will finance the last payments on the deficit bond. To the governing generation’s shame, these students – born after January 1, 2003 – will be paying the costs of services rendered in 2002. No wonder Cal students are concerned about the sustainability of current budget decisions!

The State needs to better address the consequences of fiscal solvency, growth, stability and fairness. We ought not to neglect measuring how well the state pays its current and future obligations. We ought to assess whether fiscal practices encourage sufficient economic growth.   Taxpayers need to be assured whether current spending patterns can be sustained within the existing tax burden. 

Sustainability, in its many dimensions, may have received insufficient consideration in recent years. After all, “fiscal sustainability” does not easily lend itself to the dominant budget narrative. The notion is all rather abstract, complex and difficult. But there is hope.

Gov. Jerry Brown has begun to address intergenerational issues by focusing on the Wall of Debt. Recent budgets have reduced long-term spending commitments, and passage of Proposition 30 improved our immediate revenue stream.

In time, I expect we will get better at calibrating the long-term consequences for our fiscal decisions, though I doubt there can be a single budget that can simultaneously balance current accounts, mitigate long-term obligations and provide for a sustainable budget. Rather, as we get better at calibrating sustainability, we can say with T.S. Eliot, “[I]f we can never be right, it is better that we should from time to time change our way of being wrong.”

The Daily Californian solicited and published a version of this commentary on September 24, 2013.

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