Balanced Budget Would Open Pandora’s Box

The federal balanced budget amendment was a stealth issue in the 1996 elections. While candidates of both parties were all too willing to say that they supported it, they were equally unwilling to say what the impact of such an amendment would be on the country and individual states like California.

While broad bipartisan consensus has emerged over the desirability of balancing the federal budget, support erodes once the details of specific proposals become known.

It is critical to examine the magnitude and distribution of the reductions needed to bring the budget into balance and what that means to the services provided by government and those who depend on them. Even the most staunch proponents of a balanced budget leave defense and Social Security alone. Another major expenditure, interest payments on the outstanding debt, also is not negotiable. With these off the table, there is no scenario that does not have a deep impact on programs administered at the state and local level.

California would be hit hard by any plan to balance the federal budget over the seven-year time period agreed to by Congress and the president, regardless of whether there is a constitutional amendment. In 1994-95, federal expenditures in California totaled $153 billion, including $76 billion in direct payments to individuals (such as Social Security and wages paid to federal employees) and $27 billion in grants to state and local governments. As an example of the magnitude of reductions needed to balance the budget, the congressional spending plan vetoed by President Clinton last year would have reduced federal grants to our state and local governments by 18.6%, or $45.9 billion. Moreover, the federal government is the largest single source of funds spent through the state budget. More than half of the federal grants to the state and local governments constitute Washington’s share of costs for health and welfare programs, primarily Medi-Cal, California’s health care program for the poor, and cash assistance for impoverished seniors and the disabled.

While some are rightly upset that slashing federal spending will have a harsh effect on the poor, the reality is that federal funds play a significant role in financing programs of critical importance to everyone, including transportation, disaster assistance, community development and higher education.

Despite the strength of the state’s recent economic recovery, California is ill-equipped to make up for such a loss of federal dollars. California’s ability to raise revenues in response is constrained by voter-imposed initiatives, including Proposition 13, which limits the property tax, Proposition 98’s education funding guarantee and the state’s “three strikes” sentencing law; in particular, corrections spending is anticipated to more than double over the next decade. Proposition 218, passed by voters in November, will further limit policymakers’ ability to respond to reduced federal dollars by restricting the ability of local government to increase or impose taxes.

California depends less on federal dollars today than a decade ago, largely as a result of post-Cold War reductions in defense procurement. The first wave of federal budget reductions helped plunge California’s economy into its deepest recession since the 1930s. But federal dollars also helped pull California out of the recession. During the worst of the state’s recession, federal aid increased by more than $5 billion, primarily in spending on such recession-sensitive programs as Medi-Cal, AFDC and unemployment benefits.

If the federal government’s hands are constitutionally tied during the next recession, such aid is much less likely to be forthcoming. Similarly, Congress might hesitate before sending assistance after the next earthquake, fire or other natural disaster if an increase in aid for California must be offset on a dollar-for-dollar basis with other spending reductions.

A balanced budget amendment might instill “discipline” but it would change the rules of the game in key respects. No longer could the federal government use the power of the purse to help spur a lagging economy or help states or locales in need of assistance.

What is being looked upon as an abstract question today would be a matter of real dollars tomorrow--and by then it would be too late.