Another Run at a Cap on Spending

During the tax revolt of the late 1970s, California voters overwhelmingly approved a spending cap meant to make state government live within its means.

As the multibillion-dollar debt weighing down the state’s budget indicates, the spending cap is no longer working.

On the March 2 ballot, voters are being asked to try again, this time with a different approach. Rather than trying to limit spending, Proposition 58 proposes to eliminate deficits by mandating balanced budgets and building a large reserve.

The measure, a compromise between Republican Gov. Arnold Schwarzenegger and the Legislature’s Democratic leadership, provides several mechanisms that would require a balanced budget on paper and give the governor more leverage to keep spending in line with revenue throughout each fiscal year.

Critics call it full of loopholes that would allow the Legislature to continue spending too much while balancing the budget on debt.

“I don’t think this would really be a major change in California’s fiscal environment,” said Steven M. Sheffrin, director of the Center for State and Local Taxation at UC Davis.

Though acknowledging its imperfections, backers of Proposition 58 say it would provide new fiscal restraints going far beyond current law.

“If legislators and governors approach it responsibly, it will have an impact,” said Bill Hauck, president of the California Business Roundtable and chairman of a constitutional revision commission that proposed similar measures in the 1990s.

One of the key provisions of Proposition 58 has nothing to do with restraining future state spending. It would change the California Constitution to allow a deficit bond issue this year.

Currently, the state Constitution allows long-term borrowing only for “a single object or work.” Proposition 58 would make a one-time exception by defining the reduction of the current accumulated debt as “a single object or work.” That provision would provide legal protection for Proposition 57, the $15-billion deficit bond measure that Schwarzenegger is also sponsoring.

Backers of the two measures, including business groups and all but five members of the Legislature, argue that, without them, the state will face severe cuts in healthcare and other social service programs, as well as possible tax increases.

In an ad that began airing last week, Schwarzenegger described the two measures as “critical to resolve the state’s fiscal crisis.”

Though Proposition 57 would refinance past deficits, “Proposition 58 tears up the credit card for good,” he said.

In fact, the budget restraints in Proposition 58 are less sweeping than that. The measure relies heavily on the sound judgment of future governors and legislatures. Except for the reserve requirement, it avoids the kind of formulas to control spending that were used in the state’s previous spending cap -- the Gann initiative in 1979. Those limits were weakened by subsequent laws and ballot propositions.

Proposition 58 would require the Legislature to adopt a balanced budget at the beginning of each fiscal year. But it would not require the Legislature to close the fiscal year in balance. Excessively optimistic revenue forecasts, leaving the state short during the year, could still be papered over with debt.

In a study of balanced-budget measures across the United States, Harvard government professor James Alt found that the most effective ones “bite at the end of the year.” Any ending shortfalls have to be dealt with by a tax increase or spending cut the following year.

“Requiring the governor to introduce a balanced budget is nice, but ineffective. Even requiring the legislature to pass one is nice, but ineffective, because so much happens during the year,” Alt said.

Proposition 58 includes some measures designed to give governors more authority to close budget gaps that develop during the year. It says the governor “may” call the Legislature into special session by declaring a fiscal emergency. If the Legislature failed to adopt the governor’s solution or its own alternative in 45 days, it would be prohibited from working on any other bill or recessing until it did.

Supporters of the measure say requiring the governor to call the Legislature into session would have been too restrictive, denying the governor the flexibility to plug small shortfalls administratively.

Critics contend that the mechanism in the ballot measure would do little to restrain a governor intent on spending, the main charge hurled at former Gov. Gray Davis in last year’s recall campaign.

The proposition “has no teeth,” said Richard Rider, chairman of the San Diego Taxpayers Assn., one of three taxpayer groups that oppose Proposition 58. “This thing was written with loopholes coming and going.”

One of the concerns raised by critics is that the proposition does not entirely rule out future borrowing. After carving out a one-time exception for this year’s bond issue, Proposition 58 would close the door on long-term borrowing for deficit reduction. But the state would still be able to take out short-term loans called revenue anticipation warrants. These loans, which carry debt from one year to the next, were a primary factor in the current deficit.

One legislative staff member who worked on the proposition said a prohibition on short-term borrowing had been considered but rejected on the advice of investment advisors who said the state needed the flexibility to respond to unforeseen conditions.

Though conceding that the effectiveness of Proposition 58 “begins with fiscal restraint in the corner office,” where the governor sits, H.D. Palmer, spokesman for the Department of Finance, said the measure represented a bipartisan package that contained tools to prevent a recurrence of multiyear, multibillion-dollar deficits.

“The mechanisms of Proposition 58 will prevent this type of compound fiscal crisis from occurring in the future,” he said.

The most concrete of those mechanisms is a requirement, beginning in 2006, that the state place a percentage of the general fund into a reserve called the Budget Stabilization Account. This would grow over several years to of 5% of the general fund or $8 billion, whichever figure was larger.

Current law requires a “prudent reserve” for financial uncertainties but does not specify an amount or a percentage. The existing reserve has fluctuated wildly over the last few years, tracking changes in the economy.

Foes of the proposition say the new reserve fund would be no better protected than the general fund from being raided by the governor and Legislature.

The proposition language sets no specific criteria for when the money could be used. Instead, it would allow the governor to defer payments into the account by executive order. The Legislature could dip into the account through the normal appropriation process, currently requiring a two-thirds vote. The required margin will drop to 55% if another initiative, Proposition 56, is approved Tuesday. Backers of Propositions 57 and 58 generally oppose Proposition 56.

Caltech political science professor Rod Kiewiet, co-author of a book on the ways initiatives are circumvented, said he was skeptical that the “parchment barriers” contained in Proposition 58 could hold up long against a Legislature bent on spending.

Still, he sees a possibility that Proposition 58 could be effective by creating symbolic restraints.

“It may have the tendency to shift the burden of proof a bit, to change the publicity, to change the spin of things,” Kiewiet said. “That can matter.”