LOS ANGELES -- Headlines across the country announce that California's historic recall election of Gov. Gray Davis, set for Oct. 7, has saddled the state with yet another "crisis" in government -- following failed attempts to deregulate the energy industry, a $38-billion budget deficit, and gridlock of the state legislature. Unfortunately, by focusing exclusively on the recall's political machinations, we are missing the real, and deeper, crisis -- a growing financial catastrophe that the state can ill afford to postpone until the dust from the recall has settled.

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Californians will start to feel the impact of these deteriorating state finances when the first wave of notices are sent this week announcing a tripling of vehicle license fees, which will cost the average car owner about $158 per year. Steep hikes in tuition at community colleges and state universities will quickly follow.

Just last week, Standard and Poor's added to California's travails by downgrading the state's general obligation debt by a massive three levels -- from "A" to "BBB." In the history of this country, only Massachusetts has ever suffered the ignominy of such a low rating. This decline in California's creditworthiness, skimmed over by taxpayers and the media, should have received top billing for weeks because of its massive impact upon the state, its municipalities, and, ultimately, its citizens. The downgrade will result in hundreds of millions of dollars of increased interest costs for the outstanding bonds California is going to issue and will also significantly affect the pool of investors who choose to hold California securities in their portfolios. And when totaled up, the higher interest costs that the state will pay far exceed by multiples any cost associated with the recall election, an argument frequently levied by the anti-recall supporters as a reason for voting against the recall.

As we saw firsthand from the 1995 Orange County bankruptcy, this reduced creditworthiness will not only affect the state's own ability to borrow, it will also create a chilling effect on local municipal bond issues and threaten the ability of local governments to deliver services like libraries, parks and recreation, and police. Orange County's bankruptcy and junk bond status severely undercut the ability of other municipal governments to borrow. That was just one wealthy county. Here we are talking about the state government -- the largest economic entity in one of the largest economies in the world.

With the recall looming, the real danger is that for the next several weeks, state legislators and officials will be distracted from California's financial crisis, a primary reason the recall election is on the ballot in the first place. Despite repeated promises to address the structural imbalances that caused the historic budget deficit -- an amount that would qualify a third world country for IMF assistance -- the state legislature has concocted a budget with roughly $18 billion in accounting gimmicks, internal fund transfers, deferrals of spending, and heavy use of short- term debt (more than $10 billion). On top of that, the plan includes numerous fee increases, and only very limited expenditure reductions. State leaders openly acknowledge that this year's budget will result in a beginning deficit of at least $8 billion next year.

Given the magnitude of this crisis, fundamental reform of state finances cannot wait until the recall's conclusion. It must be the focus of the debate leading up to the recall election, and the measuring stick for all candidates on the ballot.

It is time for Californians to awaken to the immediacy of the economic threat that undermines the future of our state, risks the success of our businesses, and reduces the quality of life for our citizens. It is time for taxpayers, as shareholders in the state of California, to demand the fiduciary responsibility that is required of any corporate director. Just as the shareholder has forced corporate America to a new standard of transparency and accountability, so should the California taxpayer require those standards replace backroom negotiations and accounting gimmicks in the state budget process.

Over the coming weeks, all gubernatorial candidates should be measured by their response to specific proposals to restructure state government's fiscal operations. Many previous legislative proposals, some sponsored by us as state officials, have urged these common-sense reforms. NGOs like the Reason Foundation and Performance Institute, think tanks specializing in government reform, have also highlighted significant opportunities for restructuring.

To end the financial crisis, the recall debate should focus on these simple but powerful imperatives:

• Implement a watertight expenditure and revenue limit to bring state spending into balance with available revenues and avoid the "feast and famine" cycle of the current system.

• Create the most jobs-friendly climate in the nation through fundamental regulatory and tax reform that would provide the state with a growing revenue pie. Workers' compensation insurance reform should be high on this list.

• Shift the state to a two-year budget cycle, currently used by more than 20 states, to increase legislative oversight and eliminate the potential of spending deferrals and accounting gimmicks.

• Use performance-based budgeting that requires every state agency to justify every dollar spent based on performance goals and savings targets. Currently the legislature only reviews new budget spending proposals, simply assuming previous year's expenditures are acceptable.

• Create a competitive government structure with the requirement of open bidding for state services, including public and private sectors.

• Appoint a budget oversight commission to review progress toward reform goals and enact midyear budget changes as needed. This commission would function similar to the federal base realignment and closure commission that made politically unpopular decisions regarding closure of military bases. Such a commission could become the independent watchdog, akin to a bankruptcy judge in a corporate restructuring.

All these may seem to be common sense to most of us. Yet given the dynamics of state budget politics, no such principles exist in California and the gap between spending and revenues has escalated to the current $38 billion deficit.

The recall election will determine the leadership of California. If the state misses this opportunity to ask the right questions of its leaders and candidates and allows a continuation of the same pattern of deferral and denial, the problem will worsen and next year's budget crisis will make this one look like a picnic. Then, it will matter little who sits in the governor's office.

Ms. Connell, a Democrat, served as the elected California State Controller from 1995 to 2003. Mr. Fong, a Republican, served as the elected California State Treasurer from 1995 to 1999.