Rumor abound around the capitol that revenue is falling short of projections in last year’s budget.  The May revise, coming soon, is said to be gloomy, although no one has said so publicly yet.  Capitol bean counters have an interesting method for determining what receipts from income taxes will be.  If you will recall on your tax form, you send your return to one address if you owe money, to another if you get a refund.  By counting the trucks going to each address, the estimators know, within a couple of million dollars, exactly how much the state is going to receive.

That being said, it appears that the state is on the verge of another budget crisis.

I survived two such crises during my fourteen years in the Legislature.  The first began in 1991 and ended in 1994, after several years of increased spending, an average of 11 percent per year in the late 1980s.  Governor Deukmejian tried to stave off the crisis by returning surpluses to the taxpayers, as he did in 1986, with the billion dollar rebate.  The CTA responded with Proposition 98, which required any surpluses to be spent on education, and put all education spending on autopilot.  The result–the 1991 deficit.

Gray Davis helped along the second crisis by failing to hold the Democrats in the Legislature accountable for their spending.  In the two budgets from 1999 to 2001, spending increased $22 billion, from $57 billion to $79 billion.  Pete Wilson also cut taxes to try to hold the growth of government down, but Davis felt no such desire.  As a result, he lost his governorship when it became clear that he acted irresponsibly.  I predicted the budget collapse, calling it the "Perfect Budget Storm."  One year later, spending exceeded revenue by $11 billion, and the state had a $28 billion deficit.

In last two budget years, state spending (general fund) has once again gone from $78 billion to $102 billion.  The surpluses caused by the vibrant economy are quickly disappearing, and spending is continuing unabated.  A crisis is on the horizon.

Will it appear this year?  I don’t know.  A lot depends on how the surpluses from last year are addressed.  Will they stay surpluses, or will they be spent to paper over the deficit?  If they are spent, next year’s budget will be horrendous, because the surpluses will be gone, but spending will have increased.  That is exactly what happened in the 2001-02 budget.  Davis spent $6 billion in deficits to cover over the revenue shortages, and then wildly overestimated revenue projection for the 2001-02.  When those estimates fell about $8 billion short (and surpluses were gone), the state had no choice but to borrow the money.

The borrowing option is now gone, due to Schwarzenegger’s first deal, which resulted in Proposition 57 and 58, and the state can’t paper over its problems.  If revenue (not surpluses) are as low as is projected, the state is in real trouble again.

All in all, the only good that may from all of this is that there will not be enough money to pay for the crazy health care proposals floating around the capitol.  Perhaps it will be a lesson.  Maybe someone will slow down the spending and growth of government.  Or maybe all the politicians will claim that we are not taxed enough–again.  Unfortunately, with term limits, there are very few capitol Republicans who remember how the last two crises happened, and one or two of them might buy the "raise taxes" line.  It almost happened in the 02-03 budget.  It may happen again.

This entry was posted on Tuesday, April 24th, 2007 at 12:00 am and is filed under Blog Posts.