California’s debt still a heavy cloud over state’s future

SACRAMENTO — Gov. Jerry Brown proclaimed last week that California, which now has enough cash to pay its day-to-day bills, can no longer be described by naysayers as a “failed state.”

But even though it appears to be free of the deficit that dogged the Capitol in recent years, the state is no model of financial health.

Sacramento is legally obligated to pay many billions of dollars withheld from schools, local governments and healthcare providers as lawmakers struggled repeatedly to balance the books. It owes Wall Street more per resident than almost every other state. And it has accumulated a crushing load of debt for retiree pensions and healthcare, now totaling more than taxpayers spend each year on all state programs combined.

The budget Brown proposed Thursday addresses only a small portion of the overall debt, which stems from the same types of bills that drove cities like Vallejo, Stockton and San Bernardino into bankruptcy. The state is likely to find its debt consuming an ever larger share of money meant for the basic needs of government.

“Every year we fail to acknowledge or fix these things, it just makes the cost bigger,” said Joe Nation, a former Democratic assemblyman who teaches public policy at Stanford University.

When he released his budget plan, Brown vowed to knock down the state’s “wall of debt.” He presented a timeline for repaying nearly $28 billion the state owes to government programs that it raided for cash or deprived of funds over the years, as well as some bonds sold to balance the budget.

Payments of $4.2 billion would be made in the budget year that begins in July. Subsequent payments, growing to as much as $7.3 billion a year, would continue into 2017.

At that point, Brown says, $4.3 billion in debt would remain, mostly for delayed payments to healthcare providers and money owed to municipalities and schools for implementing state mandates.

“By paying down the debt, we’ve put ourselves in a stronger position when things go bad, as they inevitably do,” Brown said.

But numerous reports by state agencies, think tanks and academics have shown the wall of debt to be many stories higher than $28 billion — hundreds of billions of dollars over the next few decades. Brown’s repayment plan does not significantly reduce the sizable debt to Wall Street or account for promises the state has made to its current and future retirees but is not setting enough money aside to cover.

“If we just ignore these longer-term pressures, we’re going to be back in the soup soon,” said Mike Genest, who was budget director for Gov. Arnold Schwarzenegger.

State officials must grapple with a major shortfall in the retirement fund for teachers. Fund officials have warned that Sacramento needs to immediately start contributing about $3 billion annually to keep the pension system solvent.

Sacramento could kick the bill to school districts, requiring them to start paying more pension costs from their own budgets. But the money needed now to stabilize the fund is enough to wipe out the $2.7-billion budget boost the governor is proposing for schools after many years of cuts.

“That is a demand that will have to be met,” said David Crane, who advised Schwarzenegger on pensions and the economy. “Even if there is an increase in funding for schools, the districts may have to use that — and more — to meet that demand.”

So far, lawmakers have taken no action to fill the gap. They have opted, for now, to let it grow. (The changes legislators made in public pensions last year do not fix the problem.)

They have taken the same approach with the escalating cost of retiree healthcare.

State employees on the payroll 10 years or more are guaranteed insurance coverage for life — a benefit bestowed decades ago, before the cost of medical care exploded. Now, the state is facing a bill of $62.1 billion for those employees over the next 30 years, according to state projections. Sacramento has set no money aside to cover the payments, and the tab grows each year.

Brown proposed that lawmakers confront that cost last year. Lawmakers balked and excluded his plan to limit the number of state workers eligible for retiree healthcare.

The cost of closing the gaps in California’s major public pension funds would be considerable. The State Budget Crisis Task Force, a bipartisan think tank based in New York, reported in September that every Californian would have to contribute $3,635 to cover the shortfalls. Paying for retiree healthcare might add a couple of thousand dollars to that tab.

The state’s borrowing from Wall Street in recent years also comes at a cost. According to the state treasurer’s office, it will cost $2,559 per Californian to pay that back. Texas, by contrast, has taken on just $588 of debt per resident.

Genest said California undeniably has made major strides since the darkest budget days of recent years. “We’ve finally got through the worst of it,” he said.

But the mess is far from cleaned up, he cautioned: “We can’t jump for joy.”

evan.halper@latimes.com

chris.megerian@latimes.com