California-size budget mess faces governor

The two months of grinding, 18-hour campaign days are over. The high-pressure fundraising and strategy meetings about policies and opponents' attacks are past.

Now comes the hard part.

The governor of California will oversee the biggest budget crisis in the history of America's most-populous state. In fact, the Golden State's fiscal shortfall far outweighs that of any other state. It's these complex economic challenges that fueled the historic recall, and voters will expect him to tackle them head on.

"There are more economic challenges to the next governor of California than you can fit on paper," says Ross DeVol, director of regional studies at the Milken Institute in Santa Monica, Calif.

With revenues pinched, bond ratings plummeting, companies making an exodus, and deferred budget deficits, the intractable problems could fill a David Letterman "Top Ten" list of "Why anyone who wants this job is probably nuts."

The three most pressing challenges for the governor, according to Mr. DeVol and other analysts, are the state's tax structure, a term-limits law, and budget-approval provisions.

Since California's tax system relies heavily on sources of personal income that fluctuate wildly - such as capital gains and stock options - state leaders often fund social programs based on erroneous estimates of incoming revenue. Such was the case leading to California's recent years of budget deficits, including an $11 billion shortfall in tax revenue that happened between 2001 and 2002, the year after Silicon Valley's high-tech, dotcom industry went bust. Unemployment, a nagging issue for the state, has also hurt incoming revenue.

"California has yet to find a way to swallow the money they lost in personal income tax that year," says Claire Cohen, an analyst at Fitch Ratings, a bond rating service. When the income dried up, legislators were stuck with the conundrum of which programs to cut amid pressure to raise taxes.

"Even if recession ends and jobs come back in a big way to the state, it's not going to bring back the kind of money that was coming in during that year," says Ms. Cohen. "The legislature is going to have to look at ways to get longer-term solutions by relying on less volatile income."

The occupant of the governor's mansion must confront the reason California's budget woes seem to make headlines every year: a tricky negotiation process in the legislature. The threshold of votes needed to pass a budget - two thirds, which is higher than most states - means small groups can hijack the process by demanding favors in return for their support.

Page: 1 | 2