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  A “Fantastic” Budget
by Tom McClintock [politician] 1/22/07

According to Gov. Schwarzenegger, California’s financial condition is “fantastic.” Spending has been brought under control, the budget has been balanced and our debt is being paid down.  But as Churchill once said, “It is not possible to state the opposite of the truth with greater precision.”

To the governor’s credit, he has proposed some long-overdue spending reforms, most notably conforming state welfare eligibility standards to federal law.  

Tom McClintock

Mr. McClintock is an expert on matters of the State budget and fiscal discipline. He is a Senator in the California State Legislature and ran for Governor in the 2003 recall election. His valuable website is found at www.tommclintock.com [McClintock index]

But there’s very little else to praise about the Governor’s handling of the state’s finances.

In fact, spending is growing faster than it did under Gray Davis, the state is now running the biggest deficit in its history, and the only way it can pay its bills is because of massive borrowing carried over from 2004, contributing to a doubling of the state’s debt burden in just three years.

When Gov. Schwarzenegger claims the budget is balanced, he ignores his Finance Department’s own figures that report a $7.6 billion shortfall in the 2006 budget ($1 billion worse than Davis’ worst year in 2000).  His proposed 2007 budget adds $1.9 billion more to the state’s ocean of red ink.  

The Governor justifies his claim that the budget is balanced by concocting a new accounting concept he calls the “net operating deficit.”  Here’s how it works: to enable his claim that he is paying down debt when it is actually increasing, the Governor made some pre-payments during the last two years – akin to paying more than the minimum balance on your credit cards.  But to hide the deficit he created on the other side of the ledger, he simply doesn’t enter those payments in the state’s checkbook.  (Don’t try this at home, boys and girls, or you’ll be hearing from your banker).  

California can get away with such bookkeeping gimmickry for a while because unprecedented borrowing in 2004 and a revenue windfall last year allowed Gov. Schwarzenegger to begin the year with $10.8 billion in the bank.  The state’s deficit spending will nearly exhaust that cushion by next year under the Governor’s proposal.  

Meanwhile, borrowing is now completely out of control.  When Gov. Schwarzenegger took office, the percentage of the general fund required for debt service was three percent.  Since then, that burden has doubled to six percent and will exceed eight percent next year.  Put another way, our minimum credit card payment now consumes more tax money than the budget of the entire University of California.  Ironically, the state’s debt service ratio never exceeded 2.2 percent throughout the 1960’s, when California was at its zenith in public works construction.

The new budget purports fiscal restraint – growing the general fund just one percent (after a staggering 30 percent during the last three years).  But this is based on some very shaky assumptions that are very unlikely to materialize.

State revenues in 2006 were projected to grow just 1.2 percent, and actual revenues are now falling behind even his modest goal.  The Governor’s 2007 budget is predicated on robust 7.1 percent growth next year.  If the state’s economy merely does not deteriorate any further, it will produce a $7.5 billion deficit – placing the state on the brink of insolvency within 18 months.  

But even assuming that every one of the Governor’s calculations is correct, and the Governor’s budget is adopted intact, the condition of the state’s finances will be this:

  • The cumulative four-year general fund deficit under this administration will be $5.2 billion, compared to $4.2 billion during the five years under Gray Davis.
  • State general fund spending will have increased at an average annual rate of 7.9 percent, compared with 7.1 percent under Davis.
  • The state’s debt service ratio, which Davis reduced from four percent to three percent, will have more than doubled – and by the following year nearly tripled.

The Oxford English Dictionary notes that the original meaning of the word “fantastic” as, “existing only in imagination.”  Perhaps that’s what the Governor means. CRO





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