THE HUESSY REPORT
Weekly Report from Peter Huessy, the President of Geo-Strategic Analysis, June 17, 2024
California Dreamin’
The coming California budget cuts are just the beginning
By Joshua Rauh
Facing a massive budget deficit for the coming fiscal year, Gov. Gavin Newsom’s revised state budget for 2024-2025 addresses a $45-billion gap. Even as the Legislature debates the governor’s proposals, which include significant cuts to such priority areas as homelessness spending, the question remains whether California can reset itself on a sustainable fiscal path.
Unfortunately, the cuts will do very little to shore up the long-term fiscal health of the state.
Newsom’s proposal includes drawing billions from state reserve accounts. Furthermore, most of the long-term spending plans enacted two years ago, when the government projected a $97.5-billion surplus for 2022-2023, remain in place, including investments meant to tackle homelessness and climate change and to establish universal prekindergarten and healthcare for undocumented immigrants.
California’s budget problems at their root come from increasing expenditures significantly while depending on flimsy revenue assumptions, which is further exacerbated by a volatile revenue stream.
Half of personal income tax revenue in California comes from the top 1% of earners, whose incomes fluctuate along with stock market gyrations. In 2021, the fluctuations and federal pandemic funds played a strong role in the future surplus forecast. But in 2024, the surpluses have vanished.
To avoid these boom-and-bust problems, the state must change its budgeting process to ensure that more of the revenues resulting from sudden and clearly unsustainable increases go into reserve accounts. But it must also permanently reduce spending.
Public employee pensions remain an expanding money sink for the state. State contributions to California’s defined-benefit pension plans — which guarantee lifelong salaries and benefits to public employees regardless of the state’s ability to actually pay — amounted to $26 billion in 2022. That’s a hefty 9% of the governor’s $288-billion revised budget, and using reasonable assumptions about state retirees, $26 billion significantly underestimates the real government costs.
To protect future budgets, new state employees should be brought in on defined-contribution plans, like the private sector’s 401k plans, rather than defined-benefit plans. Even if these plans were more generous than private sector’s, they would save the state considerable money, prove desirable to many public employees and stop the defined-benefit Ponzi scheme. Similarly, retiree health benefits for state employees cost the state more than $7 billion per year. In many cases, these are duplicative of benefits available to retired public employees through Medicare and the Affordable Care Act exchanges, and thus they could be eliminated.
While budget cuts may seem scary for citizens who depend on public services, the bottom line is that the state’s spending is unsustainable. Perhaps no group is a more egregious representation of the state’s wasteful approach than correctional officers. Their total compensation rose by 16% from 2021 to 2022, even as the prison population remains 25% lower than it was in 2018.
Even in the area of K-12 education, do we really think the problem is that the level of spending is too low? All-source per pupil spending in California public schools is projected to be $23,878 for the 2024-2025 fiscal year, although satisfaction with public schools is low and enrollment is down.
The 2024-2025 California budget will require painful cuts. Taxpayers need more accountability in public spending and a better deal for their tax dollars.
Joshua Rauh is a professor of finance at the Stanford Graduate School of Business and a senior fellow at the Hoover Institution.
Another False Immigration Measure
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President Joe Biden unveiled a phony border executive order to try and fool the American people into thinking he’s taking steps to solve the illegal immigration crisis that he created. The order is a joke. It supposedly “seals” the border but only if more than 2,500 illegal aliens cross the border every day. That’s 912,500 a year.
So, hypothetically, if 900,000 illegal aliens come across the border, well no additional steps need to be taken as nearly one million aliens taking up residence in the US must be as the head of Homeland Security keeps telling us the “border is secure.”
The order will also likely never take effect. That’s because left-wing activists will sue to stop the new order and do so in a hand-picked jurisdiction where they know a Democrat judge will issue a nationwide injunction.
Biden will then likely not choose to appeal ending the matter once and for all. So, you see you can say you are doing something about the border, and 70% told a CBS pollster they supported the Biden executive order, but actually the surge of folks across the border will continue.
Senate Republicans held a press conference to slam Biden’s kabuki theater on the border. But it was what happened after the press conference that drew the headlines. A hot mic picked up U.S. Senator Joni Ernst (R-IA) telling U.S. Senator John Kennedy (R-LA) that “bottom line, never trust a man whose uncle was eaten by cannibals.
A CBS News/YouGov poll last week found that 62 percent of registered voters are in favor of a government program that would deport all illegal immigrants living in the United States, compared with 38 percent against.
Did Reagan’s Tax Plan Boom the Economy or Was it Just Trickle Down?
The three major economic recessions of the past 45 years were the recession of 1980-82 (double dip recession actually); the 2008-9 subprime mortgage and spiked energy created crash; and the CV caused shutdown of 2020-1. What happened re the pace of the recovery? Well, here are the three recoveries in graphic form. Note the range is quarters after the recession ends. And remember we have heard for half a century that tax rate reductions and regulatory reform just result in trickle down, minor recoveries.
In model year 2027, which is just two years away, manufacturers will be required to sell at least 32% electric vehicles. They won't even come close. A good year in the US is for all auto industry sales to reach 10 million vehicles. Each electric vehicle sold gets a subsidy averaging $48,000.
Budget Spending From the House Budget Committee
The US national debt is $34.71 trillion. The annual budget for the US government was $4.6 trillion in December 2019. Today it is $6.5 trillion, with the increase largely CV-19 related. The Administration’s proposed executive actions are in the following table and they come to over $2 trillion in additional government spending.
Transgender Update
CV-19 Update: New York Times story says it was a lab leak!!
https://www.nytimes.com/interactive/2024/06/03/opinion/covid-lab-leak.html?smid=nytcore-ios-share.
And this on wearing masks:
The gold standard of evidence-based medicine, the Cochrane Collaborative, came under withering assault from the mask-mandators when they updated their review last year and concluded there was still no evidence that masks mandates are effective at reducing the spread of respiratory viruses including SARS-CoV2, the virus that causes COVID-19.
Another Story That Tax Rate Cuts Cause Deficits
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My many thanks to Heritage Foundation expert and Trump adviser Tom Moore, the creator of the Unleash Prosperity Hotline that comes out every day and which has all of these great graphs and charts that in just one picture tell a great story the value of tax rate and regulatory reform.
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Peter Huessy is a Member of the Montgomery County Republican Central Committee. Since 1981 he has been President of Geo-Strategic Analysis of Potomac, Maryland. He was a former special assistant to the Secretary of the Interior and consultant to the US Air Force. He can be reached at [email protected]