Boom-or-Bust Spending: A Budget Cycle We’ve Seen Before

“[The governor] was aided in his [budget] by the strength of California’s economy, which gave him more new money to distribute than he had a year ago,” one newspaper reported. Education was the big winner, said the state finance director, simply reflecting “that the budget is roomier this year . . . and that the governor will devote more money to education whenever he can.” There were expressions of bipartisan support, with the Senate Democratic leader calling the budget “relatively generous in terms of funding for the status quo.”

A major newspaper called the budget “a big-spending document made possible by rising revenues from the state’s economic recovery.” Another crowed, “The biggest winner . . . was--as it should have been--education.” Said the Assembly Democratic leader, “When you look at this budget from the standpoint of working men and women, seniors and children, this budget does the best we can for them.”

Same show. Different years. The first observations were made eight years ago when George Deukmejian unveiled his 1988 spending plan; the second were made last week, when California’s 1996 state budget was adopted. We have heard this song before.

1987 and 1988 were fat years for Sacramento’s budget writers. In 1987, surging revenues--and politicians’ eagerness to spend them--pushed the budget over the spending limit for the first and only time. In 1988, state expenditures exploded 10.3% in a single year. A billion dollars of new funds for education produced a truce in the feud between Deukmejian and the state superintendent of public instruction, Bill Honig (although test scores kept declining.

Everyone but a few conservative malcontents was effusive in praise for the munificence. Sighed one Republican assemblyman as he surrendered to temptation, “I guess we’d better spend all this new money before the big spenders get hold of it.”

But in mid-1988, the economy began to turn downward, and within a year red ink was seeping onto the state’s ledgers.

California’s experience was typical of the states that shopped till they dropped in the 1980s. Writing for the Cato Institute in 1991, budget analyst Stephen Moore summarized the fiscal wreckage of California and other high-spending states with words that should be haunting in 1996: “With few exceptions, the states with the most severe deficits today are those that saw their economies and tax revenues grow rapidly over the past decade, but allowed spending to grow even faster.”

The growth of California spending, for example, outpaced the national average by 15% during the 1980s. Beneath the “Iron Duke’s” dour exterior, it turns out, there beat the heart of a party animal.

According to Moore’s study, the frugal states that restrained their growth in the 1980s as a whole avoided crippling tax increases and massive budget deficits when boom turned to bust. Many ran surpluses.

California, of course, was not one of them. As recession-ravaged revenues could no longer maintain the bureaucracies in the style to which they had grown accustomed, lawmakers attempted to fill the widening budget gaps with unprecedented tax increases and borrowing. The record-shattering 1991 tax hike plunged the state’s economy from recession to near-depression, while California’s total debt soared from $18.2 billion to $28.6 billion between 1990 and 1994.

Deukmejian at least maintained a 3% reserve until the last year of his administration, without which the state’s fiscal plight would have been even worse. This year’s budget provides about one-fifth of that cushion.

California’s 1996 budget repeats the 1988 experience in almost every detail. State spending will leap 9% over last year’s budget and Sacramento’s solons will be able to appease every bureaucrat in town. California’s public school system will get $2.5 billion more than was budgeted last year, up 11%, although serious proposals to change performance incentives, such as targeted vouchers, were abandoned.

The old parable of the ant, who stores a surplus in the summer in order to endure the winter while his cousin the grasshopper first feasts and then starves, is as true for governments as it is for families and businesses. Frugality in good years softens the hard choices in lean ones.

Ironically, an administration that has grappled for six years with the harsh consequences of such choices now sets in motion the same cycle for its successor when the economy turns downward again.

It’s the same old song, a familiar California medley: “Let the Good Times Roll,” followed by “The Party’s Over.”