Spending Cap in Place Already

During the recall campaign, Arnold Schwarzenegger argued that the only way to end California’s penchant for deficit spending was to change the state Constitution to place a firm limit on the amount the Legislature and governor could spend.

On Tuesday, the Republican governor formally proposed just such a spending limit, bringing immediate cries of alarm from Democrats.

Ironically, California has had a constitutional spending cap -- little known and of little effect -- for nearly a quarter of a century. Experience with the existing limit illustrates that capping state spending is far easier said than done.

The Gann limit, named after anti-tax crusader Paul Gann, said state spending could grow no faster than the rate of inflation and population growth.

The cap was approved by voters. But over the years, subsequent voters approved a string of new ballot measures that created holes in the limit.

Now, with Schwarzenegger’s proposal, the state may come full circle, back to the concept that voters need to impose financial discipline on the political system in Sacramento. And Schwarzenegger’s proposal faces some of the same criticism that eventually eroded the Gann limit: that it would harm schools.

“The education community will strongly oppose this proposal,” said Paul Goldfinger, a Sacramento-based consultant to school districts. “It is a take-away from schools.”

At his first news conference as governor last week, Schwarzenegger said that the spending limit was critical so that we “never again allow politicians to recklessly overspend.” Similar anger at Sacramento led voters to approve the Gann limit in the fall of 1979. The anti-tax fever that had swept California a year earlier when voters approved Proposition 13 was still strong: The spending cap was overwhelmingly approved.

Gann’s goal was to keep government in check by limiting any increase in spending to no more than the rate of inflation and population growth. At first, the limit had little impact on the state budget because of several years of high inflation and rapid population growth, which pushed the spending cap skyward.

During the recession of the early 1980s, revenues fell well below the spending limit. It took until the mid-1980s for state revenues to reach the spending cap.

The Gann measure required that excess revenues above the spending limit be returned to taxpayers, which happened only once: in the 1986-87 budget year.

But the tax rebate angered education interests who felt the windfall should have been used to improve schools. Advocates for schools drafted another ballot measure, Proposition 98, which passed with just over 50% of the vote in 1988. Proposition 98 provided that public schools and community colleges receive a share of any excess revenues.

In periods of rapid economic growth, schools won a larger share of the state budget, lifting California’s ranking among the states in terms of per pupil spending on education. Proposition 98 also required the state to make up for decreases in education spending that occur when revenues drop in times of economic difficulty.

But the increased spending on schools came at the expense of other state programs. That angered the transportation lobby, which in 1990 sponsored yet another initiative, Proposition 111, which altered the Gann limit again to exempt gasoline taxes. Proposition 111 also recalculated how fast spending could grow. The formula, instead of using the Consumer Price Index and population to raise the spending cap, was tied to population growth and per capita personal income, which typically grows faster than inflation.

Since the stock market bubble burst in 2000, state revenues, particularly income tax receipts, have fallen dramatically.

But spending has remained high. To “balance” the budget on paper, lawmakers and former Gov. Gray Davis relied on borrowing, accounting changes, unrealistic revenue and spending estimates, and one-time revenues.

State Budget Director Donna Arduin told lawmakers Tuesday that during the last five years California government has spent $23 billion more than it has taken in. “State expenditures have risen by 43%,” Arduin said. “Revenues have increased by 25%.”

The spending cap that Schwarzenegger proposed would force state government to live within its means by requiring that general fund expenditures not exceed general fund revenues beginning July 1, 2004.

The constitutional amendment would further limit the Legislature by diverting any revenues above the spending limit to a new “rainy day” reserve account.

Money placed in the reserve could be spent only to provide tax rebates, pay off deficit financing bonds, deal with emergencies, or supplement general fund spending when revenues drop in economic downturns.

That, however, means that schools no longer would have a fixed claim on new state revenues.

Alarmed, the education lobby is lining up against the governor’s spending cap. The proposed limit would force “huge, huge cuts” in next year’s budget, said Goldfinger.

“It would lock in a relatively low level of funding,” for schools, he said. “This would lock us into mediocrity, a low level of mediocrity.”