Credible Proposal in a Time of Fiscal Crisis : Willie Brown calls for a budget for two years instead of one

Gov. Pete Wilson and the Legislature are fast coming up against the June 15 deadline for a state budget for fiscal 1992-93. California’s economic situation is the worst since the 1930s. After last year’s combination of tax hikes and spending cuts, another year of Draconian budget measures could be crippling to the state’s economic recovery, which, at best, is now considered slow.

With the new fiscal year only a little more than three weeks away, Sacramento must put a plan on the table. California is going to be $10.7 billion short of what it needs. It must pay off this year’s $3.8-billion deficit, deal with next year’s projected shortfall of $5.7 billion, rebuild a prudent reserve and fund all state programs at current levels while meeting expected growth in school, prison and welfare rolls.

A DEVICE FOR THE ‘90S: The governor--still smarting from last year’s $7 billion in new taxes, an amount that was matched by spending cuts and other adjustments--is insisting that budget cutbacks are the only way to avoid being in the red. But a number of Democrats, including Assembly Speaker Willie Brown, offer another suggestion--spreading the shortfall over two years instead of one.

A two-year budget is a credible proposal, providing that Wilson and the Legislature first balance the figures for next year. That would require the usual haggling, but with a two-year plan the deep program cuts, especially in schools, that would be inescapable in a one-year budget could be avoided. Averting severe cuts would be possible because the $3.8-billion deficit would be paid off over 24 months; in doing so, the state would rely on projections of rising revenues in the second year. However, the plan must specify cuts, or tax increases, that would be made if actual revenues fell short of the amount needed to pay the state’s bills.

A key concern about a two-year budget is that California might head down the slippery slope of living on credit. That is a valid worry. The credit habit is one reason the nation is in sorry shape, having borrowed for years against the future. Many federal obligations have been shifted to state and local governments, exacerbating their budgetary woes. The recession made matters even worse for California when its full fury finally hit the state, which at this point has lost 690,000 jobs.

Much of the $3.8-billion deficit for 1991-92 is attributable to the fact that there has been no swift and robust economic recovery. Steep one-year cuts to make up for the shortfall might permanently set back state programs. One advantage of a two-year budget is that it would permit moderate adjustments, including spending cuts, closing tax loopholes or extending temporary revenue-raising measures such as the sales tax hike put in place last year.

A DEVICE FROM THE ‘30S: The legality of a two-year budget cycle needs to be clarified. Under the state Constitution, the Legislature is required to adopt a balanced budget every year. California is prohibited from incurring debt of greater than $300,000 without a vote of the people. But in the Great Depression of the 1930s, the state operated on two-year budget cycles and raised money by issuing short-term notes called warrants, which did not require a vote.

Legal challenges to this financing mechanism resulted in case law that interpreted warrants as being permissible if they are repaid within reasonable time. Wilson has a contrary analysis of the constitutionality of warrants. Obviously this difference in interpretation must be resolved.

Budget negotiations will take on greater urgency as the clock ticks down to the June 15 deadline. A two-year budget just may be the answer to California’s fiscal headaches, at least for the short term. But we won’t know until Sacramento actually gets to work on the idea.