Right on the money

Between the disastrous budget years that helped push Gov. Gray Davis from office in 2003 and the disastrous budget years that have plagued the second term of Gov. Arnold Schwarzenegger, there was one year — 2006 — when everything seemed rosy. The mortgage market was booming, the economy was humming, and the governor proposed a budget that continued to pay down Davis-era debt. Democrats in the Legislature instead tried to use some of that money for program expansions. As usual, they and the governor locked horns, but gently, given the comfortable level of revenue expected.

Then the April tax payments came in and shocked everyone. California was rolling in unanticipated money. Our tax system is heavily weighted toward income taxes on the wealthy, so when well-to-do investors have a good year on Wall Street or realize profits from lucrative investments, the state hits the jackpot along with them — and that’s what happened in 2006. Led by a group of Google backers who cashed in their chips, wealthy taxpayers gave the budget a surprise boost.

So what was the state to do with all that extra money? Democratic Assemblywoman Karen Bass of Los Angeles had a smart plan to spend $82 million of it on a long-needed overhaul of the foster care system that would keep more children with their relatives instead of sending them to group homes or into foster care.

Schwarzenegger and Republicans in the Legislature wanted a larger “rainy day” fund as a hedge against bad times, and a spending cap so the state would not embark on programs it couldn’t afford in future years. Democrats argued that money properly spent now would save the state millions in the future and was a necessary investment. Then-Speaker Fabian Nuñez, also a Los Angeles Democrat, also from a district affected by the broken foster care system, went to bat for Bass’ plan and included it in the budget that Schwarzenegger signed.

Meanwhile, Californians were happy with their government. Largely because of a decent economy and a fairly easy budget year, the Legislature’s approval ratings soared. Schwarzenegger was easily reelected.

When the housing bubble burst, Schwarzenegger stepped up his demand for far-reaching budget reform to cap annual spending and mandate saving for the future. This page called it “budgetary Skynet,” a reference to the computer system that, in the “Terminator” movies, eliminated the human factor from defense decisions. “A better future for California will come when voters and elected officials begin to make tough choices,” we wrote, “not when they shrug their shoulders and relinquish their power to a budget machine.”

Bass then became speaker and had to preside over the dismantling of much of her good work on foster care. Soon to leave the Assembly for a seat in Congress (her election in November is all but certain in her heavily Democratic district), she hasn’t backed off her support for foster care reform. But she has come around on Schwarzenegger’s rainy-day fund.

“So much of what we did was undone” by the last several very bad budget years, Bass said recently. “I do think we need something to even out the budget from one year to another.”

The Times’ editorial page reluctantly joined Bass and other legislative leaders in backing Schwarzenegger’s May 2009 ballot measure that would have imposed an automated spending cap and a rainy-day fund. It failed to pass because it was packaged with tax increases that angry Californians were unprepared to accept.

Today, this page again asserts its support for the governor’s budget reform, this time putting aside our past reluctance. It’s unfortunate that automated budgeting is necessary. But it is necessary. The state must continue to invest in the social welfare of its people, but we must do it in accordance with California’s projected growth so that we do not repeatedly yank from the young, the elderly and the poor the very services that we provided only a year or two before.

There are, in theory, alternatives. A revamp of our tax system along the lines of the one produced by the Commission on the 21st Century Economy, for example, would be one way to smooth out the revenue peaks and valleys and make the state’s tax receipts more predictable from year to year by putting less emphasis on the income of corporations and the wealthy. But there is little widespread support for transferring the tax burden to middle-income earners. Allowing the Legislature to make budget decisions on a majority vote, instead of two-thirds, would force lawmakers and the majority party to stand behind their budgets. There’s a measure on the November ballot to do that, but there’s also a measure to expand the two-thirds requirement. Until California is ready to adopt widespread and rational governmental restructuring, it needs to change its budgeting practices.

There are downsides. The public can become impatient when the state is sitting on a large reserve. It happened in 1978, when then-Gov. Jerry Brown prudently socked away a huge reserve for expenses he saw coming in future years. Property owners were angry that their taxes were rising when the state had plenty of money, and the surplus became one of the factors that helped defund government with Proposition 13. In the 1990s, the state had enough money to roll back vehicle license fees. Gray Davis prudently raised them again, as the law contemplated, when the surplus disappeared — but that move helped get him recalled. Budget reform can put reserves for future years off limits for tax rebates as well as for spending.

This is Schwarzenegger’s last budget, and his last chance to push for a spending cap and a rainy-day fund. It’s the right time and the right goal. The Legislature should agree, and send budget reform to voters one more time.