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Senate President Pro Tem Darrell Steinberg, D-Sacramento, left, receives congratulations from Sen. Kevin de Leon, D- Los Angeles, at the end of the Senate session where lawmakers approved the state budget, Friday, June 14, 2013 in Sacramento, Calif. Both houses of the Legislature approved the $96.3 billion budget plan on party line votes: 28-10 in the Senate and 54-25 in the Assembly.(AP Photo/Rich Pedroncelli)

SACRAMENTO -- Let's say you were buried under an avalanche of debt for years and could only make the minimum payments on your credit card bills. But then you started cutting back your expenses -- and even got a raise at work. Suddenly, you were paying your bills on time, and even going out to eat a couple of times a month.

But then you find a huge stack of bills in your desk drawer from years past, and the first payments from that no-money-down car loan come due. Then your adjustable mortgage rate starts going up. And you realize things aren't as rosy as you first thought.

That's one way to look at the situation facing California lawmakers and Gov. Jerry Brown as they celebrate a balanced budget that even includes a small surplus, all while staring down a mountain of future bills that amounts to more than twice the total of this year's general-fund budget -- more than $200 billion worth.

"There's no question we've come a long way," said Mike Genest, a government finance consultant who was finance director under Republican Gov. Arnold Schwarzenegger. "But no matter how good the picture looks right now, it's not good enough to deal with" the long-term debt.


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Bolstered by tax hikes approved by voters in November and savings from cuts over the past half decade, the $96.3 billion budget approved by the Legislature on Friday and finalized Saturday includes no spending cuts for the first time since the Great Recession began in 2008. Instead, it features billions of dollars more for education and a few hundred million dollars extra for social services such as mental health and dental care for the poor.

"I think it's a dramatic improvement from just two short years ago, when the governor came into office and had to close a gap of more than $27 billion," said H.D. Palmer, the governor's chief budget spokesman. "We're probably on the most stable fiscal footing we've been on in a decade."

Brown has also already helped knock down part of what he has coined "California's Wall of Debt" from $35 billion two years ago. But it still stands at $27 billion -- enough money to run the Cal State, UC, state prison and state court systems for a year.

The debt is largely the result of massive borrowing over the past several years, mostly under Schwarzenegger, just to keep the budget balanced over the short term. So Brown and the Legislature plan to put aside billions of dollars per year to chip away at the debt -- largely using new tax revenues approved by voters in November and by restraining spending on new programs. They project the debt will shrink to less than $5 billion by 2017.

But perhaps the most daunting challenge facing the state is an additional $196 billion worth of future employee costs for which the state has not set aside money. These "unfunded liabilities" are the result of retired state employees -- and future retirees -- who are owed pension and health care benefits. The health care cost, in particular, is expected to rise significantly in coming years, and the annual cost to the state budget to pay for retired employees' benefits already tripled to about $6 billion from 2002 to 2012.

The nonpartisan Legislative Analyst's Office projects that the unfunded cost just for retired teachers' pensions, which is currently $71 billion, would carve a $2.6 billion hole into the budget by 2016, continuing for three decades. The retiree health care cost, which is unfunded by $64 billion, would cost the budget an additional $1 billion per year, the Legislative Analyst's Office says. This is largely because of lucrative union deals that were handed out during the boom times in the late 1990s.

"The day of reckoning is coming," said Bob Williams, president of the conservative nonprofit State Budget Solutions. "They continue to underfund pensions. They just keep kicking the ball forward."

But Palmer noted that Brown last year helped push through pension reform for new employees. And this year, the spokesman said, Brown supported a directive from the state retirement board to pay down retiree costs faster starting next year, saving money over the long run.

Even still, those efforts have only put a dent in the pension problem -- and because they only apply to new employees, the savings will take decades to materialize. Employees who scored better retirement plans under previous administrations can still retire at younger ages and receive better benefits than employees hired after the new pension rules went into effect this year.

Another top concern among state leaders is California's "rainy-day fund," which has been nonexistent in four of the past five years. But officials are promising a $1.1 billion reserve one year from now -- the highest in six years.

The fund was $10.1 billion during the housing bubble in 2006 and $8.7 billion at the height of the dot-com boom in 2000. But each time, state leaders quickly burned through that money by starting up new programs, which politicians have vowed to avoid this time.

"To me, the main story of this budget cycle is that Jerry Brown learned the lesson of 2000, which is, don't assume the upturn is going to go on forever," said Steven Levy, director of the Palo Alto-based Center for Continuing Study of the California Economy. "The really bad times are over. The key thing is not to make the same mistakes as before and put all the increases into the operating budget."

Brown and legislative leaders have made it a goal to set aside additional reserves until reaching 10 percent of the budget, which would currently be about $10 billion, to help weather the next recession. Had such a policy been in place before the Great Recession, the state could have avoided about half the cuts it had to make, said Assembly Speaker John Pérez, D-Los Angeles.

Pérez's plan -- to deposit funds from spikes in capital gains revenue during boom years into a new rainy-day fund -- could go before voters next year.

The state might need some of that money when the Proposition 30 tax hikes on the wealthy passed by voters in November expire after seven years.

One hopeful sign came in January, when Standard & Poor's raised the state's credit rating from A- to A. But the long-term funding obligations remain high, with no clear path toward completely balanced books.

"Over the long haul," former finance director Genest said, "we have real problems."

Contact Mike Rosenberg at 408-920-5705. Follow him at Twitter.com/RosenbergMerc.