Old LAO Wisdom

JULY 30, 2010

Oh, what a difference six years makes.

We were cleaning out our conference room the other day, going through stacks of old government reports and think tank studies when we found a copy of the Legislative Analyst’s Office’s report California’s Fiscal Outlook, published way back in November 2004. Taking a break, we thumbed through the old report, which covered 2004-05 through 2009-10.

It was fascinating.

And we didn’t have to go far to find the good stuff, either – it started on Page 1 with the warning that the state faced a “nearly $10 billion” budget deficit and that something really had to be done soon to correct it.

That’s right: the state was not quite $10 billion in the red, and the LAO was concerned.

“The size and persistence of this shortfall, even in the face of an expanding economy and strengthening revenues, underscores a critical point that we have made in the past,” the LAO report states, “namely, it is unlikely that California will be able to simply ‘grow its way out’ of this shortfall.”

How quaint. Let’s think back to the state of affairs back in November 2004. Arnold Schwarzenegger had been governor for a little over a year. The unemployment rate for the state was 6.1 percent (5.5 percent for the nation).

Times, as they say, were good. And the LAO was predicting that good times would last: for the rest of the decade in California, the analysts said, unemployment would remain practically frozen at 5.5 percent.

Revenue was pretty good, too. The state pulled in about $75 billion in tax revenues in 2003-04. And that number was scheduled to climb between four and six percent each year for the rest of the decade, topping out at $105 billion in 2009-10.

And yet, there was still that budget deficit of nearly $10 billion. Most troubling to the LAO was the fact that the deficit was structural. “The state has been plagued with a large structural budget shortfall since 2001-02, when revenues plunged following the recession and the steep decline in the stock market,” the LAO reported. “The annual gap between projected revenues and expenditures has been massive, reaching as much as one-quarter of annual General Fund spending.”

The government’s then popular solution – deficit financing – scared the LAO even more. “While budget-related borrowing enables the state to maintain funding for programs and avoid deeper cuts or revenue augmentations in the year in which it is undertaken, it is a temporary solution, which does nothing to address the ongoing mismatch between revenues and expenditures,” the LAO report stated. “Just as importantly, the borrowing eventually becomes a drag on future budgets, as revenues are diverted from current programs to pay for past borrowing.”

That was six years ago. Today the 2008-09 housing crash continues to devastate the state’s economy, with unemployment in California standing at more than 12 percent. It’s not dropping below 10 any year soon.

State tax revenue, according to the LAO’s November 2009 Fiscal Outlook report, is nothing like what was projected six years ago. The state took in just $83.6 billion in 2008-09 ($98 billion had been forecast). By 2011, revenue is barely going to rise to $84 billion, if current trends stand.

And the budget deficit, as has been widely reported, tops $20 billion. Far from “growing our way out” of our deficit, it’s actually doubled in less than a decade.

And true to form, legislative leaders are still pushing deficit borrowing, though Assembly Speaker John A. Perez’s proposal to borrow $9 billion got slapped down by, of all people, Attorney General –and gubernatorial candidate – Jerry Brown, whose office decreed back in June that such a plan would violate state law.

About the only thing that’s stayed the same is the LAO’s sobriety: “[T]he scale of the deficits is so vast that we know of no way that the Legislature, the Governor, and voters can avoid making additional, very difficult choices about state priorities,” the LAO reported last November.

Anyone want to bet how many of those “difficult choices” state officials – who are still nowhere near approving a state budget – end up making?

-Anthony Pignataro

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