News

Dennis Hollingsworth

Governor Schwarzenegger began his third year in office by proposing to spend
$125.6 billion in the state budget, with a sizeable $6 billion operating
deficit that relies entirely on prior-year revenues to fill the current year
gap. It’s a risky tactic Republicans oppose, in the face of a structural
deficit that may grow much worse in future years when revenues might decline
and there will not be a reserve to fall back on.

Republicans hope the economic outlook predicted in the governor’s May
revision will show improvement when compared to the budget proposed in
January, much as it did last year. More importantly, the governor must bring
down the programmatic spending so that we’re not committing to spend more
than our revenues.

Otherwise, California’s finances could be landing squarely between a rock
and a hard place.

Balancing California’s budget despite considerable population growth was a
strategic and fiscally healthy move in the 10 years between 1985 and 1995,
when the state’s population grew at an ample 20 percent and the state spent
about 8 percent less than was brought in for revenues. But compare that to
the next 10 years and you will see a significantly different picture. The
population grew by 3 percent less and we over spent our revenues by 10
percent. Thus, the record budget deficits that brought down Gray Davis in a
recall and brought in Governor Schwarzenegger.

That’s a tough cycle to break in Sacramento with the Democrats and their
sympathies with the spending lobby. The governor’s January budget puts them
right back in that temptation zone, over-committing our state’s resources to
far too many programs.

Fortunately, the governor so far has avoided the Democrats’ proposed
solution: raising taxes. Raising taxes is a bad idea. First of all,
California ranked No. 1 in total taxes paid and ranked No. 9 in per-capita
taxes when compared to all 50 states, according to 2005 U.S. Census Bureau
data. Raising taxes even more would only make our state even less
competitive, driving entrepreneurs and revenue-producing jobs out of state.

Those tax-rate increases of the mid-’90s designed to plug the budget gap?
They resulted in nearly $2 billion less tax revenue coming into Sacramento
over the next two years at a time when personal income was growing.

The proposed state budget does not increase debt and also makes early
repayment of a lot of inherited debt, deposits into the rainy day fund
created by Proposition 58, recommends renewal of a governor’s ability to
make the mid-year spending adjustments bargained away in the Deukmejian
years, and makes the massive, much need investment in roads and
transportation by fully funding Proposition 42.

However, the biggest red flag in the governor’s budget is his failure to
address the needed reforms of Proposition 98, the education-funding mandate
that has us spending more than half the general fund on schools, and
threatens to crowd out all other programs and outpace revenues. Failure to
address this threatens to undo much of the good work that earlier won him
the praise of Legislative Analyst Liz Hill for paying down the annual
structural deficit, from more than $16 billion to about $6.6 billion. Rather
than see that continue to go down, projections now show that it will be $9.6
billion by the 2008-09 fiscal year–and in later years growing to tens of
billions of dollars.

Senate Republicans are hoping to see a May budget from the governor that
rectifies these basic flaws and merits their support. The future of
California’s economic health requires a responsible budget. More
importantly, the people of this state deserve a budget that is fiscally
sound.


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