The Truth About This Budget : Sacramento avoids IOUs--but is neck-deep in red ink

Working through the long holiday weekend, the Legislature managed to pass a budget so the state will not have to resort to IOUs to pay its bills. The fact that the state is spared the fiscal chaos and obloquy that would have resulted otherwise is indeed good news. The bad news is that California now begins the new fiscal year with a level of deficit spending unprecedented since the Great Depression. Of course, Sacramento is operating in an economic environment unprecedented since the Depression.

In order to “balance” the two-year, $57.3-billion budget, the state is taking on a record $7 billion in short-term borrowing, cutting benefits to the needy and disabled, and counting on, for year two, $2.8 billion in federal funds that are yet to be committed.

In short, the budget--which Gov. Pete Wilson is expected to sign today--was politically expedient. But deficit spending will haunt us as it did before this budget was passed. A spooked Wall Street sought reassurances that California was good for its debt. The Legislature had to pass an unusual standby measure that triggers automatic spending cuts across the board if the state suffers cash-flow problems; the move ensures that creditors will be paid and helps to maintain California’s credit rating--for now. Only for now, because the red ink that threatened the state’s credit rating will persist.

It is unlikely that the $3-billion deficit accumulated over the last three years will be whittled down significantly over the fiscal year or even the year after. It also is unlikely that the federal government will come through with the full $2.8 billion (although rightly it should) that Wilson is seeking in reimbursements for state services to illegal immigrants.

The state budget process has long been dysfunctional. Fashioning a creative way to pay down the deficit should be a major issue in this year’s governor’s race. We must find some alternative to either significant new taxes or significant new cuts to vital social programs.

Securing new loans to pay old loans to finance the costs of the deficit translates into a further decline in services and infrastructure. California simply cannot afford to mortgage its future forever.