Friday, November 22

On The Record

Gov. Jerry Brown recently announced that he was ending talks with Republican legislators over a temporary tax increase. What can be done to prevent partisan standoffs in Sacramento and improve the UC's financial circumstances?

By Daniel ҬMitchell

When the state legislature spends time in the midst of a major budget crisis debating about whether to ban shark fin soup, you know we’re in trouble.

The current focus on soup is not because legislators don’t know about the dire budget situation. Rather it means they don’t know what to do about it. And that is bad news for UC and its state funding. But there is something the state can do for UC, despite the fiscal crisis.

First, some background: In January, when Gov. Jerry Brown took office, he faced an immediate problem. State taxes had been raised in February 2009 on a temporary basis, slated to expire at the end of June 2011. Even if voters could be persuaded to extend the taxes, there would be ongoing budget deficits. Without tax extensions, those deficits would be much larger.

The only practical way to put the extension issue to voters by June was through the legislature where a two-thirds vote is required. To obtain all the necessary votes, a few Republicans would have to go along with the vote extension.

Brown presented the legislature with a budget back in January that assumed he could negotiate successfully with the Republicans and get those needed votes. In the end, however, the strategy failed.

Even if the votes were now obtained, it is unlikely a special election could be called before July. Once we are in July or later, the tax “extensions” become tax “increases” which voters are more likely to reject. As a discretionary item in the state budget, UC’s funding is especially vulnerable to the turmoil in Sacramento.

So what can UC ask from the governor, given these unfortunate circumstances?

More cash is not going to be on the table. But if the governor were willing, the state might do what it did in 1984 and 1990 when cash was also in short supply. UC needs to contribute to its now-underfunded pension plan.

UC’s pension became overfunded in the early 1990s and the state stopped contributing. Before then, however, the state routinely made the annual employer pension contribution.

Now that contributions are needed again, the state is refusing to resume paying its share, placing an added burden on UC.

In 1984 and 1990, however, the state gave UC an IOU to put in the pension in lieu of scarce cash. The IOU was essentially a promise to pay interest and principal on the state contributions due for those two years over the subsequent three decades rather than upfront. If the state simply followed this earlier precedent, it would alleviate some of the pressure on UC’s operating budget. No immediate cash would be needed.

Would the state be willing to help UC absorb whatever budget cuts are coming next fiscal year by providing a pension IOU?

There is only one way to find out: Ask the governor.

Professor ҬMitchell is a Professor Emeritus at the Anderson School of Management and the Luskin School of Public Affairs

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