1 state gets fiscal discipline, 1 gets a disaster
By Dennis Cauchon, USA TODAY
Second in a series on the State's financial mess. California is unbelievable! This is what happens when you give liberal Dems full control. Georgia has conservative Dems
On the surface, Georgia seems a lot like California and other states facing tough financial problems. The weak economy has cut into revenue. The political debate over taxing and spending is rancorous.
But appearances can be deceiving in state finances. A USA TODAY analysis found that Georgia is an A+ student in managing its money compared with other states. California ranks dead last.
This tale of two states reveals how the fog of political battle obscures the true financial condition of state governments. Voters in both Georgia and California blame their political leaders for mismanaging their states' budgets, opinion polls show.
But financial analysts on Wall Street see the two states' financial conditions as different as night and day. They give Georgia a AAA bond rating, the highest possible. California gets a single A, the lowest.
"We're much better off than other states, but most folks here don't know it," says political analyst Chuck Bullock, who teaches at the University of Georgia. "Elected officials get few rewards for last year's fiscal prudence."
Georgia's success is all the more remarkable because its economy ? dependent on business travel and technology ? has had a boom and bust just like California's.
Measuring the growth of state spending
Some politicians in both parties say that state spending shouldn't grow faster than the rate of inflation plus the rate of population growth. In the table below, the last column shows how much bigger each state's budget was in 2002 than in 1997. In every state except Hawaii, Louisiana and Nevada, that percentage exceeded inflation plus population growth from 1997 through 2002:
State/ Inflation + population change/ Spending growth
Ala. 17.3% 26.6%
Alaska 19.1% 29.2%
Ariz. 33.2% 47.7%
Ark. 20.8% 25.3%
Calif. 22.2% 54.7%
Colo. 29.2% 37.5%
Conn. 19.2% 26.0%
Del. 23.7% 31.1%
Fla. 27.5% 45.2%
Ga. 27.8% 31.4%
Hawaii 18.3% 8.2%
Idaho 24.2% 31.7%
Ill. 19.3% 38.4%
Ind. 18.4% 29.1%
Iowa 16.4% 23.3%
Kan. 18.1% 35.6%
Ky. 18.1% 33.0%
La. 16.4% 14.1%
Maine 17.6% 36.9%
Md. 20.6% 34.3%
Mass. 18.5% 43.8%
Mich. 16.2% 32.6%
Minn. 20.5% 38.4%
Miss. 18.6% 50.7%
Mo. 18.4% 39.7%
Mont. 16.9% 45.8%
Neb. 17.8% 44.3%
Nev. 43.0% 37.1%
N.H. 22.1% 66.3%
N.J. 20.1% 43.1%
N.M. 20.6% 45.4%
N.Y. 19.0% 34.8%
N.C. 25.5% 34.3%
N.D. 12.3% 35.7%
Ohio 15.5% 34.9%
Okla. 18.7% 50.5%
Ore. 22.0% 36.9%
Pa. 16.0% 29.3%
R.I. 21.8% 46.6%
S.C. 22.6% 46.1%
S.D. 16.5% 45.4%
Tenn. 21.4% 38.2%
Texas 25.4% 34.4%
Utah 25.9% 30.8%
Vt. 18.1% 51.7%
Va. 21.7% 49.5%
Wash. 21.6% 29.9%
W.Va. 12.6% 26.9%
Wis. 18.6% 39.7%
Wyo. 17.3% 46.8%
U.S. avg. 20.0% 38.4%
Sources: Census Bureau, Bureau of Economic Analysis and state Comprehensive Annual Financial Reports
Yet Georgia still has a rainy-day fund of $562 million. It hasn't sold its right to billions of dollars in future payments from the tobacco industry for quick cash. It has hundreds of millions of dollars in trust funds ? for education, medical care and other purposes ? that haven't been raided. And Gov. Sonny Purdue and the Legislature approved a balanced budget that eliminated a shortfall that some estimates had placed at $1 billion. Georgia's solution: Limit spending, raise cigarette taxes and spend part of its reserve fund.
By contrast, California isn't close to approving a budget, and its 2004 fiscal year begins next Tuesday.
The nation's most populous state ran a deficit even in its best recent year: the fiscal year ended June 30, 2001, when tax collections were at a record high thanks to the high-tech boom.
For the past two years, California has spent $1 billion a month more than it took in. To cover its losses, the state sold its tobacco settlement, borrowed enormous sums and used creative accounting. It has done nearly everything except significantly raise taxes or cut spending.
A strong governor
Why are Georgia and California so different? It's not politics: Both have long been ruled by Democrats. It's not the economy: Both experienced a boom in the 1990s, followed by a crash two years ago. Elected officials and political observers say the keys to Georgia's success have been:
?A long-standing ethic of financial caution.
?A string of forceful governors who enforced fiscal prudence.
?A state constitution that makes reckless spending difficult.
Georgia's governor probably has more power over spending than any other governor. Like governors in 42 other states, Georgia's chief executive can veto all or part of a budget. But this governor's golden hammer is something more obscure: the constitutional authority to estimate how much revenue the state will have to spend. The governor picks a number. The Legislature cannot spend a penny more.
