The state failed to publish its financial report on time for the sixth straight year.
The state failed to publish its financial report on time for the sixth straight year.
C alifornia’s fiscal year, like most states‘, ended on June 30. Unlike most states, however, California failed to produce an Annual Comprehensive Financial Report (ACFR). An ACFR is a document that explains the financial health of the state government. Unfortunately, this tardiness is par for the course. This year marks the sixth consecutive year that California has failed to produce a financial report before the March 31 deadline.
This is an extremely pertinent issue because California is desperately trying to close a $46.8 billion budget shortfall and manage hundreds of billions of dollars in debt. Without timely financial information, Californians are left to wonder where their money is going and if Sacramento can keep its promises. The more doubt Sacramento creates, the harder the time it will have convincing people to live and invest in the Golden State.
An ACFR contains information about revenues, spending, borrowing, and creditworthiness. While all this information is available elsewhere, one must know where to look. ACFRs help citizens by consolidating this information into one document. The longer policy-makers wait to publish this information, however, the less useful the information is to taxpayers and bond investors. When it comes to ACFRs, the Government Accounting Standards Board (GASB) recommends, “Sometimes a timely estimate is more useful than precise information that takes a long time to produce.”
Sacramento blames the tardiness on its own Financial Information System of California (FI$Cal) and the attempt to transition every government entity onto it. Sacramento had promoted FI$Cal as a one-stop online resource for all state financial information to increase transparency and taxpayer education. Since the attempt to transition to FI$Cal several years ago, a timely ACFR has not been published.
The day before the end of the fiscal year, Governor Newsom signed a budget, hoping to close a $46.8 billion deficit through $16 billion in tax hikes and spending cuts. Since the pandemic, policy-makers in California have turned a $100 billion surplus into multi-year, billion-dollar deficits.
The state Unemployment Insurance (UI) Trust Fund is unprepared to face the next recession. After the fund was run dry during the pandemic, Sacramento borrowed $20 billion from the federal government and it hopes to borrow more for the next year. Borrowing to cover UI is paid for by a surcharge on employer payroll taxes, which takes money away from businesses that could have gone toward employee compensation, new hires, and community investment.
If that weren’t bad enough, California faces hundreds of billions of dollars in debt and unfunded liabilities. California owes over $201 billion in bonded obligations. In unfunded pension promises, the Golden State owes $1.4 trillion, and in other promised benefits to retired public servants (such as retiree health insurance), it owes $124 billion.
These financial woes are why California has one of the highest tax burdens in the country. High taxes pushed 2 million residents out of California over the past decade. As more families and businesses leave the Golden State, larger tax burdens to cover the deficits and debt fall on those who remain.
Expect more delays in the future because the state is giving itself until 2032 to complete its FI$Cal transition. While policy-makers in Sacramento played the blame game, the SEC began to require state and local governments to prepare their annual financial statements in a standardized, electronically searchable format known as eXtensible Business Reporting Language (XBRL).
XBRL formatted data will make searching for the state’s financial information easier, as users can search a keyword instead of looking through an ACFR or searching across various websites and budget documents. While some are cheering for the increased transparency, it comes at the cost of greater federal control over state financial processes.
Ultimately, the best rebuke for California is for taxpayers and bond investors to vote with their dollars, not federal intervention. Although credit outlooks remain stable for now, rating agencies warn that continued delays could negatively affect state credit ratings. The combination of out-migration and credit downgrades could be the wake-up call the Golden State needs.
If they hope to be prepared for the next economic downturn, policy-makers in Sacramento can no longer ignore the irresponsible fiscal policy that is driving millions of people (and dollars) out of the state.