California’s Achilles Heel

The state of California struggles more than often with budgetary problems.  The last major
budgetary crisis occurred on the heels of the ‘Dot.com’ crash.  The state of California had a
$14 billion deficit after its collapse during the 2001-02 Fiscal Year. It took several years and
the recall of a Governor to reverse that trend.

Yet again, the State faces another $14 billion deficit in Fiscal Year 2008-2009 following the
mortgage meltdown or what others call the bursting of the real estate bubble. Thus, the
increases in tax revenue from the previous Fiscal Years, specifically 2004-05; 2005-06 and
2006-07 have all been spent, hence the deficit.

You would think Californians would learn. The more prosperous times in the late 1990s,
tax receipts grew from $62.7 billion in Fiscal Year 1996-97 to $94 billion in Fiscal Year 2000-01.
California’s elected officials increased spending by 50 percent in the course of four years,
rising from $62 billion to $92 billion. But when the revenues began to decline, dropping to
$83 billion in Fiscal Year 2001-02, legislative action raised spending $14 billion to $97 billion.
The State borrowed money to make up the $14 billion deficit which taxpayers have since been
paying interest.

Revenues returned to $95 billion in Fiscal Year 2002-03 against restrained spending of $95 billion.
After another flat year of revenues and restrained spending in Fiscal Year 2003-04, revenues
again increased as residential real estate development exploded. Revenues increased over 8
percent annually, to 33 percent in four years, unfortunately, spending increased by the same
percent. For Fiscal Year 2008-09 revenue is projected to fall $14 billion short of projected spending
levels. Governor Schwarzenegger has called the Legislature into Special Session to deal with the
crisis, which already has the state spending $400 million to $600 million more per month than it is
taking in.

Schwarzenegger, in his State of the State speech, described the situation as a crisis and the need
for action as imperative.   He identified that the state is not suffering from an economic downturn
and that the budget problem is not because the state is in economic trouble but because there
exists a lack of fiscal controls.

Prior to this time, the downturn in the housing industry had not impacted other sectors of the
economy.  But it now unfortunately appears that in order for the Governor and the Legislature
to resolve this fiscal problem, it will require assistance from every sector and resident, but what
those requirements will be and to what degree their impacts will be is anyone’s guess.

                                                      

The Governor’s leadership regarding this resolution is by far more significant to the history of the
state than the transition after the recall. It could be Schwarzenegger’s defining moment.

Tim Johnson
www.CaliforniaBusinessMinute.com