Why the budget never adds up

In this decade, California has run a budget deficit -- spent more than it has collected in taxes, fees and interest on cash reserves -- nearly every year. But that has been largely hidden from the public. From 2000 to 2003, the deficits were concealed by cash reserves carried over from the Internet boom. In 2005 and 2006, they were also masked by more than $20 billion of borrowing treated as "revenue."

Getting the accounting right isn't just a cosmetic nicety. It's essential to letting policymakers and the public see the real problem. If the public understood today that California's core problem is an ongoing structural deficit of about $5 billion a year, currently exacerbated by the housing bust, it would be easier to come up with a solution.

Real budget reform starts with transparency. Budget documents should lay out spending, revenue and whether the balance between the two produces a surplus or a deficit, as federal budgets do. Only taxes, fees, interest and transfers from other government funds that don't have to be paid back should count as revenue. Money borrowed in financial markets or from other government funds should be listed as borrowing. Any cash surplus in a budget year should be assigned to the existing rainy-day fund created by Proposition 58 in 2004, and the budget should clearly say when those funds are being tapped to cover a deficit.

None of this requires a constitutional amendment such as Schwarzenegger is seeking. It only takes an agreement between the governor and the Legislature to set up a clear and honest accounting of the state's finances.

* Adopt pay-as-you-go budgeting. California's current budget crisis has its roots in the Internet boom of the late 1990s, when the state, its coffers overflowing with tax revenue from capital gains and stock options, raised spending for such programs as children's health and Cal Grants for college students and cut the vehicle license fee and other taxes. Then the boom went bust, leaving California with the structural deficit that continues to plague us. Ever since, the budget reform debate has centered on creating some constitutional contraption to prevent the state from again enacting programs or tax cuts that cannot be sustained over the long run.