Despite Record Annual Budget Surpluses, States Face Massive Long-term Shortfalls

Most states currently have a budget surplus, including deep blue states like California, New Jersey, New York, and Illinois. These short-term surpluses can be misleading, however, as public finances in these states are not on sound long-term footing.

“It’s a sign of how well a number of people are doing in this economy,” California Governor Gavin Newsom (D) said of the Golden State’s nearly $100 million state budget surplus. “I’m proud of California’s progressive tax system and we’re the beneficiaries of that.”

What state officials and media reports don’t mention is this projected $100 million surplus, as large as that might sound, is dwarfed by an estimated $1.5 trillion in state and local unfunded pension liabilities, for which California taxpayers are on the hook. Since cost-reducing reforms like shifting from defined benefit to defined contribution pension plans are off the table in California and other blue states, union leaders and state lawmakers are instead seeking to cover rising pension costs with new revenue.

Toward this end, a new strategy serving to delay needed pension reform has come out of the Golden State that involves local government officials and union leadership seeking to take over emergency ambulance services. Private companies provide more than 70% of California’s 911 emergency ambulance services. By taking control of emergency ambulance service, union and local government officials have found they can generate new revenue to cover rising pension costs.

It began in 2019, when California lawmakers passed SB 438, introduced as part of an effort to restrict the ability of private EMS agencies to provide 911 dispatch. Then in 2021, Governor Newsom enacted AB 389, which handed decision making power over ambulance services to fire departments.

The fire department takeover of emergency ambulance services is an approach referred to as the “alliance model.” The alliance model has been instituted in Contra Costa County, California, and is now under consideration in Alameda, Butte, Sonoma, Santa Barbara, and other counties.

Alliance model critics say it’s characterized by “avoidance of competition and less stringent oversight,” writes Austill Stuart, the director of privatization and government reform at the California-based Reason Foundation. “Keeping private sector innovation in EMS will continue to be crucial, but if the alliance model takes hold, the competitive pressures that drive EMS innovation could largely halt, and service could decline as private EMS providers and expertise leave localities where they feel that they cannot receive a fair bidding process.”

After legislative victories in 2019 and 2021, CalChiefs, the state fire chiefs’ association, suffered a setback in 2022 when they failed to pass SB 443. Critics of SB 443 contend it would remove all remaining competition between fire departments and private EMS providers. Though defeated this year, SB 443 is expected to be reintroduced.

Milking Medicaid To Pay Pension Costs

Governor Newsom’s Department of Healthcare Services recently proposed an increase to the ambulance transport reimbursement for Medicaid patients served by government providers from a base rate of $106 to $1,062. That change would make the alliance model more lucrative for local governments.

Newsom’s proposed Medicaid reimbursement increase is nine times greater than what private providers now receive. Firefighters unions appear to have an ally in Governor Newsom. In fact, a former representative for the California Professional Firefighters, the largest statewide career fire fighters union, is now Newsom’s Legislative Affairs Secretary. If fire departments take over all ambulance services from private industry, it could increase Medicaid spending in California by nearly $1.3 billion annually.

Escalating pension liabilities, if unaddressed, will further erode resources available for core government priorities. By 2024, 54% to 63% of public safety payroll in California cities will go toward paying retiree pension obligations, according to estimates from the California League of Cities. Unsustainable growth in pension liabilities is not limited to California.

The challenge presented by unfunded state and local pension liabilities is widespread, affecting most states, not just blue ones. That, coupled with the way in which other states often follow California’s lead, means the alliance model spreading in California is likely to be proposed elsewhere. Unlike Vegas, what happens in California, at least when it comes to public policy, often does not stay in California.