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State Spent Its Way Into Budget Crisis

Davis, legislators of both parties lavished windfall on programs. Analysts see years of pain ahead.

October 29, 2002|Jeffrey L. Rabin | Times Staff Writer

During Gray Davis' term as governor, California's state budget has gone from a record surplus to a record deficit.

When the state treasury was flush with cash, the governor and lawmakers from both political parties pushed state spending to new heights. In part, that money was spent to expand programs -- especially in education -- that locked the state into future spending.

But when the economy faltered and revenue sank, the governor and the Legislature kept spending at near the levels they established early in Davis' term. So now, instead of having billions in the bank, the state is borrowing billions from the future to pay today's bills.

Republican Bill Simon Jr. has criticized Davis for his handling of the state budget, saying that he would bring smarter fiscal management to a state that has seen its fortunes reverse in recent years. Indeed, California's deep fiscal problems will be a front-burner problem for the next governor -- no matter who wins Nov. 5.

The seeds of the state's budget difficulties were sown in Sacramento and on Wall Street.

When Davis took office in January 1999, the stock market was climbing toward a historic peak. The state's high-tech economy was turbocharged. Silicon Valley was booming.

The surging stock market pumped new money into state coffers, helping to build a surplus of $8 billion in 1999-2000.

State income tax receipts just from taxpayers exercising stock options and taking capital gains on the sale of assets more than doubled from nearly $8 billion in 1998-99 to $17.6 billion in 2000-01.

State Finance Director Tim Gage said administration officials understood that the windfall from stock options and capital gains would not last forever and tried to set aside a portion of the extra money for one-time spending programs.

Even so, the governor and lawmakers responded to the state's good fortune by embracing sharply higher spending, particularly for education. The state also embarked on a major expansion of health coverage for uninsured children, more college scholarships and raises for state employees. Lawmakers also gave back money to taxpayers in the form of reduced motor vehicle fees.

In the first two budgets of the Davis administration, the state's general fund spending shot up by $20 billion, accelerating a growth trend that began in Gov. Pete Wilson's second term. Those spending plans won approval with solid support from Republican lawmakers.

Susan Kennedy, cabinet secretary to Davis, said that when Davis became governor, he was determined to address "16 years of pent-up demand" for school funding, transportation and health care for uninsured children.

During Davis' tenure as governor, state spending for kindergarten through high school education increased by $15 billion to $56 billion, a 37% jump.

Per-pupil spending on California public schools has risen from $5,756 to $7,067 a year, a 23% increase since the last budget of the Wilson administration. From near the bottom, Davis administration officials said, California's spending per pupil has climbed toward a middle ranking compared with other states.

Student fees for California residents at the University of California, state colleges and universities, and community colleges were cut 5% during Davis' first year in office -- with the state government stepping in to make up the difference. The reduction followed a similar decrease in the last year of Wilson's governorship. Those fees have not gone up.

In an effort to extend health coverage to uninsured California children, enrollment in the state's Healthy Families program has increased more than twelve-fold to 624,000. The program is expected to cost the state $672 million this year, more than six times the amount in Wilson's last budget.

During the boom years, lawmakers also reduced the fees charged at state parks and enacted tax breaks for business, teachers, research and development, child care and elder care.

But when the tech bubble burst, the income tax windfall from stock options and capital gains abruptly ended. State revenue plummeted by 15%, the largest drop since the Great Depression. And the state's cash reserves were being eroded by $6 billion on spending for power purchases during the energy crisis.

"The speed with which the revenue dissipated was just shocking," said Tom Lieser, senior economist with the UCLA Anderson Forecast.

Since the peak in early 2000, the stock market's steep slide has slashed income tax receipts by more than $10 billion, according to an estimate from the legislative analyst's office.

Finance chief Gage said the stock market dive caught everyone by surprise. "No one saw this coming, at least not to this magnitude."

While the downturn depressed revenue in many states, California and its high-tech economy suffered a particularly hard blow.

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