Cause for Caution

Last summer, with Pete Wilson boasting that the California economy was a rocket taking off, the Republican governor and Democrats in the Legislature indulged in a mini-orgy of spending on tax cuts and new programs. The state treasury was bursting with unexpected revenues. Wilson’s advisors sought to minimize the impact of the Asian fiscal crisis on the California economy. And when Wilson finally signed the state budget into law, he said beamingly that he was leaving his successor a $2.5-billion budget reserve, the biggest in years.

That was in the balmy days of summer. Now winter is approaching and guess what? Elizabeth G. Hill, the Legislature’s fiscal expert, estimates that the reserve has dwindled to $331 million in the current budget year. Her projection is that next year’s budget will be in the red by about $1 billion if revenues and spending continue at present levels.

The California rocket hasn’t flamed out. It’s just lost some of its sizzle. Hill is not expecting a recession, merely a softening of the economy, especially in collections of personal income taxes. And some costs of government ran higher than expected last summer; notably, there was a $309-million increase in Medi-Cal.

The decline in growth should right itself within a few years. But for now, it would be prudent for incoming Gov.-elect Gray Davis and the Legislature to exercise fiscal restraint. In fact, Davis will have to trim some ongoing expenses if he is to present a balanced budget to the Legislature in January.

This may be an unforeseen benefit for Davis. The Democrat campaigned as a moderate who would not dramatically change the course of government. But many Democrats in the Legislature, looking forward to one of their own being in the governor’s office for the first time in 16 years, are eager to enact some of the spending programs that have been vetoed over the years by Republicans. Hill’s report on Thursday allows Davis to fend them off for now by insisting that fiscal prudence must be his administration’s top responsibility. Indeed, it should be.

Craig L. Brown, Wilson’s departing finance director, emphasizes that Hill’s estimates represent a change of no more than 1% in the state’s general fund. The state will not really have a good fix on next year’s revenues until after income tax returns are filed in April. There was a giant, pleasant surprise the last two Aprils, with billions in unexpected new money pouring into the treasury.

But it’s clear that the state economy has moderated since then. While job creation remains ahead of national trends, California is heavily dependent on high-technology exports, particularly to Asia. Exports to Asia during the first half of this year fell sharply and were not offset by increased sales to Mexico, Canada and Europe. Brown said there easily could be another happy surprise next April. But it seems far more likely that April could bring sober economic news.

We expressed serious concern last year about Wilson’s insistence on a $3-billion cut in the state car tax, on top of a $1-billion reduction in income taxes in 1997. Fortunately, the Legislature forced Wilson to compromise and accept a reduced car tax cut, one that will cost the state $1.4 billion in fiscal 1999-2000. In the coming year, the Davis administration will have to exercise fiscal restraint and seek to discourage the pent-up spending desires of Democrats. Such an approach, in fact, could get Davis off to a sound beginning in his governorship.