LOS ANGELES – Speakers at a forum on California’s budget crisis agreed that the use of “money from heaven” from the late-1990s Internet boom is largely responsible for putting the state in its current fiscal hell.
Financial policy experts and UC administrators and professors gave presentations at UCLA’s Covel Commons on Monday examining the causes and extent of California’s deficit, currently estimated at around $15 billion. Several speakers alluded to the bursting of the Internet bubble, which caused market-related income in the state to drop from around $45 billion in 2000 to $35 billion in 2001.
Former State Finance Director Tim Gage said that when the “Internet rush” brought a roughly $10 billion windfall in the late ’90s, efforts were made to devote most of it to one-time expenditures such as infrastructure and housing, rather than ongoing costs in the form of new programs and initiatives that would continue to demand funding after the extra money dried up.
“But we clearly didn’t do enough,” Gage said. “And the Davis administration wasn’t able to do enough with spending cuts and tax increases to bridge the gap.”
UC Berkeley public policy Professor John Ellwood, who made the “money from heaven” remark, said in order to fix the budget problem, elected officials must occasionally vote against the wishes of their constituents, specifically in the form of tax increases.
“The problem is in you and me,” Ellwood said. “We want that extra $10 billion without paying for it.”
Ellwood placed much of the blame for the deficit on a provision in California law that requires a two-thirds majority vote in the state legislature to raise taxes. He said that California is one of only 18 states to require a “super-majority,” and that those 18 states average 8 percent lower revenue than the other 32.
“If this state operated under normal majority, we would have no deficit at all,” he said. “But we would be a much higher-taxed state.”
Edward Leamer, director of UCLA’s Anderson Forecast, called the current downturn the state’s first “business cycle,” as opposed to the more typical “consumer cycle.”
“A normal economic recovery occurs when consumers come back to the market,” Leamer said. “That can’t happen this time. Scratch the word ‘recovery’ from your vocabulary.”
Several speakers addressed Gov. Arnold Schwarzenegger’s recently announced recovery plan, which includes the issuance of $15 billion in state bonds, $3 billion in immediate spending cuts and an unspecified state spending cap.
Renee Boicourt of Moody’s Investors Service, which advises on investment in state bonds, said that such a large bond measure could be dangerous because the bonds could still not be retired by the time the state faces its next fiscal crisis.
“There’s a little bit of ‘sinning on Saturday and repenting on Sunday’ in this proposal,” Boicourt said. “We’re a little skeptical about its actual ability to fix the problem.”
The governor’s spending cap proposal also came into question.
“A spending cap does not address the volatility of California’s income stream at all,” Leamer said.
Alan Auerbach, professor of economics at UC Berkeley, said limiting the rate of spending growth to that of income and population “won’t do anything in the short term. But it may help us prepare for the next budget crisis.”
UCLA Chancellor Albert Carnesale opened the forum by remarking how important state funding is to his university.
“State money is at the core of our enterprise, especially our teaching enterprise,” he said. “It’s only 22 percent of our funding, but we use that 22 to leverage other funds.”
The UC has already sustained $410 million in state funding cuts.
UC President Robert Dynes, who was present at the forum, has yet to propose a definite plan for coping with the cuts, but said in November that he opposed increasing out-of-state admissions to benefit from higher tuition as a possible solution because it would displace too many in-state students.
