Posted 08 December 2002 - 11:36 AM
Deficit soon to hit where it truly hurts
By John Hill -- Bee Capitol Bureau
Published 2:15 a.m. PST Sunday, December 8, 2002
Kim Rueben was a student at a Brooklyn junior high school in the 1970s when New York City almost went bankrupt and started cutting back programs.
"Suddenly, the music teacher wasn't there," she recalled. "For the first part of the semester, we sat in the library. Then they started giving us more sheet-metal classes."
Rueben now studies state and local finance for the Public Policy Institute of California. And her adopted state is facing a fiscal crisis of its own -- one that Rueben believes also will touch the lives of ordinary folks.
"It means budget cuts may start to affect popular programs," she said.
The magnitude is $21.1 billion in a general fund of more than $80 billion by the end of the next fiscal year in June 2004, according to the most recent estimate. But officials say it's expected to be several billion higher.
It comes on the heels of a similar shortfall that was -- on paper -- supposedly wiped out by the budget signed by Gov. Gray Davis in September. But that budget was balanced in large part with one-time measures and accounting maneuvers that failed to nurse the state back to fiscal health.
Now the Legislature, starting in a special session Monday, must confront a short menu of unpalatable choices: cuts to programs, including popular ones that had largely been spared until now, or tax hikes.
By any measure, the size of the shortfall is staggering. It matches the size of the entire general fund budget -- the main source of state spending -- during the administration of Gov. George Deukmejian in the 1980s. The deficit outstrips the entire budgets of 46 states.
It is more than one-quarter of the current general fund, a percentage that rivals the shortfalls of the early 1990s, when California was mired in an economic decline that approached a depression.
The shortfall approaches the annual revenues of the Walt Disney Co., Microsoft Corp. or Aetna.
If the state were to halt all funding for the University of California, California State University and the Medi-Cal program, it would still have a budget gap of several billion dollars.
It breaks down to more than $700 for every man, woman and child in the state.
But the dimensions of the problem may not have sunk in with many insiders -- lobbyists, bureaucrats, local officials -- much less everyday Californians.
"I think the reality is going to start hitting in the next week or two," said Patrick McCallum, a lobbyist for community colleges who has been through four budget crises as a lobbyist and legislative staffer. "You say, 'Oh, this hurts me personally, or I'm going to have to hurt things I believe in.' "
Education accounts for half the general fund budget. Schools, largely spared by earlier budget cuts, are almost certain to feel the pinch.
"Given the size of the deficit, they're going to have to start talking about programs that had been sacred," Rueben said.
Still, a minority of California households include school-age children, and most Californians have limited direct contact with government.
"Occasionally, they go to the library, but usually it's the DMV," said Jesse Huff, Deukmejian's finance director and more recently an adviser to Republican gubernatorial candidate Bill Simon.
But just about everyone relies on state operations whether they know it or not. Some of the effects of a dwindling state treasury may be hard to detect at first.
"The pothole grows a little, but the pothole was already there," Huff said.
Ten years ago, when the state faced its last budget crisis, the impact was felt far and wide. Taxes went up, including the income tax on high-income residents, the sales tax and the vehicle license fee. The sales tax base was expanded to include food, candy, bottled water and newspapers.
The state shifted property tax revenues from local governments to schools. School budgets were cut, and people who relied on social service programs had to get by on smaller grants.
Those budgets also resorted to accounting maneuvers. But many of those techniques were later ruled illegal by courts and can't be used in the current crisis. Among them were deferred state contributions to retirement funds and transfers from the state's own special funds to the general fund.
As the effects of the budget crisis start to be felt, many Californians who have paid little attention to the brewing fiscal storm may start to take notice and ask how it came to pass.
Republicans say it's simple: Their Democratic colleagues couldn't restrain themselves, a message they have been sounding since the dot-com explosion drove stock-option and capital-gains revenues to astronomical heights.
But many observers point out that it would have been politically difficult to pour all the revenue from the boom into a rainy-day reserve. When the state did maintain a big reserve in the 1970s, some politicians called it "obscene."
It added momentum to the passage of Proposition 13, putting strict limits on property taxes. If the state is sitting on that big pile of cash, the thinking went, why does it soak us for property taxes?
In the current crisis, "The problem is that the economy was doing so well and the cycle lasted as long as it did," Rueben said. "It's hard to say that money isn't real in your budget when you've seen it for three or four years." Liberals press to spend it, she said, while conservatives want it returned to taxpayers.
The question remains whether budget decision-makers, from Davis down, should have seen it coming. A year ago, Davis and many of his fellow Democrats urged short-term accounting maneuvers to weather what was portrayed as a short-term hit to the state treasury.
But just about everybody got it wrong, said Jean Ross, executive director of the California Budget Project, a Sacramento-based policy research group -- the Federal Reserve, institutional investors, financial markets and President Bush, whose tax cut was predicated on a sizable surplus.
"This is not a unique problem to California," she said.
Most officials across the political spectrum agree that the only long-term solution is an overhaul of the state's tax collection and bureaucratic structure.
But McCallum is skeptical that some of the difficult cures will get much of a hearing this year: taxing services as well as goods, revisiting Proposition 13 or broadening the tax base instead of just focusing on a hike for the rich.
As for the cuts, McCallum, like many others, is hunkered down.
"Everyone knows it's coming," he said, "but when it hits you in the face, you're more shocked.'"
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About the Writer
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The Bee's John Hill can be reached at (916) 326-5543 or jhill@sacbee.com