12.01.2003

From today's Wall St Journal
Arnie's Choice

By TOM MCCLINTOCK

Have you ever had to make serious cuts -- 15% or more -- in your family budget because of an unexpected job -- loss or unforeseen expense? It's not pleasant, but it's not impossible. And it's also not permanent. As long as you're willing to face your financial problems squarely, you can be sure that the hard times won't last forever and things will improve.

But if you're not willing to face those problems -- if you paper over your debt by borrowing and continue to spend as if that debt didn't exist -- those hard times will follow you far into the future.

State government is no different. And as the new administration decides which road it will take, it is important to understand the simple math of the state's finances.

California's current budget deficit is caused by two actions Gray Davis took last year to paper over his mismanagement: He illegally tripled the car tax and he attempted to borrow $12.6 billion unconstitutionally.

Gov. Schwarzenegger rescinded the illegal tax increase on his first day in office. It's important to note the word "illegal." Not one of the conditions required to raise the car tax had been met, and it was only a matter of time before the courts ordered the money to be returned to taxpayers with interest. By acting now, he saved California from having a multi-billion dollar hole blown in a future budget by court order.

But repairing this problem requires that local governments be reimbursed for their losses. In addition, the courts have already invalidated $1.9 billion of Mr. Davis' borrowing plan, further deepening the deficit. According to the Legislative Analyst's Office, these developments mean that the state will end up spending $76.9 billion this year, with only $74.2 billion in revenue.

It gets worse. The courts are also poised to strike down the additional $10.7 billion of borrowing in Mr. Davis' last budget. It is not a pleasant financial situation. But it is also not impossible. If the current rate of state spending were reduced 13.4% on Jan. 1 and frozen through Gov. Schwarzenegger's first budget, the state would be back in the black, free and clear of external debt, and able to start the governor's second year in 2005 with a clean slate.

A 13.4% reduction would mean cutting $5.2 billion from this year's budget before Jan. 1 and setting next year's budget at $66.6 billion. That's a big cut -- and it means giving up billions of dollars of programmed spending increases next year. But it's still 15.2% more than California was spending when Mr. Davis took office. And after 18 months of austerity, Gov. Schwarzenegger would be able to plan his second budget with $12 billion of breathing room in 2005 when revenues are projected to reach $78.6 billion. Like a family that has faced its finances squarely and tightened its belt, California would be solidly back on its feet and looking toward a sunny future.

The alternative is to borrow the difference at heavy rates of interest over the next generation. Like a family that can't bear to change its ways, it would end up dragging its financial difficulties into future years as it struggles to meet its current expenses and pay down a crushing credit-card debt as well.

These are the two roads diverging in the budget woods and the choice that is made in coming weeks may well determine whether California has the fresh financial start it deserves, or whether the ghost of Mr. Davis' excesses stalks a generation to come.

Mr. McClintock, a Republican California state senator, recently ran for governor of California.

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