The Only Thing New In The World Is The History You Don’t Know

A quarter century ago, another GOP governor, George Deukmejian, faced a fiscal crisis eerily similar to the one Gov. Arnold Schwarzenegger will attempt to solve when he issues his May Revision on Wednesday the 14^th. 

Smart and respected folks have urged Schwarzenegger to take the kind of action Deukmejian’s successor Pete Wilson did and raise taxes. 

In 1991, Wilson had more than one-third of the state’s general fund torn from his pocket. The problem Schwarzenegger faces is far more analogous to the problem Deukmejian faced in 1983. 

A problem solved without actually raising taxes. 

Given the rosier than expected April tax receipts, Schwarzenegger will likely announce a shortfall Wednesday in the neighborhood of $12 to perhaps $15 billion. The state’s General Fund is a skosh over $101 billion. 

So the current GOP governor is looking at a hole representing about 12 percent to 15 percent of the General Fund, well less than half the mess Wilson had to clean up. 

It’s also just about the same percentage of General Fund shortfall Deukmejian faced 25 years ago. 

Before Deukmejian was sworn in, the budget for the final year of his predecessor, Jerry Brown, was already unraveling.  Sound familiar? 

To battle double-digit inflation, the Federal Reserve had launched two recessions in a row. Bailouts to local governments in the aftermath of Proposition 13 erased the state’s cash surplus. 

As he took over in January 2003, Deukmejian inherited a deficit of $1.5 billion, starting the job with a hole amounting to some 8 percent of his $21 billion general fund. Rating agencies lowered the state’s bond rating. Cash flow dried up. 

Deukmejian elected to spread the problem over 18-months – in effect, balancing the budget over two years. 

The state constitution prevents California from carrying over debt of more than $300,000 each year but a series of court rulings during the Great Depression allows debt as long as there is a specific plan to retire it. 

Deukmejian called for quick enactment of a fiscal recovery plan during the middle of the current budget year to increase the savings from any spending reductions. Sounds kind of like what happened this February. 

Like the current occupant, Deukmejian was a pragmatist. So was the Speaker of the California Assembly at the time, master dealmaker Willie Brown.  

Deukmejian negotiated with Democrats to create some $640 million in current year budget reductions, mainly raking off money from special funds to shore up the general fund. Nobody does that anymore, do they? 

Democrats wouldn’t back the idea without a tax increase. Republican lawmakers adamantly opposed a tax increase of any kind. Deukmejian didn’t want one either – particularly during a recession. 

(Deukmejian was the lawmaker who carried then Gov. Ronald Reagan’s tax cut some 15 years earlier – a tax increase that, at the time, was the largest in California history.) 

Another great pragmatist was the late Mike Franchetti, Deukmejian’s finance director. In his 1993 oral history, Franchetti said he came up with the compromise that ended the budget loggerheads between Deukmejian and the Democrats. 

Franchetti proposed a temporary 1-cent increase in the sales tax.  If the economy didn’t rebound by October 1, 1983, the tax would go into effect. Revenue raised by it, at that time about $100 million a month, would be devoted exclusively to pay off the budget shortfall. 

Once the debt was retired, the sales tax would not only return to its former level but would then be reduced by 1 cent for the same amount of time it took to erase the deficit. 

Presto!  No tax increase. 

“The governor was able to say we did not raise gnerl taxes and even if triggeredthere would be no net tac cinrease,” said Steve Merksamer , Sacramento political lawyer who was Deukmejian’s chief of staff in 1983. 

“Even if the trigger was pulled it was a creative idea. It would have gotten us through the downturn. And I would argue that this year that’s what the policy makers need to do more than anything else is bring some creative thinking to this problem.”  

Deukmejian gambled that California’s dynamic economy – not anywhere as dynamic or diverse as it is today – would rebound and the trigger would never get pulled. Democrats figured it would. 

Here’s a shocker — Assembly Republicans would have none of it. The cuts were smoke-and-mirrors and triggered though it was, the sales tax boost was still a tax increase. Deukmejian had sold out to the Democrats, Assembly Republicans said. He wasn’t a real Republican. 

On February 16, lawmakers finally approved the package. 

Now Deukmejian and the Legislature turned their attention to the new fiscal year that would begin July 1, 1983. 

The GOP governor proposed to hold year-to-year spending at the same level – no cost-of-living increases and the like. He backed the first ever $50 a semester fee for community college students. 

Deukmejian also called for closing a variety of tax loopholes and ending a goodly number of tax exemptions. The idea was to raise revenue without “raising taxes.”  

Franchetti described the bills to close the loopholes as “lobbyist full employment acts” and noted that few of the proposed loopholes ever got closed. Go figure. 

(It would be surprising if the current governor doesn’t employ a similar strategy. Legislative Analyst Elizabeth has compiled a bountiful smorgasbord of options.) 

Democrats balked at the proposed spending cap and student fees. June 15 – the date the Legislature is supposed to send the governor a budget – came and went. So did the end of the fiscal year. 

Back then, failure to enact a budget on time had consequences. Checks to the unemployed and the disabled couldn’t be cut. State workers didn’t get paid. 

Pragmatism eventually prevailed. Deukmejian budged, dropping his student fee idea and granting welfare recipients a 4 percent increase rather than holding them flat. And he agreed to leave the sales tax trigger in place. 

When he signed the budget, AB 223, on July 21, 1983, Deukmejian ended what, at that time, was the longest budget stalemate in California history – a record long since eclipsed. 

Before signing the spending plan, Deukmejian vetoed $1.1 billion from the $22 billion general fund, helping him earn the sobriquet, “the Iron Duke,” which by temperament he was – and is – anything but. 

In his prepared remarks, Deukmejian said: “$22 billion in general fund spending can buy us a lot of government and amply provide the services that citizens expect to receive from the state. 

“We are putting the fiscal irresponsibility of the past behind us and embarking on a new course of common sense.” 

Turned out Deukmejian bet right. The trigger never got pulled. Two years later he was sitting on a $1.2 billion surplus. 

He turns 80 in June. 

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Grateful acknowledgement to UCLA Professor Daniel J. Mitchell’s paper, “From Jerry-Rigged to Petered Out: Lessons from the Deukmejian Era for Contemporary California State Budgeting” for both an insightful explication of the 1983 budget year and the title of this posting. Llink to it from this sentence: “The problem Schwarzenegger faces is far more analogous to the problem Deukmejian faced in 1983.”