The technology-heavy Nasdaq stock index hit its historic high of 5,047.69 on March 10, 2000, but shortly thereafter began a steep decline that saw it bottom out three years later at 1,108.49.

Two months after the Nasdaq hit its peak, with stocks already falling sharply, Gov. Gray Davis unveiled the annual "May revise" of the budget and cheerfully made official what Capitol insiders already knew: The state was the beneficiary of a whopping windfall in income taxes on stock options and capital gains in the high-tech sector.

Pegging the 2000-01 budget surplus at $12.3 billion, Davis said the state has "been blessed with enormous good fortune," but he also warned that it could be a one-time event, given the volatility of the technology industry and the stock market, and wisely counseled against spending it on ongoing programs or tax cuts.
"I intend to resist the siren song of permanent spending whether it comes from the left or the right," Davis said, "and I will stand up to anyone who tries to convince the Legislature that they should spend most or all of this money on ongoing expenses."

Davis said he wanted most of the windfall to go for one-time public works projects or into reserves. But the surplus touched off a political feeding frenzy among Capitol interest groups, and Davis came under intense pressure to spend it.

The California Teachers Association was threatening to place an initiative on the ballot that would commit the state to about $6 billion in additional yearly spending, and Davis bought off the CTA with a $1.8 billion slice of the surplus -- a commitment he made, in fact, a few days before unveiling his revised budget.

Davis' fellow Democrats, meanwhile, were demanding big expansions of state-financed health care for the poor and other social and health programs. Powerful public employee unions were seeking new benefits, especially enhanced pensions. And Republicans were insisting that their price for a new budget would be substantial tax cuts.

Within a few weeks, the lion's share of the $12 billion surplus had been committed to "ongoing expenses" of various kinds, including billions of dollars in tax cuts to placate Republicans. And when, just as Davis had publicly fretted, it turned out to be a one-time windfall, the state was stuck with a spending habit roughly $8 billion higher than its annual revenues.

The failure of Davis and lawmakers to wisely manage the bounty was a gross dereliction of public duty. While the tax cuts and new spending items were not evil unto themselves, we simply couldn't afford them. And the irresponsibility was compounded in the succeeding two years, when the inevitable income-outgo deficits made themselves apparent. Rather than acknowledge that they had erred and correct the imbalance by cutting spending or raising taxes, politicians borrowed heavily to cover the gap.

Davis even campaigned for re-election in 2002 by bragging about how much he had boosted spending on schools and health care.

The accumulated two-year deficit, largely covered with short-term loans, plus the projection of another deficit for 2003-04 adds up to the whopping $30 billion-plus shortfall that so befuddles the Capitol this year.

This bit of history is important because California politicians are doing their level best to rewrite it. Davis blames the stock market, the economy and just about everyone but himself for the problem. The state Democratic Party chairman, Art Torres, offered a wholly fictitious rationale on national television last week that post-Sept. 11 security expenses were to blame. And Republicans blame Democrats for overspending while sidestepping their advocacy of billions of dollars in tax cuts.

USA Today, in a national survey of state budget woes, depicts California as the "worst-performing state" because it squandered the surplus and turned to head-in-the-sand borrowing to cover the resulting deficits. "Today it continues to spend $1 billion a month more than it takes in," USA Today said, and as state Finance Director Steve Peace notes, California is now operating totally on borrowed money, including a new $11 billion loan from a bank consortium.

USA Today's evaluation of California's sorry record is abundantly justified.