Strangling California’s budget

As California grapples with a fiscal crisis, state lawmakers are facing painful choices about where to cut spending and how to increase revenues this year. California is one of only three states that require a “supermajority” vote to pass a budget, a constraint that results in deadlock and chronically late budgets. The economic downturn has contributed to a massive budget shortfall now estimated at more than $40 billion -- roughly $15 billion for the rest of the current fiscal year and $25 billion in 2009-10. Even in good times, California’s outdated tax system does not bring in enough revenue to support the schools, universities, programs and services that Californians want and expect.

In the midst of these complex challenges, Republican lawmakers are proposing replacing the current state spending limit with what’s called a hard spending cap. They consider it a cure-all for the state’s budgetary woes.

The specifics of this cap surfaced last year as a proposed state constitutional amendment -- ACA 19 -- by Assembly member Mike Villines (R-Clovis). The California Budget Project analyzed the effect of the proposal, looking at what would have happened to the state had Villines’ cap been enacted in three earlier fiscal years. What we discovered was that far from being a cure-all, a hard spending cap would place an arbitrary stranglehold on the state’s ability to improve its schools, rebuild its infrastructure, care for its senior population and respond nimbly to future challenges. Disguised as a solution, this cap could quickly become one of California’s most serious budgetary problems.

What would the hard spending cap do? It would choose a recent fiscal year as a “base” and tie increases in state spending beyond that cap to population growth, as well as the change in the consumer price index or the change in per capita personal income, whichever is lower.

The Budget Project found that if this cap had been enacted in 1995, using that year’s budget as the base, it would have resulted in a 2008-09 budget $39.7 billion below what was enacted in September. While this would bring the budget into balance, it also would require spending cuts more than twice as large as those proposed by the governor.

What would that missing $39.7 billion pay for? It’s almost as much as the state spent for K-12 education in 2007-08, and it’s more than the state spent for all its health and human services programs last year.

Instituting such a cap would result in permanent, draconian cuts to California services. It would limit the state’s ability to restore cuts made during the current crisis and stifle hopes of, in better times, increasing spending on programs that need it: providing preschool or healthcare for all children, rebuilding infrastructure and improving public education.

Linking future budget increases to inflation and population growth, blunt instruments at best, is part of the problem. A simple rise in population does not account for complex changes in population that affect demands on the state’s budget. As baby boomers age, California’s senior population will grow and turn to Medi-Cal and other such programs in large numbers. Without increased investment, these programs will not be sufficient. Likewise, the consumer price index measures changes in the costs of household purchases -- such as diapers and canned goods -- not things such as healthcare. Between 1990 and 2007, national per capita healthcare expenditures more than doubled, rising by 164%, while the consumer price index for California rose by just 61%.

The hard spending cap also would be incompatible with Proposition 98, which guarantees a minimum level of state funding for K-12 education and community colleges. That guarantee would generally outpace increases allowed under the cap, which would result in education crowding out all other state spending.

California has had a spending limit since 1979. It calculates a cap each year, based on changes in population and per capita personal income, and therefore limits spending as a share of the state’s economy. At one point, California had a harder spending cap, similar to the one proposed recently. But even business leaders and Republican lawmakers recognized that it constrained the state’s ability to meet basic demands for public investment. The campaign to modify the original cap was led by then-Gov. George Deukmejian, then-California Chamber of Commerce President Kirk West and then-California Taxpayers Assn. President Larry McCarthy.

At the end of the day, the important lesson is that caps don’t sensibly balance budgets -- leadership and difficult choices do.

Jean Ross is executive director of the California Budget Project, a nonprofit public policy research group.