Be Happy, Be Prudent

The Legislature’s budget analyst has taken an advance peek at California’s immediate fiscal future and declared the outlook is bright. In releasing her 44-page assessment last week Elizabeth G. Hill said, “The bottom line is our fiscal outlook is very positive.”

But the careful reader will discover that this silver lining may not be a lasting one. Anyone who considers Hill’s analysis as a go-ahead for greatly expanded state spending next year is mistaken.

There are always assumptions attached to such forecasts. And one of Hill’s is that the economy will remain strong, producing revenue growth of about 5% in each of the next two years. Indeed, income for this year is running $500 million more than forecast a few months ago. The state’s reserve fund by the end of 1998-99 should approach $1 billion, based on present state spending levels.

But in the following year, the situation suddenly turns darker, largely due to spending measures enacted by the 1997 Legislature that grow in fiscal impact over time. Chief among them is an income tax cut that has hurt little this year but eats into revenues by $591 million next year and by more than $1 billion annually thereafter.

In fact, if present levels of spending continue unchanged, Hill says California would wind up fiscal 1999-2000 paying out $530 million more than it takes in. That is called deficit spending, and it’s a loser.

Even so, there will be considerable pent-up spending energy this January when the Legislature convenes, in part because of 1997 budget cuts required to pay off a $1.3-billion debt to the state pension fund. Lawmakers will want to restore those funds and presumably push other election-year programs since the economy appears strong and revenues are growing.

But Hill cautions that any major new proposal should be balanced by offsetting savings. And she urged lawmakers to put a priority on other issues involving California’s long-term fiscal health--issues that mostly were ignored this past year.

For instance, California has a $33.5-billion backlog in construction needs, primarily for transportation and education. And the state does not have the emergency reserve it needs.

The Legislature has yet to tackle one of California’s most pressing needs: comprehensive reform of the tangled fiscal relationship between state and local government. While the state feasts on a bounty of revenues, cities and counties remain on starvation diets.

Hill’s appeals for long-term solutions and her cautions about new spending tended to be understated. After all, she is the Legislature’s employee and it would be imprudent for her to lecture her bosses about their failure to act on important matters. But she knows and they know that long-term fiscal problems of California cry out for solution.

On the Rebound

State general fund revenues (in millions of dollars)

Source: Legistlative Analyst’s office