Davis’ Fix Is Like Wilson’s Dilemma

Upon taking office in January 1991, Gov. Pete Wilson faced the same problem Gov. Gray Davis confronts now: a deep budget shortfall and no easy way out.

Then, as now, costs of welfare, prisons, public schools and other state-funded programs simply outpaced tax receipts. Three days after being sworn in, Wilson summed up the situation with an observation echoed today:

“Fundamentally,” he said, “the state suffers from a structural budget problem.”

Initially, the Republican governor thought the shortfall he faced was $7 billion. By the time he signed his first budget into law in mid-July 1991, the deficit had ballooned to twice that. To fill the gap, he agreed to spending cuts and accounting tricks that saved $7 billion, and tax increases intended to raise $7 billion more.

Eleven years later, Wilson hasn’t flinched from what he says are bedrock budget principles. There are three ways to handle a shortfall, he says: Cut spending, raise taxes, or use a combination of the two.

Reviewing Davis’ proposal to close a shortfall now projected at $12 billion, Wilson says his Democratic successor has chosen a fourth alternative--deficit spending--that Wilson contends may be illegal under state law. At the very least, Wilson says, Davis’ budget is a prescription for tax increases in coming years.

“I think it is unconstitutional,” Wilson said in an interview. “Even if it were legally permissible, it is terrible economic policy. Talk about undermining not just your credit with the rating agencies. . . . Anybody with a brain that looks at this situation sees the almost certainty of future tax increases.”

Susan Kennedy, a top Davis aide, responded by calling Wilson “the king of budget gimmicks.” She defended Davis’ proposal to fill the $12-billion gap by cutting $5.2 billion, seeking $1.1 billion from the federal government and raising more than $5.6 billion through loans, transfers and other accounting mechanisms.

“Every governor faced with a deficit of any magnitude has used every financial tool at their disposal,” Kennedy said. “In many ways, Gov. Wilson cut the path. He was a trailblazer. You can’t accuse [Davis] of pushing the problem off to any colossal degree.”

The budget decisions Wilson made in his first years in office ended up shaping much of his tenure. He angered conservatives in his own party by raising taxes, and alienated influential interest groups, particularly education lobbyists and state workers, with his decisions to cut state programs and limit pay raises.

Three years out of office, Wilson, 68, is a fellow at the Hoover Institution at Stanford University and an appointee of President Bush to defense policy and intelligence oversight boards.

Even now, some Republicans try to distance themselves from Wilson, worried that his vocal opposition to illegal immigration--particularly state costs associated with it--alienated Latino voters.

But he remains the last Republican to win major statewide office in California. And as the state faces a new deficit, some Capitol veterans praise Wilson’s handling of state finances during the recession. At a hearing this week, Senate Budget Committee Chairman Steve Peace (D-El Cajon) said Wilson had shown “courageous leadership.”

“He managed to get us through,” Peace said. “We did not cut funding for core programs.”

There are parallels between Wilson’s and Davis’ budget crises and their strategies; there are also differences. One is scale.

In the early 1990s, the general fund budget, which relies primarily on taxes Californians pay on personal income, retail sales and corporate profits, was about $40 billion. With the sputtering economy wreaking havoc on state finances during Wilson’s entire first term, the general fund, which pays for most state programs, shrank.

Today the general fund is nearly twice the size of Wilson’s. The spending plan that Davis offered earlier this month calls for a slight increase in the general fund from the current year--to $78.8 billion in the fiscal year that begins July 1, up from $78.4 billion.

Another difference involves timing. Wilson faced a deficit during his first year in office, and smaller though still multibillion-dollar deficits in following years. By 1994 when Wilson was running for reelection, the economy, although still slow, was recovering.

Davis is dealing with a slowing economy and a budget deficit at the same time that he and most legislators must face voters. He cannot afford a budget impasse that drags on through the summer, when he otherwise would be on the campaign trail.

“[Davis] may be facing a tough election fight,” Wilson said. “It doesn’t change the dynamics of the situation. If his choice is to decide whether he is going to do what’s best for himself or what’s best for the state, he should chose what’s best for the state.”

Davis’ Aide Dismisses

Wilson’s Criticism

Kennedy dismissed Wilson’s suggestion that Davis is postponing such hard decisions as imposing unpopular spending cuts or tax increases until after the November election. The budget, she noted, is sure to change when revenue estimates become firm after people pay their income taxes in April.

“Do you slash the safety net by several billion dollars in anticipation of a problem two years from now?” Kennedy asked. “Do you raise taxes to solve a problem two years from now?”

Among the similarities between Davis’ quandary and the one Wilson faced in the early 1990s are the governors’ approaches to cuts. Davis is calling on the Legislature to freeze annual cost-of-living raises for people on welfare, a proposal decried by some Democrats. Wilson not only froze cost-of-living increases, but also presided over reductions in monthly welfare checks.

In another similarity, Davis, like Wilson, is seeking help from Washington. Wilson in 1994 demanded $3.1 billion in federal assistance to cover costs associated with illegal immigration. He got a fraction of that sum.

“It was a political decision to go after the federal government for $3.1 billion; it bought him time,” Kennedy said. “But for [Wilson] to have that as part of his portfolio of solutions and criticize this governor is a farce.”

Davis is seeking $1.1 billion, including $400 million more for health care for poor people and $350 million in costs related to security against terrorism. Unlike Wilson, Davis has not publicly identified cuts that he will impose if the money does not come.

“It was worse than pulling teeth,” Wilson said of his efforts to persuade Congress to come to California’s aid.

Both governors also sought to borrow money, as did governors before them.

By far the bulk of Wilson’s borrowing was short-term, spread over a year or two. Like Wilson, Davis is turning to the massive state pension funds, though he is seeking more. He proposes to skip $2 billion in payments to the pension funds of teachers and state employees. If approved, the move could result in $10 billion in principal and interest costs and improved benefits, spread over 30 years, Davis’ Department of Finance estimates.

In addition, Davis proposes to obtain $2.4 billion this year by selling a long-term bond to be repaid from the state’s $500-million annual share of the 1998 national tobacco litigation settlement. The administration places the annual cost of borrowing against the settlement at $190 million for 22 years. The tobacco money currently is used for a variety of health care programs.

Governors’ Budgets

Finance Their Legacies

As Davis faces his first shortfall, the warnings sound a lot like the observation in Wilson’s first budget about the need for structural changes. The nonpartisan legislative analyst’s office said in a recent report that unless “corrective actions” are taken--deeper spending cuts and tax increases are two such steps--California will face deficits for years to come.

Governors and lawmakers use budgets to finance their priorities and their legacies. In the process, they sometimes saddle incoming governors with costs. Wilson rolled back taxes in his final budgets, all but erasing tax increases he presided over in his first year.

Some of Wilson’s tax cuts took effect in Davis’ first years. In 1999 and 2000, however, California’s economy was so strong that Davis enjoyed record surpluses and even used the surplus to increase spending.

General-fund spending grew almost 36% during Davis’ first three years, rising more than $20 billion, with public schools, the issue that Davis has focused on more than any other, receiving almost a third of that sum.

During Wilson’s eight years, general-fund spending rose 43%, to $57 billion. In his view, the pace cannot continue.

“They have been spending at a merry rate,” Wilson said of his successors. “The same people who were full of new ideas as to how to spend the bonanza obviously are not very good candidates for people who will reduce it. But that is what they have to do.”