California Dreamin'

From Investors Business Daily

If the States coffers are so full, wouldn't it be prudent to then look at federal spending bills and cut out all federal pork earmarked for that state? After all, if they want to tax the Oil Companies' "windfall profits" (that's 7 cents profit for every dollar of sales), shouldn't they take the same approach in the public sector?

Posted 11/17/2005
States: Its top fiscal analyst says California's $5 billion budget gap will disappear next year — thanks to an unexpected surge in tax revenues. Good news? Sure. But we remember the last time this happened.

It was 1999, and California's dot-com economy was booming. Revenues soared as the government cashed in capital gains taxes paid by all those Internet millionaires. The problem then seemed simple: How to handle all the newfound high-tech wealth? Lawmakers had an answer: Spend, spend, spend.

Which is exactly what they did. The general-fund budget exploded from $59.87 billion in 1996 to just under $100 billion by 2002 — up 40% in just six years.

Why worry about spending when revenues were through the roof? When boom went bust, California found out. The capital gains revenues that the state relied on dried up, and from 2003 through 2004, the state racked up $45 billion in operating deficits — more than any state, ever. More, in fact, than all the other 49 states combined for those two years.

Now, comes word from the state's top budget analyst, Elizabeth Hill, that in 2006 the deficit will shrink to zero, instead of the $10 billion in red ink expected just last year.

Seems the legislature, with its feet held to the fire by Gov. Arnold Schwarzenegger, has actually cut $6 billion since the Governator took office.

The state is also benefiting from a resurgent national economy that has boosted business and personal tax revenues and spurred new capital gains. Higher oil prices have also helped: In addition to an 18-cent-a-gallon gas tax, California levies a 7.25% sales tax on fuel.

Have spendthrift legislators learned their lesson? Or will it be like 1999 all over again?
"The state has to keep its foot on the gas pedal of getting its fiscal house in order," said budget analyst Hill. "We are not out of the woods yet, and those operating shortfalls are very important."

Yes, "those operating shortfalls." Next year's budget may be OK, but (as the chart shows) things don't look so good beyond that. At current trends, California will in three years be back to a $4 billion operating deficit if nothing is done.

During their last run of good luck, legislators built in all sorts of automatic spending increases. Now, roughly 70% of spending is off-limits to them — making cuts painful if times get tough.
Let's hope they've wised up. When it comes to budgets, a little sobriety goes a long way.