State Spending Cap Detailed

Gov. Arnold Schwarzenegger asked legislators Tuesday to approve a constitutional cap on state spending that would greatly expand the governor’s power over the budget and eliminate the long-standing guarantee that roughly half of all new state revenue go to public schools and community colleges.

The cap -- which would be imposed next fiscal year if placed on the March ballot and approved by voters as a constitutional amendment -- drew sharp criticism from educators and lawmakers who fear it would gradually restrict the flow of money to school programs.

With next year’s budget already facing a shortfall of as much as $14 billion, the cap would also restrict the Legislature’s ability to balance the budget through borrowing or on promises of unrealized revenue.

That means lawmakers would begin the new budget process in January knowing they must make severe cuts -- about 20% of the state’s general fund -- unless taxes are raised or the economy improves more rapidly than expected.

Sen. John Vasconcellos (D-Santa Clara), a Budget Committee member, characterized the spending cap as “inhumane and stupid,” warning it would make it impossible for enrollment at the state’s universities to keep pace with population growth.

Republican leaders, however, praised the governor’s action.

“This proposal is a good first step on the road to recovery and deserves serious and thoughtful consideration,” said Assembly Republican Leader Dave Cox (R-Fair Oaks). “It’s time for legislative Democrats to stop posturing and get serious about solving the state’s budget mess.”

The cap would also give governors broad new authority to make budget cuts at any point in the year if the state begins running a deficit. The cuts would take effect unless two-thirds of the Legislature voted to overturn them.

The Schwarzenegger plan was presented in legislative hearings Tuesday, along with a proposal to borrow up to $15 billion to cover past debts, and to make $2 billion in immediate budget cuts, some of which have already been criticized by Democrats as unfairly targeting the poor.

In separate proceedings, state Finance Director Donna Arduin told the Assembly and Senate budget committees that the constitutional amendment is necessary because the state has spent $23 billion more than it has taken in during the last five years.

“State bureaucracy has grown and agencies have been allowed to consistently spend above and beyond their budgeted levels,” Arduin said. “We have to face reality.”

In her testimony, Arduin offered a glimpse of the far more severe reductions the governor is expected to present in his January budget. She talked about health and human services programs that are not restrictive enough in whom they serve, suggested that taxpayers may be too heavily subsidizing public universities, and that local schools have been consistently over-funded, while school districts have not been held accountable for improving student achievement.

Arduin also made clear that the governor has the state’s prison system targeted for significant reductions, and that the administration will push for privatization of some government services.

But Schwarzenegger’s spending cap drew the most attention from lawmakers.

The proposed cap would not allow expenditures to exceed general fund revenue in the next fiscal year. After that, spending could grow no faster than the increase in per capita personal income and the growth in the state’s population.

Any revenue over and above the spending limit would go to a rainy-day reserve account. That money could be spent only to provide tax rebates, pay off deficit financing bonds, handle emergencies, or to supplement general fund spending when revenues drop during economic downturns.

To spend the money for any of these purposes would require a two-thirds vote of lawmakers.

Local school officials quickly expressed concern about the plan. Kevin Gordon, executive director of the California Assn. of School Business Officials, said the cap would change funding formulas for schools in a way that does not provide them the substantial increases they have traditionally received in good economic times.

Gordon also said that the way the cap is written, schools would also immediately lose $3.6 billion owed to them in the next couple of years under Proposition 98.

The 1988 proposition requires that a certain percentage of the state general fund be devoted to school and community college programs, and that education automatically receive roughly half of any new revenue. The governor’s cap, however, would change that last part of Proposition 98 so new revenue could be used for deficit reduction or tax rebates. While leaving the rest of Proposition 98 in place, that would mean school funding would grow more slowly.

“We are definitely concerned about this,” said Gordon.

At the hearing, state Sen. Denise Ducheny (D-San Diego) told Arduin, “you are permanently dooming the state to never get back to a higher level of education financing.”

Administration officials quickly went on the offensive. They suggested that lawmakers should spend less time criticizing their proposals and more time working with the administration.

“If the people upstairs want to finally get to working at solutions to get at this terrible deficit that many of them helped create, the plan will work,” said Rob Stutzman, administration communications director. “We’re confident that at the end of the day, many of them will come to see that. But if you’re looking for courage and leadership upstairs, in the Legislature, no, I don’t think we’ve seen it yet.”

Lawmakers are under an extremely tight deadline. They would have to act as early as Dec. 5 for Schwarzenegger’s proposal to make the ballot. Many have suggested it is too short a time to expect decisive action on such a complex proposal to change the state Constitution.

Stutzman suggested that after Thanksgiving, the governor might begin making appearances in the districts of lawmakers critical of the proposal to rally support from voters.

It wasn’t just lawmakers who were critical, however. In his appearance before the committees after Arduin, state Treasurer Phil Angelides warned that the governor’s plan is incomplete.

Angelides, a Democrat expected to run for governor in 2006, told the committees that there is no evidence to back up the administration’s claim that spending caps would improve the state’s damaged credit rating.

“They are about political optics right now, not real budget reform,” he said. “They do not balance the budget.”

Angelides repeatedly said that properly balancing the budget requires a tax hike.

Stutzman said the governor intended to stick to his pledge not to increase taxes, and said voters already endorsed that position with their decision to recall Gov. Gray Davis.

“Taxes was on the ballot,” said Stutzman. “There was another candidate who advocated taxes. Voters didn’t like that.”

In his presentations, Angelides also warned of another element of the governor’s plan that had made educators nervous: It could interfere with a $12-billion school construction bond issue on the ballot in March.

The treasurer said that while the state has had success getting investors to buy bonds despite its credit troubles, trying to borrow that much at once could backfire.

“We are in uncharted waters trying to put this much debt in the market,” he said.

John A. Bohn, an advisor to the governor on the bond and the former president and chief executive of Moody’s Investors Service, said that is not necessarily the case.

He said there are major potential investors that “have been sitting on the sidelines” while California sorts out its fiscal problems.

The third part of Schwarzenegger’s budget proposal that was presented on Tuesday was $3.9 billion in cuts in government services for the next 19 months.

The cuts drew criticism from Democrats and advocates for the poor almost as soon as they were released late Monday afternoon -- highlighting how difficult it would be to balance the budget in the way the proposed spending cap requires.

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Times staff writer Peter Nicholas contributed to this report.