Saturday, May 16, 2015

LAO's Verdict of Fragility and What It Means for the Pension Deal

The Legislative Analyst's Office (LAO) has issued an interim statement on the governor's May Revise budget. Its statement is focused on the general condition of the budget rather than the details of particular spending items. In that context, it warns about budget fragility as this blog has: [excerpt]

Fragile Budget Position Could Quickly Return to Structural Deficit. As has been widely discussed in recent years, the state has a very volatile revenue system. For example, compared with assumptions in last year’s budget, the administration’s estimates of PIT revenues for 2013-14 through 2015-16 are now over $9 billion higher. We are clearly on the upward slope of the state’s revenue roller coaster. But just as the state’s revenue picture has improved significantly over just a few months, it can just as easily reverse course with a stock market or economic downturn. There is little indication that such a downturn will occur soon, but as we discussed in our November Fiscal Outlook, such slumps can occur with little warning. Restraint in approving new ongoing programs is key to preventing an unsustainable spending base. More spending now generally means that the state’s elected leaders will face more difficult budgetary decisions in the future when downturns emerge. In addition, resolve in building a large budget reserve is key to blunting the effects of sharp revenue declines. Proposition 2 aims to build such a reserve over the long run. With only $3.5 billion in the BSA [budget stabilization account] at the end of 2015-16, however, the state has a long way to go to realize the roughly $12 billion goal approved by voters in Proposition 2...

Full evaluation at

We are getting some one time upfront money for the pension liability which is a Good Thing. But to get those funds, we have to do a total revamp of the retirement system that will go on "forever." And, as the LAO points out (and as we have pointed out), the fragility of the state budget means there really can be no guarantees about how the state will treat UC in the future. We should keep in mind the fate of past "compacts" between UC and the state which governors quickly voided when budget stresses appeared.

The actual dollar savings due to the pension cap is essentially political tokenism. But the token requires a revamping of the system that will go on indefinitely.  The current "Era of Good Feeling" between the governor and the UC prez could turn out to be the Error of Good Feeling. Our Academic Senate leaders might want to point this out at next week's Regents meeting.

There is no reason for the Regents at next week's meeting to rush into a long-term commitment on the pension which cannot be reversed in exchange for a deal that the governor could easily reverse if budget pressures arose. There will be temptation for the Regents to look at the deal as good for UC simply because it was tough to negotiate. But that approach would be a classic confusion of inputs with outputs. Again, that is something for the Senate leadership to point out.

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