Dan Walters: Officials' budget crisis tale bolsters the myth about its origins

By Dan Walters -- Bee Columnist
Published 2:15 a.m. PST Friday, March 7, 2003

One of the more enduring public myths about California's severe budget crisis is that it was generated, at least in part, by state spending for electricity during the 2001 energy crisis.

The state did, in fact, tap its treasury for something like $8 billion to buy power in 2001, after California's major utilities had their credit cut off because rising wholesale prices outstripped their revenues from consumers. Thus, one might conclude that the $8 billion outlay left the state in a budgetary hole.

It didn't, however, have that effect, which requires a technical explanation. For accounting purposes, the energy outlays were treated as loans from the general fund to a power-purchase fund -- effectively, an account receivable -- with the expectation that they would be repaid by utility ratepayers. And the state, in turn, refinanced the debt with short-term loans that finally culminated in a massive energy bond issued last fall. Customers of California's private utilities will be paying off the bond debt for years, including interest to the general fund.

The important fact about the treatment of energy purchases as loans is that they did not affect, in the slightest, how Gov. Gray Davis and legislators fashioned a state budget in 2001 or 2002. While they may have created a cash-flow squeeze, requiring additional outside borrowing, the energy loans had absolutely no effect on the budget itself, as state budget officials repeatedly pointed out at the time. Some Republican legislators suggested that the energy outlays be treated as budget outlays, rather than as loans, but the dominant Democrats rejected that suggestion because it would have sharply curtailed other spending.

This bit of fiscal history is being offered because Davis, Attorney General Bill Lockyer and other state officials have decided to rewrite it to serve their own political purposes. The false account of what happened is contained in filings this week with the Federal Energy Regulatory Commission, supporting their assertion that California was ripped off during the energy crisis by energy generators and brokers.

The state's outlays for energy in 2001 at high prices, the documents allege, "took the state's budget from a multibillion-dollar surplus to a multibillion-dollar deficit, thereby robbing schools, police forces and many other essential services of needed funds."

That's a deliberate lie. There's no other term for it because Davis, Lockyer and the others who filed the papers with FERC know the truth. It's a lie that not only bolsters their case with FERC for refunds, but one that also, in effect, acquits Davis and legislators of responsibility for the budget crisis that did develop in 2001.

The budget crisis occurred because Davis and lawmakers of both parties foolishly succumbed to political pressure from various interest groups to cut taxes and raise spending when state revenues suddenly spiked upward in 2000, even though they knew that the windfall could be a one-time occurrence. It was just a one-time revenue boost, as it turned out, but because spending had been ratcheted upward and multibillion-dollar tax cuts had been enacted, the state was left with a huge "structural deficit" between income and outgo. The current estimates of the problem, something in the $26 billion to $35 billion range, are the accumulated deficits of the past two budgets, plus the projected shortfall for the next fiscal year.

The bitter irony is that we'd have been much better off if Davis and lawmakers had, in fact, treated the energy purchases as state expenditures rather than as loans. The $8 billion in energy purchases is very close to what the politicians overspent on tax cuts and program expansions in 2001-02. But energy was a one-time outlay, while the other spending goes on year after year.

Had the energy money been taken out of the state budget, rather than treated as loans, the other spending and tax cuts would have been fiscally impossible, and we would not have that nasty structural deficit. Thus, if the state had actually done what Davis, Lockyer et al. say they did in their FERC filings, the effect would have been just the opposite of what they said it was.

This is complicated, to be sure, but lying is lying, and it underscores a myth that already is too prevalent.

---

---