"That is a tremendous amount of power," says state Sen. George Hooks, a Democrat who was chairman of his chamber's Appropriations Committee for 10 years until Republicans took control in January. "He can raise or lower the estimate at his will, and there's nothing we can do about it."
A state economist provides three estimates of revenue, and Georgia governors have chosen the most conservative number in 23 of the past 25 years, Hooks says. The exceptions were in 1989 and 1990, when Gov. Joe Frank Harris chose the middle estimate. Higher spending followed. When the economy soured in 1991, the state found itself in poor financial shape.
The next governor, Zell Miller, a Democrat now in the U.S. Senate, returned to the most conservative revenue estimate.
"This brief period of fiscal indiscretion is remembered as a walk on the wild side never to be repeated," says economist Jeff Humphreys, director of the Selig Center for Economic Growth at the University of Georgia.
Georgia legislators are not saints. They often load state budgets with pork. They know how to use accounting tricks. The state trimmed $166 million from next year's budget by delaying a state payday from the final day of the 2004 fiscal year until the first day of the following year.
But Georgia's cautious revenue estimates ? and the conservative spending that followed ?produced huge budget surpluses during the 1990s.
The estimates forced Georgia to be frugal even during the boom years. In 1998, Georgia decided that it couldn't afford to maintain the state's 2,000 historical markers. So it turned the job over to local historical societies.
When Georgia has made major spending commitments to education and roads over the past decade, it has found new revenue to pay for them. Ten years ago, the state launched a program to provide college scholarships for every high school student who earned a B average or better. Georgia created a state lottery to pay the bill. The program has spent $6 billion on 700,000 scholarships.
Skyrocketing spending
Everything Georgia does, California seems to do the opposite.
Georgia's spending rose 3.6 percentage points more than the combined rate of inflation and population growth from 1997 through 2002. By contrast, California's spending rose 32.5 percentage points a year higher than inflation and population growth.
The state's budget gap could reach $35 billion next year if spending that already has been approved is not restrained or taxes aren't raised, according to Gov. Gray Davis. The keys to California's desperate financial condition, according to elected officials and outside experts:
?A boom-bust cycle ? huge spending increases followed by sharp reductions ? that has plagued the state for 70 years.
?Ballot initiatives approved by voters that force spending increases and tax cuts.
?A governor with weak powers and a state constitution that gives strong power to the minority party in the Legislature.
California's governor proposes a budget and vetoes what he doesn't like, but his influence is largely through political persuasion.
Davis, a Democrat whose 27% approval rating has prompted a recall-election effort, has had a hard time getting the Legislature to listen to him.
California is one of three states that require two-thirds approval in both legislative chambers to pass a budget or raise taxes. (Arkansas and Rhode Island are the others. In 47 states, only a simple majority is required.) Democrats have a majority in each house of the California Legislature but not enough votes to override the Republican minority.
"Other states have been better at setting aside political differences and getting down to business," says Paul Lewis, a researcher at Public Policy Institute of California, a non-partisan research group.
California's laws work against good financial management in non-political ways, too.
The state constitution requires that the governor propose a balanced budget, but it doesn't require the Legislature to pass one. It allows voters to put initiatives on the ballot that cut taxes or increase spending on popular programs such as education. The initiatives, considered separately, result in a fiscal policy often at odds with itself.
Volatile tax base
California's tax system makes revenue dependent on the income of the state's wealthiest residents. The top income tax rate of 9.3% also applies to capital gains, so state revenue there rises and falls with the stock market more dramatically than in other states.
The lack of predictability, not the lack of money, has led to California's fiscal chaos. With no budget compromise in sight, the state borrowed $11 billion last week, and more borrowing is likely.
In a state poll released June 12 by the Public Policy Institute of California, a majority favored borrowing $10.7 billion to cover the state's deficit and paying it off over five years. Those polled also supported an initiative on the March 2004 ballot to borrow $12.3 billion for schools. Last November, California voters approved borrowing $13 billion for schools.
But Californians oppose higher taxes on income, sales or automobiles, the poll found. Property taxes already are capped by Proposition 13, a 1978 ballot initiative. Californians also oppose cutting spending on education or human services, programs that make up 74% of the state's budget.
Democrats are talking about overhauling the budget process to address the state's financial breakdown.
Steve Westly, a former eBay executive who was elected California's controller in November, is the first Democratic statewide officeholder to support a spending cap.
"To get out of this hole, we have to make some smart decisions now and put spending caps in place," he says.
The governor's strong powers are not the only budget advantage Georgia has over California.
Georgia's government workforce largely is not unionized, unlike California's. That makes it easier for governors to lay off state workers and freeze wages of state employees. Georgia's constitution does not allow voters to put initiatives on the ballot, so it has avoided spending increases and tax cuts imposed by voters.
Even Georgia Republicans who accuse state Democrats of mismanagement agree that their state's situation is nothing like California's.
"We sure wouldn't run a railroad that way," says Georgia state Sen. Tom Price, a Republican.
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