Davis Battens the Hatches

California government is entering a fiscal storm just half a dozen years after emerging from a deep and damaging recession. The sunny boom years between are fading fast. There’s no cause for panic, but Gov. Gray Davis is shifting course, as he should. He is being far more selective about approving legislation that creates new spending programs. He has asked state agencies to prepare contingency budgets for the next fiscal year that are down by 15%, a valuable exercise even if the ultimate cuts need not be that deep.

While squeezing elsewhere, the state must stay prepared to spend on its social safety net. Davis already has waived the one-week waiting period for unemployment insurance benefits for airline workers. The state should consider similar action for others as the shock of Sept. 11 ripples through the economy.

A decade ago, the national recession finally came to California, magnified by the collapse of the defense and aerospace industry. In his first year in office, Republican Gov. Pete Wilson was forced to accept budget cuts and tax increases totaling $14 billion.

Davis, a Democrat who took office in 1999, benefited from a booming post-recession economy fueled by the technology revolution. Now, the dot-com boom is bust.

Worse yet, California is stuck with the huge costs of the energy crisis. The terror raids of Sept. 11 are devastating the airline, tourism and other industries. The state budget for the fiscal year starting next July 1 will be $5 billion to $7 billion in the red.

That could balloon to $13 billion if the state fails to float a bond issue to pay for energy costs, including $6 billion borrowed from this year’s budget. It’s critical that the bond issue, totaling $12.5 billion, be approved. But Davis and the state Public Utilities Commission are bitterly divided over its terms. Davis opposes letting the PUC keep regulatory authority over state power purchases, including the right to order the state to renegotiate deals it considers bad. Davis and the PUC must sit down and compromise. The bond sale must proceed because some major state debt is coming due. But the PUC, which keeps consumers’ interests in mind, must also retain some independent control over state electric power purchases.

California’s plunge into recession a decade ago was masked by a gubernatorial campaign that glossed over it. The severity of the situation did not hit home until Wilson took office. This time, the warning signs are more visible.

The economy is certain to be a major issue during the coming campaign, in which Davis and more than half the members of the Legislature will be seeking reelection or other offices. They will not relish having to administer bad-tasting medicine, possibly including a tax increase.

Some incumbents may try to minimize the extent of the economic damage and the need for budget cuts or taxes that might trigger voter wrath. This would be a grave mistake. Californians got a nasty surprise in 1991 when they learned just how bad the recession was. This time, forewarned is forearmed.