Our country’s Founding Fathers rejected burdensome debt and excessive government spending as morally unacceptable. George Washington referred to debt as “ungenerously throwing upon posterity the burden which we ourselves ought to bear”. Thomas Jefferson remarked that lower taxes and reduced spending would go “far towards keeping the government honest and unoppressive”.
Voters in Riverside County would do well to heed the Founders’ advice and elect better stewards of the County’s financial accounts. Sadly, the Board of Supervisors’ trajectory of financial mismanagement is on collision course with unsustainable debt, burdens on posterity, and dishonest accounting.
The County’s latest budget of $8.6 billion (for the fiscal year ending June 30, 2024) swelled by 15% from the previous fiscal year’s budget of $7.6 billion, and a staggering 25% from the fiscal year before that. However, over the same two-year period, population in Riverside County increased by approximately 1% (according to the United States Census Bureau), and the most recent 12-month inflation rate for Riverside County tops off at 4.3% (according to the United States Bureau of Labor Statistics). Alarmingly, this reveals Big Government in Riverside County is growing faster than ever before, exceeding both population and inflation rates combined, and far outpacing changes in California and federal budgets over the same period.
But it gets worse. When we consider the nature of incremental expenditures between the two most recent fiscal years, the principal driver of the approximately $1.0 billion increase relates to labor costs. This type of recurring expenditure has compounding effects in the long-term which are far more serious than any one-time infrastructural improvements. This is because union contracts reflect multi-year commitments that are almost impossible to unwind (even in recessionary years). More generally, recurring expenditures in Riverside County tend to persist inflexibly, even when corresponding revenues fail to keep pace.
We all support fair compensation for hard-working employees, but discretionary spending in all areas of County government (from third-party vendors to new hires) must be tempered by economic realities and constrained by recurring sources of revenue. This is especially relevant today, in light of COVID relief funds that will soon expire, and significant deterioration in California’s own statewide budget.
According to Transparent California (a public database of government compensation), about a dozen Riverside County employees are compensated annually at $500,000 (or more), and another 800 employees are compensated at least $250,000 each year. According to the County’s most recently published Annual Comprehensive Financial Report for the fiscal year ended June 30, 2023, total accrued liabilities for earned but unused vacation, holiday, and sick pay benefits now total $340 million. We can expect this compensation debt to grow significantly, in proportion to the incremental compensation adjustments referenced above.
This brings me to the most significant long-term threat to the fiscal stability of the County: pension obligations. Alarmingly, the County’s unfunded pension liability (the difference between pension fund assets and the present value of future obligations) stands at $9 billion by my independent calculation, or greater than the entire size of the current year’s annual budget. This debt will continue to accrue as employees work more years and earn greater pension benefits. As for my estimated calculation, I speak with some level of authority as a certified public accountant, former pension auditor, university lecturer in statistics, and one-time Mayor. However, one does not require these experiences or credentials to perform basic arithmetic!
Here’s how: The County estimates its total net pension liability at $3.4 billion as of June 30, 2023, based on the unrealistically achievable discount rate of 6.9%. Basically, this represents the County’s assumption that pension assets will grow 6.9% every year in perpetuity, even in turbulent and recessionary cycles. This assumption has long been discredited by professional economists in the private and academic sectors, as the basis for pension debt valuation. Recent history also suggests that the stock market cannot be relied upon to generate this level of return on consistent, uninterrupted, annual basis in perpetuity, let alone high-risk investments in emerging markets.
Instead, economists at Stanford University (my alma mater) recently converged on the risk-free rate of return as a more realistic discount rate to use for estimating pension debt, because pension promises are often protected by statutory law and as such require discounting by a default-free rate. Using the 30-year treasury rate of 4.3% as a proxy for the risk-free rate, and extrapolating the County’s own sensitivity analysis (which reveals incremental liability of $2.2 billion for every 100-basis-point decrease in the discount rate), we converge on a revised net liability of $9.2 billion. This is a staggering amount, which would make Washington and Jefferson drop their jaws, while doubling-down on their own advice!
Alas, the buck stops with Riverside County’s Board of Supervisors. Unfortunately, the Board’s unwillingness to address these financial matters responsibly means future budgets will be seriously impaired, placing basic government services at risk, burdening our children with greater debt, and eroding public trust. Long-term remediation requires pension reform today, government spending that can live within the County’s means, and honest accounting that can communicate the TRUTH.
I am running for Supervisor because the time has come for new leadership with the competence and ethical disposition to steward the County’s financial affairs, honestly and responsibly. Surely, our Founding Fathers would demand as much, nearly two-and-a-half centuries after their first admonishment.
Jack Guerrero is an economist, certified public accountant, and candidate for Supervisor in District 3.