by Lance T. Izumi, Fellow in California Studies
Pacific Research Institute
May 29, 2001

Announcer lead: Time for Perspectives. Lance Izumi says that Gov. Davis’ proposed budget contains serious long-term flaws.

A key criticism of Gov. Davis’ handling of the electricity crisis has been his willingness to sacrifice long-term solutions for short-term political gains. When he recently unveiled his revised 2001-02 budget proposal, Davis again displayed this disturbing propensity, opting for a short-term fix at the expense of the state’s long-term fiscal health.

Due to the slowdown in California’s economy plus reverses on the stock market, personal income has fallen. Consequently, state government, which relies heavily on the state personal income tax, will collect $4.2 billion less in tax revenues by the end of the next fiscal year. In order to plug this budget hole, though, Davis has resorted to band-aids that could leave California in worse shape down the road.

According to state Legislative Analyst Elizabeth Hill, Davis balances the budget through short-term fixes such as drawing down the state’s reserve fund, transferring money between accounts and cutting one-time expenditures. Because Davis fails to reduce ongoing spending, the state will face at least a $4 billion budget deficit in 2002-03. If Davis’ shaky scheme to sell bonds to pay back the state’s general fund for past and future electricity purchases comes up short, then the deficit could be much larger.

Davis’ budget worries legislators. Sen. Dick Ackerman, vice chair of the Senate Budget Committee, says that Davis’ budget is unrealistic because it fails to account for the size of California’s economic downturn and the state’s rising energy costs. Indeed, past history shows that in a recession, income and tax revenues tend to fall faster than projected by state finance officials.

Elizabeth Hill says that deeper cuts in ongoing spending will be needed in order to ensure balanced budgets in future years. For Gray Davis, who has overseen record increases in state spending, fiscal discipline will require putting good policy over easy politics. Given his track record, though, don’t expect Davis to do the right thing.

With a perspective, I’m Lance Izumi.

Lance Izumi is the Director of Center for School Reform at the California-based Pacific Research Institute for Public Policy. He can be reached via email at lizumi@pacificresearch.org.