Spending Laws Leave State’s Hands Tied

Gov. George Deukmejian recently reported that state revenues will exceed expectations by $2.5 billion. Starting July 1, however, the state will have to reduce the public services that it provides and its bank account will be empty. How could these seemingly contradictory statements both be true? The long and short answer is that the state’s budget laws prevent the governor and the Legislature from allocating these additional funds to address California’s budget problem.

It is important to note at the outset that the announcement of $2.5 billion in additional revenues does not mean that the state already has these funds in the bank. It does not. Instead, this is an estimate of additional money the state may receive over the next 14 months. If the economy does not perform as strongly as estimated, some or all of these funds may not materialize. In my view, the estimate is optimistic, even if California’s economic expansion continues. Thus, for budget planning purposes, it would be prudent to plan on a less optimistic revenue forecast.

Even if the revenue increase is not as large as estimated, why can’t the state spend the additional funds on the full range of public services? The answer lies in two constitutional initiatives passed by the voters--the Gann limit and Proposition 98. The Gann limit sets annual limits on the amount of money the state and local governments can spend. Proposition 98, on the other hand, guarantees local schools a fixed portion of the state budget, plus a bonus any time revenues exceed the Gann Limit, as they now are estimated to do. Moreover, the bonus must continue to be paid in the future--even if the state collects less revenue or fewer students attend local schools.

In bygone years, if tax revenues exceeded projections, the governor and the Legislature would deliberate on how best to allocate the money to meet state priorities. If the revenues fell below the projections, state decision-makers had to cut the budget, allocate money from the state’s bank account (the reserve for emergencies), raise additional revenue or do some combination of the three. The picture is no longer that simple, given the requirements of existing law. The current dilemma is a case in point.

Under current conditions, the Gann limit and Proposition 98 dictate how almost 90% of the additional $2.5 billion in revenues will be allocated (principally to schools, grades kindergarten through community college). This leaves only a small amount--about $275 million--that can be used to offset the 1.6 billion that is needed to avoid a reduction in state services and replenish the state’s bank account for emergencies. Thus, despite the availability of more revenues, the Legislature and the governor are seriously limited in their authority to allocate them where the perceived needs are the greatest.

Alternatively, the Legislature and the governor could modify current law so as to enable more of the additional $2.5 billion to be used for other state purposes. Such action, however, would have to be taken by June 30. Under this scenario, about $1.1 billion in additional state funds would be available for state programs. The current versions of the Assembly and Senate budgets anticipate that an agreement of this type will be reached. In order to meet budgetary deadlines, the two versions of the budget are moving to conference committee, where the remaining details of the new state budget will be hammered out.

Thus, the Legislature and the governor are faced with two major choices for allocating the additional revenues--let current law run or change the law to allow spending some of these funds on other state programs. In choosing to change current law, however, the issue is not being “for” or “against” local schools. The schools would get significant amounts of the money regardless of the choice. The real issue is the state’s ability to provide needed public services within our means. I believe the current complexities of state budgeting have tied the hands of the governor and the Legislature too tightly. While the Gann limit and Proposition 98 didn’t cause the state’s budget problems by themselves, they have aggravated them significantly. Any solution to the state’s budget problem must involve modifying these and other legal restrictions.

Without such actions, the current contradictions in the state budget are likely to continue.