Proposition 76: Curb on spending - or a 'power grab'?

Author: Alexa H. Bluth

Published: October 12, 2005

The jury is out on whether Proposition 76 would actually deliver what its backers promise: an end to California's chronic budget troubles.

Gov. Arnold Schwarzenegger says the spending control measure will smooth out the effects of the volatile budget cycles that have left California swimming in surpluses in certain years and drowning in debt in others.

Conservatives who had hoped to place a strict spending cap before voters call it a watered-down attempt to rein in spending that won't hurt but probably won't help much either.

Opponents, including elected Democrats and teachers unions, say it will give the governor unprecedented and unchecked budget-cutting power and will gut California's voter-approved school-funding guarantee, Proposition 98.

And academics and analysts who have studied Proposition 76 say many of its true effects are impossible to predict because of its sweeping nature and the fact that it will interact with and affect other voter-approved budget measures.

"I don't think it simplifies budgeting in California," said Kim Rueben, public finance economist for the Tax Policy Center and an adjunct fellow at the Public Policy Institute of California.

"I think that there are parts of this (measure) that could help California ... but in aggregate there is too much going on."

Proposition 76 is supported by the Republican governor and business interests who are supporting his initiative agenda. It has won lukewarm support from anti-tax groups who say it does not go far enough, including Howard Jarvis Taxpayers' Association President Jon Coupal, who described it in a recent opinion piece as "a modest proposal designed to put gentle brakes on state spending."

The measure, which backers have nicknamed the "Live Within Our Means Act," would create a second limit on state spending.

The first, the 1979 Gann limit, ties state spending growth to population increases and inflation. But changes made over the years have limited its practical effect.

The new proposal would limit the rise in state government spending to the average rate revenue grew in the three previous years.

Effectively, that would prevent the deep budget fluctuations that occur when revenues rise and fall - driven largely by the volatile flow of personal income and stock options that caused the revenue spike late last decade and the precipitous drop that followed and led to the current budget crisis.

Schwarzenegger, at an appearance in Orange County last month, compared the annual budget process to "an auction amongst interest groups" driven by spending formulas that promise more money than the state takes in.

"In some things the budget throttle is wide open, and in other things it is closed shut," he said.

"It makes no sense. It is unfair, and this cannot go on."

Democrats have called for a variety of tax increases to bring the state's books back into balance and criticized Schwarzenegger for imposing his own $4 billion hit on state revenues when he reduced the state's vehicle license fee shortly after taking office.

But the Legislature has not garnered the two-thirds vote needed to raise taxes, and state budgets have been balanced largely by borrowing, funding shifts and some spending cuts in recent years.

"The strongest reason is the record of the last seven years, every one of which we've spent more than we've taken in," said Schwarzenegger's former finance director, Tom Campbell, who helped write the measure and is campaigning for Proposition 76.

"We are borrowed out. We've borrowed from every special fund that we can, and our state cannot continue this way."

If state revenues in any one year rise sharply and more money is available than the limit allows the government to spend, the measure would require that the surplus be placed into a reserve fund and be used to pay off debt and for highway and school construction projects.

The measure would also expand the governor's powers to cut state spending in certain circumstances.

Specifically, it would give the governor authority to declare a fiscal emergency when his or her own Department of Finance determines that state revenues have fallen at least 1.5 percent below the administration's forecasts.

Once the governor declares an emergency, the Legislature has 45 days to address the shortfall - something critics call unrealistic with the current two-thirds vote threshold for budget cuts or tax hikes.

If the Legislature cannot come to an agreement, the governor then has the authority to cut spending unilaterally, including reducing funding to schools, health and welfare programs that now are protected from such cuts.

The midyear cutting authority in the measure is one of its most controversial provisions.

"This initiative really eliminates checks and balances," said Assembly budget Chairman John Laird, D-Santa Cruz. "There is a reason that the constitution has different roles for the different branches, and it's not for somebody to make unilateral budget decisions."

But Campbell said the measure still leaves the option for the Legislature to come to agreement to avoid unilateral cuts by the governor.

"Even then, if the Legislature wants to pass an alternative budget and they have the votes to do so, then they may," Campbell said.

Schwarzenegger dismisses the "power grab" argument, noting that two-thirds of the states have some method for governors to deal with budget crises.

"Shouldn't the governor of the most ... populous and the most diverse state, with the biggest budget of any state in the union, have the same ability to respond to crisis as other governors?" Schwarzenegger asked at the Orange County forum.

Perhaps equally unpalatable to critics, however, is the measure's effect on Proposition 98, the 1988 voter-approved constitutional amendment that requires the state to supply a minimum level of funding for K-14 schools.

First, it would subject schools to unilateral cuts in tough budget times, whereas now two-thirds of the Legislature must agree to suspend Proposition 98 to cut schools below the guarantee.

"If the governor ever calls a fiscal crisis, which really isn't a fiscal crisis, he can unilaterally cut funding for schools," said John Mockler, an education consultant who helped craft Proposition 98 and who opposes Proposition 76.

But it also would shortchange schools money they are owed from past years' budget cuts.

The state is required to repay its obligations to schools from past budget cuts, which currently stand at $3.8 billion.

Under current law, once the state makes up for the past losses, it is built into the minimum amount of funding schools get each year.

If Proposition 76 passes, the state would repay the $3.8 billion over 15 years, on a one-time basis, and it would not increase the floor for school spending.

"For better or for worse, it changes how education will be funded in the state in that it takes away the guarantee and it takes away the growth if excess money is put into education spending," Rueben said.

Schwarzenegger said he is not the only one frustrated with automatic spending formulas, such as the one in Proposition 98.

"Many in the Legislature, of both parties, have told me privately, over and over, that we need change," he said.

"They have told me that they're tired of the automatic spending formulas, formulas that tie their hands, formulas that eat up the budget and that force us into cuts in health care, environment, for the disabled and so many other areas."