Addressing California’s Budget Crisis
Short Term: Define the Problem Just How Big is the Hole?
VIEWPOINTS
by James L. Doti and Esmael Adibi
In addressing a budget deficit that Gov. Gray Davis pegs at $34.6 billion, he stated, “We have faced this problem head-on. There are no gimmicks, no tricks, no evasions.”
Really?
We recently presented an analysis of the state’s budgetary situation before state senators and Assembly members. Our analysis shows a dramatically different picture. While the governor has publicly stated that he is proposing $20.7 billion in budgeted spending cuts over the next two fiscal years, we found only $6.9 billion in cuts from the budget.
After our presentation and press conference in Sacramento, we received many calls from lawmakers and staff asking for more detailed information that we immediately provided. We also received calls from staff at the Legislative Analyst’s Office as well as the Assembly’s Fiscal Office questioning our methodology and analysis. We fully answered those questions and challenged the callers to please show us the errors in our way and where we may have made a mistake. To date, we have received no response and no systematic rebuttal to our findings.
The dramatic difference in what the governor is saying and what we found is explained by the fact that the governor’s $20.7 billion in cuts includes reductions in spending that were anticipated or “hoped for.”
For example, let’s say a family had hoped to build a room addition costing $50,000 but now puts off those plans because a bonus didn’t come through or those stock options just aren’t worth as much as originally thought. If in all other respects the family spends the same next year as it did this year, I think it’s safe to conclude that spending really didn’t change. The governor, however, would say that family’s spending declined by the $50,000 it had hoped to spend.
We believe it is more meaningful to look at changes in actual spending levels,not differences between actual and “hoped for” levels. The difference is significant. Looking at actual spending levels and assuming that Davis’ cuts are approved, state spending from the general and special funds will decline from $96.2 billion in fiscal year ’01-02, to a proposed $94.7 billion in ’02-03, and to a proposed $89.3 billion in ’03-04. This drop of $6.9 billion over a two-year period is a far cry from the decline announced by the governor of $20.7 billion.
This difference is far more important than semantics. If everyone believes the state is reducing spending by $20.7 billion, the governor’s proposed tax increase of $8.3 billion doesn’t sound too farfetched. But when compared to a spending decline of $6.9 billion, the governor’s call for an $8.3 billion tax increase clearly shows that he hopes to take more out of the hide of taxpayers than from his spending budget.
The proposed cuts of $6.9 billion also pale in significance when compared to the actual spending increases that occurred during Davis’ first four years in office that saw spending in the combined general and special fund increase from $67.1 billion during fiscal year ’97-98 to $96.2 billion in ’01-02,an increase of $29.1 billion. This increase of 43.4% for all four years represents an average annual increase of 9.4%, far greater than the average annual cuts proposed by the governor for the next two years of 3.7%.
Moreover, our projections point to total revenues in the state’s general and special fund reaching $90.3 billion by ’03-04. As stated above, the proposed cut of $6.9 billion will result in total expenditures of $89.3 billion in ’03-04. Hence, with revenues of $90.3 billion and expenditures of $89.3 billion, our analysis points to a $1 billion surplus by fiscal year ’03-04 with no increase in taxes.
There still will be a deficit of $6 billion to fund by some type of borrowing or transfers for fiscal year ’02-03. The presence, however, of a surplus in ’03-04 with no increases in taxes means that the state’s current deficit is not structural in nature and the proposed expenditure cut alone should be enough to bring revenues and expenditures in balance without an increase in taxes.
That fact is especially good news in light of the state’s current economic situation. Forecasts emanating from our A. Gary Anderson Center for Economic Research at Chapman University point to a mild recovery from a recession that hit California’s high-tech sector particularly hard. Raising taxes by $8.3 billion in such a period defies economic logic. There is little question that tax increases of that magnitude will significantly reduce economic activity,and could very well put an end to California’s nascent recovery.
Numbers really do matter and a meaningful presentation of those numbers is essential in understanding the nature of a problem and in formulating rational responses to that problem. Californians and especially our public servants deserve nothing less.
Doti and Adibi are economists. Doti is president of Chapman University and Adibi is director of its A. Gary Anderson Center for Economic Research.
