Transcript: Press briefing Q&A w/ LAO Mac Taylor on California’s fiscal outlook for 2014-15 – Part IV

Part IV – Partial transcript of the press briefing Q&A with Legislative Analyst Mac Taylor on California’s fiscal outlook for 2014-15. The press conference was held on Nov. 30, 2013:

Question:
Could you just offer a bit of context about the decisions that had to be made over the last decade to address some of the problems? The reason I asked the question is Prop. 57 bonds are a great example. It will have taken us more than a decade to pay them off. And so this forecast, it seems to me, to be the final chapter and some of the solutions that we had to go through to deal with some of these problems.

Mac Taylor:
Well, you can see that when you do something you shouldn’t do – like paying for operating expenses with bonds, with debt financing – it has repercussions over many, many years, and it’s something you want to try to avoid in the future at all costs because we’ve had to dedicate, you know, $1.6 billion to pay off debt service on those bonds that could’ve been used for other purposes.

Similarly, we have special fund loans and the deferrals and all of these things that we need to pay off, and our goal should be not to use them again, not to think of them as sort of a reserve we can dip into. We know that some of them will be available but you don’t want to do those type of things because it does create a burden on, in effect, the next generation. So that’s one reason why we do give high priority to build up your reserves, so you have a cushion to ease yourself out of a problem of at least a moderate recession, and pay off those liabilities so you don’t have to, in effect, have to incur those and put a burden on future generations.

Question:
On the liabilities question, your recommendation in your scenario is – by my read, not your read – somewhat of a modest paying off some of the liabilities, for example, some of the pension stuff…Some would say maybe you need a more aggressive structure to that. It seems as though through your forecast period, you started off at $0.5 billion. By the time you do it, you only grow to a fraction. Why so cautious approach to paying off the debt?

Mac Taylor:
Well, I guess that’s one way of looking at it…On the other, the current baseline for 19-20 is $0 going towards those commitments. We would put $3 billion. So I don’t think it’s quite as maybe insubstantial as you might suggest from your question. And remember, on CalSTRS, even though I think we’re looking at a sort of $4 billion commitment to amortize the unfunded liabilities, that doesn’t necessarily all have to come from the state. So that maybe if the state has a proportion of those costs, you might be able to meet what even STRS says we need to amortize that and still have some money left over to pay off some of our unfunded liabilities.

But…if the legislature wants to take a more aggressive approach to addressing those, we’d be all for that.

Question:
Wouldn’t it be fair to include STRS payments in Proposition 98 since it goes to the system?

Mac Taylor:
You know, that’s a real tough question…because paying off an unfunded liability is not like a regular operating expense, it can go up and down and then it can end. So, it’s not the kind of thing that is well-suited in a budget that’s supposed to be addressing operating expenses, and I think the legislature was probably correct by not including the payment because at that time it was probably not what we would need to pay. And if you had included it in the 98 guarantee and then you have to increase it or triple it, double it or triple it, that really wouldn’t be fair to the rest of the operating budget. So, I’m not sure it is a good category. Whether they’ll consider it or not, I don’t know. But you don’t want things that go up and down. It’s the same reason we didn’t put debt service in.

Question:
The governor’s kind of indicated – hinted around – that he’d kind of like to do something like this is to isolate expenditures within categories. For example, shifting the service of general obligation bonds for transportation back over into transportation account rather than having them out of the general fund.

Mac Taylor:
Well, that’s a different issue. I think they’re very different. Having transportation pay for its debt service is a policy call that can make sense on its own. But you’re trying to change the rules in mid-stream of, “Well, it’s never been in there.” And now, you want to put it in there because it’s going to be growing rapidly. Those are the kind of things that we’ve spoken out against, that we think you want to try to reserve what 98 was intended to do.

Question:
But doesn’t the effect of leaving that out – leaving out the debt service on general obligation bonds that go to schools, does it not understate the amount of spending the state is actually undertaking? …The per pupil spending is usually calculated on just basically what Proposition 98…

Mac Taylor:
Oh, sure. I mean, I think in an ideal world, if we had a stream of capital-related payments going to schools that was fairly steady, it should be in there. And similarly, if we had a fairly consistent stream of payments that the state was making towards the CalSTRS system, it would be appropriate to have them in. But neither one of those are the case.

Question:
Let’s get back to Obamacare on the budget.

Mac Taylor:
You know, very little actually. Because we have done the Medi-Cal expansion, the federal government pays for most of that. In the outer years or the period we do have some effect because we’re picking up up to 10% of those costs. So they do ramp up and we have accounted for that. That’s the main direct effect of Obamacare on the fiscal forecast.

Question:
[Inaudible]

Mac Taylor:
Well, again, we don’t think they should follow exactly. They have to bring their own priorities…Certainly in what I’ve heard from the Speaker and from other leaders, they want to give priority to building up a reserve, of paying off budgetary liabilities. I think you have the perspective from the existing leaders who had to go through what they went through in the last 5 years that they’ve sort of already passed along to these new members who could be around for the next recession, who can be here for 12 years, that they don’t want to put themselves in the situation that they were in in 2008 going forward.

So, you know, I’m hopeful that we’ll make progress in these areas and I think there’s a good probability that we will.

Question:
As a general question, there’s so many parts of the budget that experienced difficulties over the last several years, and you’ll have legislators looking to you about social services, about the UC, about CSU, and all of these places. What would you tell them about the prioritization of restorations or growth. I know you talked about some in here but there’s got to be a larger message here about how you balance that feeling of the need to restore and grow versus all of these prudent facts.

Mac Taylor:
Well, I’d say first of all, you don’t have to worry about 98 since they have their own funding source. They should be back up to their pre-recession per student spending.

For the other part, I think that’s why a general structure is helpful because once you make certain decisions on do you want to build up your reserve or what period, when do you want to pay off the wall of debt, do you want to make commitments of some type to pay off your retirement liabilities, you only have so much money left.

And if it’s from the leadership and the governor that “Look, this is roughly what we think we have to spend”, it obviously doesn’t have to be our numbers; it can be whatever they think is appropriate.

If that sets a general framework for, you know, this is the amount of money that you have, then you can look at where you’ve made program cuts in the past, prioritize those and sort of realize that you have kind of a budget if you’re going to achieve these other goals to work within. And I think that’s what this sort of general approach may help you do of recognizing you only have so much each year and you prioritize where you want to make those restorations.

###

Learn More:

Leave a Reply

Your email address will not be published.