California Is At Fiscal Brink
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CALIFORNIA IS AT FISCAL BRINK
By John M. Broder
New York Times
December 9, 2002
LOS ANGELES, Dec. 8 When times were good and billions of dollars in income
tax payments were pouring in from high-tech millionaires, California
lavished raises on state employees, expanded health care benefits for the
poor, cut taxes on car licenses and invested heavily in education and
Those days are over.
With its huge economy stalled and state revenues plunging, California has
descended into its worst budget crisis in a decade and is now facing an
excruciating round of budget cuts and possible tax increases.
State officials are proposing deep reductions in education, health services
and other programs to deal with a budget shortfall that could total $25
billion in the next 18 months.
"That's a hole so deep and so vast that even if we fired every single person
on the state payroll every park ranger, every college professor and every
Highway Patrol officer we would still be more than $6 billion short," said
the Assembly speaker, Herb J. Wesson Jr., a Democrat.
Gov. Gray Davis announced a series of steps on Friday intended to save $10.2
billion to plug a deepening hole in the current budget and to serve as a
prelude to even deeper cuts in next year's. Mr. Davis proposed freezing pay
for state workers and warned of large-scale layoffs. As many as 200,000
people could lose their health coverage under the state Medi-Cal program.
Payments to public schools and universities could fall by more than $3
And that is just the start. In January the governor must propose a budget
for the fiscal year beginning in July that needs to address an expected $15
billion shortfall in revenues. Mr. Davis has not yet proposed tax increases,
but given the deficit magnitude, they appear inevitable.
Other states are confronting similar problems, but California's size and the
bursting of the dot-com bubble make the problem worse here.
The political combatants are entrenching along familiar ideological terrain.
The powerful employee and teachers unions are vowing to resist the pay cuts
and job losses that the governor's plan will require. Republicans have
pledged to reject any new taxes, saying that the Democratic governor and
Legislature spent their way into the current morass and must find program
cuts to claw their way out.
Democrats respond that the budget shortfall results chiefly from a severe
drop in revenue from taxes on capital gains and stock options from the
market run-up of the late 1990's and that those lost revenues must be
replaced with new taxes.
In 2000, the state received $17 billion from taxes on capital gains and the
cashing in of stock options, much of it from the technology industry. State
officials estimate that the take from such taxes this year will be less than
California prides itself on its progressive income tax, with people earning
high incomes paying a huge share of state taxes. The top 10 percent of
filers pay 75 percent of personal income taxes. But when their income drops,
as it did when the technology boom went bust in early 2000, the state
"Nobody expected the loss of revenues due to the drop in the stock market to
be as severe as it has been," said B. Timothy Gage, the state finance
director. "Nobody anticipated the truly staggering extent of the hit we
took. States have not seen such drops since World War II."
California, which generates $1.3 trillion in annual output, is the fifth or
sixth largest economy in the world. (The state is just above or just below
France, depending on the state of the Euro.) The current general fund budget
of $78 billion represents about one-sixth of all state spending nationwide,
but its current-year budget shortfall of $6.1 billion is fully a third of
the cumulative state deficits across the country, according to a survey by
the National Conference of State Legislatures.
Only five states -- Alaska, Arizona, Colorado, Idaho and Nevada -- are in
worse fiscal shape than California as measured by deficits as a percentage
of the budget. In dollar terms, no other state comes close.
Because the California state constitution was amended in 1988 to protect
spending on education and because of rapidly rising health care costs, the
state has few options for reducing spending to plug the gap.
Mr. Wesson, the Assembly speaker, said it was "mathematically impossible" to
balance the state budget without raising taxes.
"The way you do it is to put absolutely everything on the table, every
conceivable cut, every conceivable way to raise taxes," he said. "Then you
sort out what is the least painful and what is the most fair."
James L. Brulte, the Republican leader in the State Senate, said that
raising taxes would not only be insufficient to stanch the red ink but would
also throttle growth when the economy is sputtering.
