Mismanagement Responsible for States' Budget Woes

Dennis Cauchon in USA Today analyzes the root causes of state budget woes.

The financial problems racking many state governments this year have less to do with the weak national economy than with the ability of governors and legislators to manage money wisely...

Utah, Georgia and Delaware are the best financial stewards, according to the USA TODAY analysis of the states' financial performance. The key to their success: restraint. During the economic boom of the late 1990s, these states limited both spending growth and tax cuts. After the economy weakened in early 2001, they acted swiftly and decisively to keep their finances sound.

California, the worst-performing state in the analysis, did the opposite. It approved huge spending increases and tax cuts during the boom. When the economy soured, the state began borrowing money and using accounting gimmicks to avoid its day of reckoning. Today, it continues to spend $1 billion a month more than it takes in...

In California, Illinois and other states that have managed money poorly, residents will be paying off added debt for decades. Tax increases and spending cuts will be more severe than they would have been had the states addressed financial difficulties quickly...

The principles of good financial management at the state level are the same as those for a household: Balance what you spend with what you make, or you're headed for trouble. A state that spends too much or suffers a drop in tax revenue has to raise tax rates, cut spending or borrow.

The longer it delays, the worse the problem gets...

Spending growth during the boom years haunts some states today. State spending was 38% higher in 2002 than in 1997 —$983 billion vs. $710 billion. That was 18 percentage points higher than inflation and population growth combined during the period. This shows that policy decisions — not just higher costs and more people — drove spending to record levels...

Powerful governors manage money better. States in the best financial shape have governors with broad constitutional powers over spending. Forty-three governors have line-item vetoes, which allow them to reject individual programs within legislation.

Here they summarize the state of the state of California.

California

Fiscal management: Poor

Annual spending change: +9.1%

Annual tax rate change: -1.0%

2002 budget: $133.1 billion

The state borrowed $11 billion last week to cover its 2003 deficit. It will borrow another $2 billion to make a required contribution to the state employees' retirement system. Democrats, who control the Legislature and the governor's mansion, have been spending $1 billion a month more than the state takes in for two years.

California had the absolute worst rating by far. States wound up being rated between 2 to 12 stars. California achieved only 2 stars! The next lowest state was rated 4 stars!
Spending Restraint: 1 out of 4 stars
Bond Rating: 0 out of 4 stars
Tax System: 1 out of 4 stars

See also here for a more extensive analysis.