While most municipalities in California are wrapping up their annual financial statement audits for the year ending June 30, 2021, the state just issued what’s known as its Annual Comprehensive Financial Report, (formerly known as the Comprehensive Annual Financial Report), for the preceding year, ending June 30, 2020.
It’s the last state in the nation to issue its report, and by months. It’s hard to find another state that has ever released its financial statements this late.
These are two very disturbing pieces of information. A poorly run software conversion, the inability to efficiently maintain a parallel system, and not having any outside firm involved is worrisome.
There is some good news, though. California reduced what’s known as its “unrestricted net deficit” by $408 million. But, one would have expected a larger decrease with the projected budget surplus that year.
The unrestricted net deficit (or unrestricted net assets, if there’s no deficit), also known as its unrestricted net position (UNP), takes the actual temperature of a state’s financial condition. When this number is positive instead of negative, it’s a good sign.
With the initial onslaught of the COVID-19 lockdown in March 2020, California increased its total financial obligations by some $39 billion. But the money the state expected to gain only increased by $19.5 billion, with amounts due from other governments increasing by $15.6 billion, creating a $35 billion offset.
The audit should provide a more clear perspective on the impact of the coronavirus and the related 2020 CARES Act and other Federal reimbursement and funding programs.
Overall, when ranked against the other 50 states in per capita UNP, California has maintained its 41st place position, (see the graph below).
States that were impacted the most at the start of the COVID-19 lockdown were Oregon and South Carolina. New Mexico also had a large drop in overall rankings while Indiana and Virginia showed good upward movement.
In reviewing the financial statements for South Carolina, its unrestricted net deficit grew by $2 billion, nearly doubling. This state increased (by way of transfers) its restricted accounts by some $3.6 billion, which may explain its dramatic drop. Some good news? It has already published its financials for the year ending June 30, 2021.
Eighteen states stayed in place, while another 18 moved up or down a rank or two. Nine states, roughly one out of every five, have been able to maintain positive unrestricted net positions.
There wasn’t much movement within the bottom 10 states, where California resides, except that Hawaii dropped two spots. The top 10 stayed the same, however Utah dropped three spots, allowing North Dakota and Nebraska to improve their lots.
In the middle of the pack, Colorado did well by moving up three places.
California historically has had the largest such deficit of all the states, according to the dollar amount, but in recent years, Illinois and New Jersey have been vying for that undesired epithet, with the Golden State now in 48th place.
The big question is, “Who cares?”
You should care, and for many reasons.
If you’re considering leaving the state, I would recommend that you relocate to one with a positive or low negative UNP per capita. Why flee potential, if not guaranteed, personal income tax increases only to receive them as a new Illinois or New Jersey resident?
Why move your corporate headquarters to one of the other nine bottom states if tax increases there will be staring you in the face?
Progressive states, also known as blue states, are bragging about how wonderful their policies are, but their balance sheets tell us otherwise.
Consequently, make decisions with your eyes wide open. The story of the cumulative financial history for each state is provided in its balance sheet—you just have to look and dig in.
A poor financial situation may warn you that service cuts, poor road conditions, and reduced funding for public safety are the norm, not the exception.
California should make you nervous. A late financial statement release when it has Silicon Valley within its borders? A $208 billion deficit when Sacramento is rolling in budget surpluses, while its schools, cities and counties are strapped?
Taxpayers need to be fully aware of how their state is managed, or mismanaged, and they shouldn’t be surprised when higher taxes and fees are in their future.
As if ever-continuing increases in housing costs and rising prices at the pump and grocery store weren’t enough.
And, if history is any guide, these budget busters will probably come during an economic recession.
Let’s encourage our elected leaders in Sacramento to reduce the deficit by billions, not just $400 million. It needs to get its financial house in order. Our children and grandchildren deserve better fiscal stewardship from our Capitol. Not lingering debts that they'll be responsible for addressing.