State output fell by 2.3 percent in 2001, according to the Los Angeles
Economic Development Corporation. The group estimates that the state economy
will grow by a listless 0.8 percent this year. The unemployment rate is 6.6
percent (the national rate is 6.0 percent) and is expected to be worse next
year. Slow economic growth and rising joblessness cause state tax revenues
to plummet and increase costs for social services.
"You can raise the alcohol tax, the tobacco tax, the car tax, the income tax
and sales tax and you still have a multibillion-dollar deficit," said Mr.
Brulte, who represents Rancho Cucamonga and other bedroom communities east
of Los Angeles.
He said the only thing keeping the state afloat was consumer spending, which
continues to grow, modestly.
"Raising taxes on consumers clearly would be counterproductive," he said.
"Raising taxes on business, when we actually need business to step up and
start investing more so we can continue the expansion, would also be
counterproductive. Anything that has the tendency to restrain either
consumer spending or business investment will lead to an even larger deficit
The problem is especially acute for county and local governments, which
administer the programs that consume the bulk of the state budget --
schools, Medicaid (known here as Medi-Cal), welfare and public safety.
Local officials fear that they will be hit hard by reductions in state
revenue-sharing payments and in shifts in costs now borne by the state.
"They just expect us to make up the difference," said Pat Leary, the
lobbyist for the California State Association of Counties.
Ms. Leary said she hoped Sacramento would rescind the cut in vehicle license
fees that was passed in the dot-com boom. The cut amounted to $4 billion a
year, money the counties now badly need to provide essential services.
"We use it to pay for sheriffs and foster care and others things, and if we
lost that, it would be devastating to counties, absolutely devastating," Ms.
Local school officials are worried, too. While the constitution guarantees
public schools roughly 40 percent of state tax revenue, the state has been
spending more than that share in recent years, and Governor Davis said on
Friday that the overpayments were about to stop.
Wayne Johnson, president of the California Teachers Association, said the
state already ranked 38th in spending per pupil, with class size among the
largest in the country. Any additional reductions "would just push us
further down in those rankings," he said.
Governor Davis took office at the beginning of 1999, with the high-tech
industry roaring and unemployment at about 5 percent. He used the increased
state revenues to invest heavily in schools and highways and to expand
state-financed health services for children and the poor. The number of
state employees grew from 282,000 at the beginning of his tenure to nearly
326,000 in 2001, according to the California Department of Finance. The
biggest job growth came in two areas, prisons and state universities.
Republicans argue that this spending spree caused the current fiscal crisis.
Davis administration officials say that half the spending was on projects
that did not permanently add to the size of state government. Yet the
nonpartisan Legislative Analyst's Office projects that revenues are so far
short of spending that the state will run deficits of $12 billion to $15
billion for the next five years even if the economy recovers.
In September, Mr. Davis and the Legislature approved several one-time
economic fixes, including restructuring state debt and borrowing against
anticipated revenue from the industrywide tobacco settlement of 1998. But
those were just stopgap measures that offered no help for next year or
"Given this, there is really no easy way out of the current predicament,"
said Elizabeth G. Hill, the Legislature's chief budget analyst, "and this
makes it all the more important that the Legislature take advantage of the
alternative budget-balancing approaches and options available to it."
Those include deep cuts in programs, suspension of pay increases for state
employees, elimination of special tax breaks for business and consideration
of tax increases on businesses and individuals. Property taxes, which were
capped by Proposition 13 in 1978, are not an option for new revenue, so many
analysts expect increases in so-called sin taxes on alcohol, tobacco and
"California has a very liberal legislature and their easy answer is to pile
more taxes on the business sector, which is already struggling," said Jack
Kyser of the Los Angeles Economic Development Corporation. "And it's not
just business that is nervous," Mr. Kyser said. "County and city governments
are scared half to death.
"It's not a pretty sight."
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