Hard Choices in Hard Times

After three years of being Santa Claus with huge state budget surpluses, Gov. Gray Davis now has to play Scrooge. This is not a happy role for Davis going into a reelection campaign. But he would serve Californians best by being upfront about the severity of the state’s fiscal condition and the need for tough medicine to cope with it.

Economists are optimistic that the downturn will be short. If so, California can expect some short-term trauma but no long-range damage to state programs. After the disclosure of an alarming $12.4-billion drop-off in state revenues from the $80-billion general fund, Davis moved to freeze spending and to order a 15% cut in the budget he’ll introduce in January.

But it’s not safe to assume a quick recovery. The governor needs to be prepared with a second line of budget reductions in the event the downturn drags out longer than now expected. No one knows yet what long-term impact the Sept. 11 terrorist attacks and the nation’s war on terrorism will have on the state’s economy.

If there’s any good news, it’s that this slump is much different from the one that struck California in 1990-91, when the national recession spread to the state, magnified by massive permanent layoffs in the aerospace and defense industries.

Then-Gov. Pete Wilson and the Legislature slashed spending and raised taxes by a combined $14 billion out of a general fund budget of about $50 billion. They also resorted to a number of questionable fiscal gimmicks such as borrowing from pension funds and grabbing some $3 billion worth of state and local property tax revenues. Some of these tactics were later declared unconstitutional, and local government still has not been fully compensated for its loss to the state.

This time, the downturn was spurred by the bursting of the dot-com boom. The state is now missing the revenue it used to get in the form of capital gains taxes paid on profits from the crazy escalation of Internet and high-technology stock prices and as workers cashed in on stock options. But the Internet and technology industries are far from dead. They are bound to reform and blossom once again.

As Davis seeks ways to deal with the fiscal crisis, nothing should be ruled out, including the possibility of temporary tax increases. But some areas should be spared funding reductions as long as possible. These include health and hospitalization programs. As Californians lose jobs, they become more vulnerable to the economic devastation of health care costs. This is a safety net the state must maintain. Local government also should be insulated against another state raid on funds. Finally, the governor should remember the wisdom of investment spending; mental health and other programs that may not seem politically urgent actually prevent more expensive problems.

Election-year politicking cannot be avoided during the coming budget fights in Sacramento. But lawmakers of both parties will be abdicating their responsibilities if they allow political ideology to distort the tough fiscal decisions that they need to make.