California Might Stop Making Necessary Debt Payments For 2 Years

Authored by John Moorlach via The Epoch Times,

It’s July. The California State Legislature has successfully met the budget submission deadline of June 15, and it was signed by the governor. There was one small fly in the ointment: how to cut $12 billion in spending? All while trying to provide $750 million in tax credits annually to one specific industry: Hollywood. Go figure.

One massive spending reduction strategy that Gov. Gavin Newsom is negotiating is nonpayment for two years of the state’s unfunded actuarial accrued liability for retiree medical benefits. This nearly $85 billion debt would not be paid down by Sacramento and its employees, causing this languishing debt to increase from interest costs, for this unique lifetime benefit rarely seen in the private sector.

The wrong way to address the obligation of future costs is the “pay as you go” method, which deals with the immediate and not the upcoming higher bills on the horizon. Known as an “other post-employment benefit,” or OPEB, paying these retiree medical bills is a future cost that should be addressed systematically with an “annual required contribution,” or ARC, every year. Not doing so fits the definition of “kicking the can down the road.”

Not paying the ARC, or a higher amount, each year is a technique being pursued by what I would refer to as bottom-dwelling states that can’t afford to honor their commitments.

It’s July. It’s also backpacking season. And camping etiquette 101 is “Leave your campsite better than you found it.” But Sacramento, over the last decade, has failed to leave California’s balance sheet in better shape, even in flush economic times when this would have been a smart money move to make.

Reducing liabilities with higher payments helps to reduce the annual minimum payment, like with a credit card balance. But California leaders did not renegotiate or aggressively pay down the retiree medical liabilities.

I reminded both the Brown and Newsom administrations of this every year I served in the California State Senate, from 2015 to 2020. Not to toot my own horn, but I was vocal every budget cycle, to no avail.

Here is what I stated during my first State budget experience in June of 2015 in the Sierra Sun Times:

“The state is at a critical juncture, ‘an inflection point,’ where the state begins to seriously address its unrestricted net deficit and unfunded liabilities or continue to hire more state employees who will pay more dues to the unions that appear to be running California. This budget before us departs from Governor Brown’s call for greater fiscal restraint. Instead, it takes the most fiscally optimistic revenue estimates and spends up to that line. And many expenditures are also optimistic, if recent trends continue. Staying on this current course will lead to a fiscal implosion. The time to change course is now.”

In June of 2016, The Bond Buyer provided the following quote from me:

“I’m thankful that Governor Brown has worked to model out a softening economy and a budget agreement that grants a $2 billion increase for the rainy day fund; however, we still have much work to do to constrain spending and address our ever increasing debts and liabilities.”

In June of 2017, the Orange County Breeze provided my thoughts:

“Governor Jerry Brown has openly stated that a recession is coming and that budget cuts are inevitable. So I began my comments on the final budget acknowledging the uncomfortable fact that—at $125 billion—this is California’s largest general fund budget ever. It is difficult to reconcile the fact that a future deficit is a foregone conclusion while we quickly ramp up spending. Now would be the prudent time to put a little extra to the side and draw down our debts.”

In June of 2018, The Associated Press reported:

“Republicans praised the focus on savings but said the budget doesn’t do enough to pay down debt and irresponsibly increases long-term commitments that will hamstring the state in the future. Sen. John Moorlach, a Republican from Costa Mesa in Orange County, said the state isn’t doing enough to address growing obligations for pensions and retiree health care.

“‘In a year when one enjoys a bumper crop, one must set aside cash and pay down the credit card balance,’” Moorlach said. “‘We’ve got to get ahead of this mess.’”

In June of 2019, The Epoch Times would communicate my concerns about California’s balance sheet:

“When asked as to whether this provision would add to the debt, Senator Moorlach pointed out that Betty Yee, the state’s Controller, highlighted the significant increase in the state deficit for this fiscal year.

“‘In the middle of the budget conference committee meetings, the State Controller, Betty Yee, released the comprehensive annual financial report for the year end of June 30th 2018. It was finally completed in the middle of June, a year later. [The report] will show you that the retiree medical liability for health benefits for state employees has increased by $44 billion and our unrestricted net deficit went up from $169.5 billion to $213 billion. The state not only this last week approved the largest budget in its history, but it’s also been notified that its unrestricted net deficit is also the largest in its history as well,’ he said.”

And in June of 2020, Amanda Carroll of KFBK AM 1530 stated my position:

“We’re not making any systemic corrections or fixes. We’re not addressing pension plans. We’re not addressing retiree medical. And so those costs will increase in future years.”

So here we are in 2025, and Californians are burdened with even greater debts.

And now the governor wants to skip making payments on liabilities that he has ignored during his tenure, allowing them to grow by the high 7 percent interest costs. Worse, he’s also risking that those benefits may not be fully funded when state retirees will need them.

State leaders were warned to improve the campsite, to no avail. Now, California’s ever-increasing debt is a fiscal train wreck in slow motion. And it’s one that lawmakers and officials should have avoided. Now the Golden State is reaping the results of prior poor financial management, and the next governor is going to be very disappointed with the mess the prior campers left.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times or ZeroHedge.

John Moorlach is the director of the California Policy Center’s Center for Public Accountability. He has served as a California State Senator and Orange County Supervisor and Treasurer-Tax Collector. In 1994, he predicted the County’s bankruptcy and participated in restoring and reforming the sixth most populated county in the nation.