Government debt is in the news again. Recent national headlines ranged 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. Earlier this month, 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.
An op-ed recently published in The Daily Californian by the nonprofit think tank, The Can Kicks Back, raises this question: Are present taxpayers financing the full cost of the services they consume, or are they shifting costs to future taxpayers?
What are we to make of this? Are these stories merely exaggerations feeding on our cynicism about leadership and general despair about the future? Or are local, state and federal policies so tattered that our cultural inheritance 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 political posturing. Cal’s undergraduates — and millennials in general – might find that how we manage our debt reflects not only our priorities today, but how we prepare for the future.
In California, state law directs the controller to inform the public of the annual financial transactions and accounting practices of local governments. In the past, the discussion focused only on annual budget. But with increasing urgency, public finance experts have focused on broader measures of “fiscal responsibility.” Not only should governments manage their 12-month annual budgets, but they also should monitor future costs, such as the expenses of providing health care for current and future retired state workers. Still, 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, the expediency to balance the current budget has resulted in pushing costs to later years and future taxpayers. For example, facing a troubled economy and budget shortages, former governor 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 2019, a portion of the sales tax on all textbooks bought while at Berkeley will finance the last payments on the deficit bond. Ironically, these students – born after 2001 – will be paying the costs of services rendered in 2000. No wonder Cal students are concerned about the sustainability of current budget decisions!
The state and nation need long-term sustainability and plans to address concerns about solvency, growth, stability and fairness. In other words, how can the state pay for all of its current and future obligations? Do fiscal practices encourage sufficient economic growth? Can the state’s tax structure finance future costs without a change in the tax burden? And finally, will current taxpayers pay for the services they receive?
Sustainability, in its many dimensions, may have received insufficient consideration in recent years. After all, considerations for fiscal sustainability are abstract, complex and difficult. From a logistical and technical perspective, it is unlikely that the state can simultaneously balance its current accounts, mitigate its long-term obligations and provide for a sustainable budget.
But there is hope.
Gov. 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 puts all of our fiscal considerations on the same footing. Rather, as we get better at calibrating sustainability, we can say, as T.S. Eliot did, “If we can never be right, it is better that we should from time to time change our way of being wrong.”
John Chiang is the California controller.