Gov.-Elect May Seek a Cap on Spending

Fresh from their victory in the recall election, advisors to Gov.-elect Arnold Schwarzenegger are considering asking voters next fall to approve a sweeping constitutional amendment to limit state spending.

The governor-elect also may ask California voters to weigh in on whether the state should sell $10.7 billion in bonds to pay off part of the budget deficit over a period of years.

Schwarzenegger spokesman H.D. Palmer said the governor-elect will wait until after his audit of state spending is finished before making most decisions on how to proceed. “The audit is job No. 1” for the new administration, he said, and “a number of decisions are going to flow from the findings of the audit.”

But Schwarzenegger “has indicated very strongly that he believes a spending cap is very necessary,” Palmer said. “He has indicated he intends to work with the Legislature to move that forward. But he will not hesitate, if need be, to take issues to the people.”

Several of Schwarzenegger’s economic advisors have spoken in favor of a spending cap, which the candidate endorsed in principle during the recall campaign.

On Wednesday, the idea of a cap also won support from a prominent Democrat, state Controller Steve Westly, who promised to work with the new governor.

“Spending caps are something most people look for, and they think makes sense,” Westly said at a news conference in Sacramento. “The question is: How do you implement them. We have spending caps now, but they don’t work right.”

A generation ago, voters approved a limit on state spending proposed by Paul Gann, the co-author of Proposition 13. But the limit was steadily eroded by years of high inflation and subsequent ballot measures.

In general, a cap would restrict growth in state spending using a formula tied to changes in population and inflation.

During the last nine years, during the tenure of Democratic Gov. Gray Davis and the second term of his Republican predecessor, Pete Wilson, state revenue -- and state spending -- increased faster than the combined effects of inflation and population growth. Then, when the recession hit, revenue dropped sharply, creating a multibillion-dollar gap in the budget.

Supporters of spending caps say they would fix the boom-bust cycle that has plagued the state’s budget. Critics say the cost of many government services, including schools and health care, has increased faster than the overall inflation rate and that a cap would thus eventually cripple state programs.

Under one version, which Assemblyman John Campbell (R-Irvine) has proposed, surplus revenue collected during good economic times would go into a rainy-day fund that could be used to support state programs during downturns.

That approach might require changes in the current state requirement that roughly 40% of all new state revenues go to public schools, although Campbell said the cap could be put in place without violating that rule.

Campbell, who compared the rainy-day account to programs that withhold money from an employee’s paycheck for retirement, said that Schwarzenegger is “in support of the concept” but that details are still being worked out. A task force that includes Jon Coupal of the Howard Jarvis Taxpayers Assn. is working on the proposal, he said.

The other measure that Schwarzenegger has indicated he may put to voters involves the existing plan to sell $10.7 billion in deficit bonds and $2 billion in pension bonds to balance the current year’s budget.

The bonds are under legal challenge, with opponents saying they are unconstitutional because they have not been approved by voters.

At his second post-election news conference last week, Schwarzenegger was asked about the Legislature’s decision to balance the budget using deficit bonds.

“It’s not wise if you don’t include the people. I think the people should make that decision,” he said. “I think that we need to do it the right way, the legal way, the way it has always been done in California, rather than brushing the debt under the rug and pretend like we don’t have that debt.”

It is too late for the governor-elect to place a bond measure on the March ballot, meaning that the earliest Schwarzenegger could ask the voters to decide the fate of the bonds would be November 2004, more than four months into the next fiscal year.

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Times staff writer Evan Halper contributed to this report.