- A little more than two weeks ago I wrote a lengthy column
exploring the possibility of a fiscal meltdown in California, a gap between
spending and revenues so great that the state might be unable to pay its
bills or borrow without supervision from Wall Street.
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- At the time, I described such a scenario as remote. But
developments since June 30, I believe, make a financial debacle more likely
than it was when I last addressed the topic. The Legislature and Gov. Gray
Davis, while it's the last thing they want to do, need to address the situation
before it is too late.
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- The governor's Department of Finance reported last week
that revenues in June came in $407 million, or 5.7 percent, below forecast.
And that was a forecast made in early May. If the governor's best prediction
was that far off in so short a time, how can he possibly trust anything
his advisers are telling him will happen next December, or in April 2003?
The June shortfall came on top of a bad May, when revenues were $250 million
below estimates that had been finalized even as the month had already begun.
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- And it's not just the amount but the reason that's cause
for concern. Income-tax withholding -- perhaps the best barometer of current
economic activity -- was down nearly 7 percent in June from what was expected.
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- The sales tax also fell short. In May and June combined,
revenue from that source is off $214 million, or about 5 percent.
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- Those numbers are real, and in the books. They confirm
anecdotal evidence that suggests California will be lucky to see a broad-based
economic recovery take hold by the end of 2002.
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- Leaders of the state's tech economy told the New York
Times in a story last week that they don't expect their sector, increasingly
important to California, to recover until perhaps the end of 2003. Intel
Corp. announced Tuesday that it would reduce its work force by 4,000 employees
this year as revenues continue to slide. Apple Computer confirmed that
it had laid off 7 percent of its workers at an Elk Grove plant as earnings
fell by nearly half from the same quarter a year ago.
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- The stock market, meanwhile, continues what appears to
be a free-fall. Having already lost 11 percent in the quarter ending June
30, the Dow Jones Industrial Average has slid another 8 percent since that
day. The technology-heavy Nasdaq Composite, which fell 20 percent in the
second quarter, was down another 6 percent through Tuesday.
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- The market selloff presents two dangers to the state's
fiscal condition. One is direct -- that capital-gains taxes and taxes on
stock options, which fueled a revenue boom in the late 1990s, will fall
short of even their meager targets in the coming fiscal year. The other
fear is that declining stock values will produce a reverse "wealth
effect," prompting consumers to pull back on personal spending as
they watch the value of their portfolios shrink.
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- All of this would be bad enough even if the state were
not about to pass a budget that contains a structural, $10 billion gap
between spending and revenues that has been largely papered over with loans,
shifts and gimmicks. But that's what is on the table now, and, absent some
dramatic development, that's what will be approved some time this summer.
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- If the numbers in May and June represent a trend that
continues through the fiscal year, the state's shortfall a year from now
could be $20 billion or more.
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- Any sensible manager would be taking steps at this point
to guard against further deterioration in the state's fiscal position.
At a minimum, the Legislature and the governor should enact triggers that
would automatically enact deep and, yes, painful spending cuts if the numbers
continue to slide through the rest of the summer and into the fall.
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- They might want also to consider triggers that would
return taxes to the levels of 1998, before they were cut with a sense of
bravado amid surpluses driven by the surge of tax revenue from stock market
gains that have now disappeared.
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- If lawmakers fail to take one or both of these measures,
the situation could spin out of control before they return after the November
elections. But interviews this week with the key players suggest that neither
the Legislature nor the governor is in any mood to change course.
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- Finance Director Tim Gage says he will "continue
to watch the numbers closely" in the weeks and months ahead but plans
to propose no corrective action. Assemblyman Darrell Steinberg of Sacramento
says it would be "very difficult" to reopen the budget even as
the Democratic leadership and the governor are seeking to secure the four
Republican votes needed to pass the current, flawed version of a spending
plan for the fiscal year that began July 1. And while Republican legislators
complain accurately that the budget is a time bomb waiting to go off, they
have yet to offer a concrete proposal to defuse it.
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- If this keeps up, the state's budgeting and accounting
will make Enron's finances look positively responsible in comparison.
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- The Bee's Daniel Weintraub can be reached at (916) 321-1914
or at dweintraub@sacbee.com.
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- http://www.sacbee.com/content/opinion/story/3621695p-4647717c.html
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