Make ‘Balanced Budget’ Myth a Reality for State

You see it in editorials and letters to the editor and hear it in discussions by talking heads on TV. Even newly minted legislators say it: The California Constitution requires a balanced state budget, so choose your poison -- raise taxes or cut spending.

This, alas, is a myth. There is no balanced budget requirement, and these are not the only choices to keep the state running. Indeed, there is an even more toxic option -- borrowing money to finance deficit spending -- and it is being proposed in this year’s budget debate.

Defying the conventional wisdom, the Constitution requires only that the governor introduce a balanced budget. The Legislature does not have to pass a balanced budget, the governor need not withhold his signature if the budget isn’t balanced and the state is not obligated to maintain a balanced budget.

Sadly, our budgetary history is replete with unbalanced budgets. During the 1930s, the state ran deficits for 10 years. During the last 25 years, six budgets ended in deficits; this year’s is projected to as well.

Borrowing money to finance deficit spending is a long-standing approach to avoid raising taxes or making major cuts in popular programs. To finance the deficit, the state simply borrows money to cover the spending authorized in the budget and pays off the debt in a later fiscal year. But this year’s budget crisis is different and the solution needs to be too.

California’s founders were worried about the state borrowing money to finance its budgets. To address this concern, the drafters of the state’s first Constitution included the so-called debt clause. This requires a vote of the electorate for any indebtedness in excess of $300,000. The debt clause’s purpose was to prevent the state from using borrowed money for operating purposes without a vote of the people.

Unfortunately, the debt clause has not prevented this from happening. Why? In the 1930s, the state courts reasoned that the debt clause did not apply to money borrowed to smooth out the ups and downs of state revenue receipts and expenditures -- as long as revenue would be available to pay the debt in the “foreseeable future.” The concept, short-term borrowing for short-term cash flow needs, has been stretched into a new legal mythology. This interpretation argues that the foreseeable future can be more than several years. Borrowing is also allowed if the revenues are set aside in special funds and not commingled in the state general fund. No such exemptions exists in the debt clause itself.

Today, the mythology is being stretched even further. In the past, the state borrowed money for a short period to cover deficit budgets. The large borrowings in the 1990s were done over 24 months. In the current fiscal crisis, the state plans to borrow $2.6 billion and pay it back over 20 years. How far out can we go before the future is not foreseeable?

In the governor’s revision of the proposed 2003-04 budget Wednesday, the amount of “budget bonds” -- borrowing to support state spending -- is likely to reach a historic level that could exceed $15 billion. This level of borrowing may represent 20% or more of general fund spending.

Unless a separate tax is raised to support some portion of this debt, the state will face a “debt overhang” in the next several years that will eat up precious revenue and put pressure on cutting commitments to education and health and human services.

The current budgetary borrowings have little to do with the situation the state courts authorized in the 1930s. Sacramento is doing exactly what the state’s founding fathers wanted to prevent: using borrowed money to finance ongoing services.

Is there a remedy? It may be time to consider a constitutional amendment that does require a balanced budget.