California’s Spending Addiction

In a new column, Reason Foundation’s Adam Summers explains what caused California’s massive budget deficit. Summers writes:

California is facing a historic budget crisis and has only itself to blame. State lawmakers have been on a spending binge for years and voters have added to the problems by approving massive bond measures and multi-billion-dollar boondoggles like high-speed rail that they cannot afford. The state’s projected budget deficit is expected to balloon to $42 billion over the next 18 months. It has now eclipsed the enormous deficit the state experienced under then-Gov. Gray Davis, a feat of fiscal mismanagement which in large part led to Davis being recalled. In his 2009 State of the State Address, Gov. Arnold Schwarzenegger described the enormous deficit as a “rock upon our chest,” and announced that the state “faces insolvency within weeks.” To make matters worse, Standard & Poor’s recently cut California’s general obligation bond credit rating-tying the state with Louisiana for the worst credit rating in the nation-and placed it on a negative credit watch for another potential downgrade. This means it will be expensive if and when the state borrows more money to pay its bills. In truth, California never really recovered from the last economic downturn. The state was riding high during the late 1990s, projecting record revenues as far as the eye could see, and spending every penny of them-and then some. Then the “dot-com” bubble burst and the state was caught off-guard and unprepared. By fiscal year 2003-04, officials were projecting a deficit of between $26 billion and $35 billion over 18 months. Some slick accounting moves and relatively minor measures pared the deficit somewhat, and a $15 billion “economic recovery bond” (Proposition 57) was passed by the voters in March 2004. The passage of the bond was a radical departure from typical government financing practices. General obligation bonds are usually reserved for large infrastructure projects that will benefit those that have to pay them off for years down the road. In this case the bonds were saddling future generations with debt to pay for today’s day-to-day expenses. It’s like using your credit card to buy groceries and pay your rent. Not surprisingly, less than five years after the passage of the $15 billion bond, California found itself facing another $15 billion deficit, which has since grown to $42 billion. With much fanfare, and after a record delay of nearly three months, the state budget for the 2008-09 fiscal year was signed by Gov. Schwarzenegger on September 24, 2008. Despite the fact that it was clear by then that the economy was getting even worse, the budget deficit was largely ignored. Policymakers just papered over the problems, kicking the can down the road for another year – again. When Gov. Pete Wilson took office in 1991, the state budget was $51.4 billion. When he left eight years later, it was $75.3 billion. After five years of Gov. Davis’s administration, the budget had jumped to $104.2, and after another five years under the stewardship of Gov. Schwarzenegger, it has continued to increase significantly to its present level of $144.5 billion. In just the last 10 years state spending has nearly doubled, increasing approximately 92 percent. A good rule of thumb in government budgeting is that the rate of spending increases should not exceed the rate of population growth, plus inflation. California’s last three governors have not fared so well by this metric. Gov. Wilson managed best, holding average annual General Fund spending increases to 4.88 percent, compared to population plus inflation growth of an average of 3.72 percent a year. Under Gov. Davis, spending rose an average of 6.73 percent a year versus population plus inflation growth of 4.83 percent. Spending has grown slightly higher under Gov. Schwarzenegger-even considering that spending in the current fiscal year was basically held flat-increasing 6.75 percent a year, compared with population plus inflation growth of 4.98 percent a year. Over the entire 18-year period, state spending grew at an average annual rate of 5.91 percent, while population plus inflation grew only 4.38 percent a year, on average. California can’t blame its huge deficit on the recession, tax revenues, the stock market or any other excuse lawmakers might come up with. The Golden State has pushed tough fiscal decisions down the road, used accounting gimmicks to shift and hide deficits, and relied upon borrowing and bonds to pay the bills and finance projects. Gov. Schwarzenegger and state lawmakers won’t fix the underlying budget problems until they admit the state has a spending addiction.