ShareThisBy DAN WALTERS
Wednesday, November 15, 2006
The straw that broke Gray Davis' political back was his declaration, just after winning a very narrow re-election as governor in 2002, that California faced an immense budget deficit, one far larger than any previous projection.
Ironically, Davis had inflated the deficit projection to make his combination of spending cuts and new taxes sound palatable, but it backfired. The reaction in the media and the public was widespread condemnation of Davis for concealing the extent of the state's fiscal woes until after he had been re-elected, and it touched off a recall campaign that culminated in his ouster a year later.
Arnold Schwarzenegger was elected as Davis' successor on his pledge to "clean house" with the budget mess his highest priority, but in attempting to deal with it, he almost suffered the same fate as Davis. As he enters the next phased of his governorship, the state's chronic deficits remain Schwarzenegger's most vexing problem.
While seeking re-election this year, Schwarzenegger claimed to have reduced the deficit to relatively minor proportions by being tough on spending _ a contention that simply does not square with the fiscal facts. Spending, in fact, is running at or above the levels that were projected when he first took office; the general fund has ballooned by about 25 percent to $100-plus billion a year. The deficit has shrunken only because revenues have been running above projections but still not high enough to wipe out the shortfall.
The Legislature's budget office has calculated that the state remains committed to spend roughly five percent more each year that its revenue system produces. And the most troublesome aspect is that the deficits persist despite the fact that the California economy is humming along nicely, generating record employment and a cornucopia of revenues.
Simply put, if we cannot balance our budget and put aside reserves in a period of great prosperity, what happens when the economy cools off? It tells us that the income-outgo situation is fundamentally out of whack.
The danger is compounded by the interaction of our spending commitments and the revenue system. Increasingly, spending increases are locked into law and all but unchangeable, regardless of whether the money exists to meet them. Increasingly, the state's revenues are dependent on personal income tax payments from a relative handful of high-income Californians and their stock options and capital gains.
Very rigid spending and revenues that can go up and down like a yo-yo are a combination fraught with peril. The deficits began when Capitol politicians overspent a one-time windfall of income taxes and they've now continued for a half-decade.
Schwarzenegger has been all over the map on the state's finances. He's tried and failed to cut spending, refused to sanction new taxes, unloosened pursestrings to curry political favor and even cut taxes himself. The deficits persist _ with the danger of a serious crisis looming should the economy slow down even a bit _ but at the moment, he doesn't appear to have any answer other than to cross his fingers and hope that the economy continues to generate enough money to more or less keep up with the inevitable increases in spending until his second term ends four years hence.
A wish is not a plan. But any plan that involved either serious reductions in spending or increases in taxes would not only bring howls of protest from those affected but face likely rejection in a Legislature of pro-spending Democrats and anti-tax Republicans.
For the past half-decade, the only way out has been to borrow more money each year to cover the deficits. But someday, surely, the banks will cut up our credit cards.
Reach Dan Walters at (916) 321-1195 or dwalters(at)sacbee.com.
