Spending Cap Rumors Abound

As the June 15 budget deadline approaches, rumors that the Legislature will send yet another spending cap to the ballot abound. These rumors are somewhat surprising, since voters haven’t even had the chance to weigh in on the last cap sent to the ballot – ACA 4 of 2010, approved as part of last October’s budget agreement – and the fact that California’s existing cap is arguably one of the toughest in the nation. Details of what may, or may not, be under consideration are well hidden under the cone of silence.

Some key points to consider when evaluating the impact of any such proposal include:

  • The choice of a base year. As a widely displayed chart from the Governor’s May Revision shows, General Fund spending would be at a multi-decade low under the budget plan currently under consideration. Thus, locking in spending at the 2011-12 level, or any year in the near future when scarce resources are anticipated to continue, would prevent restoration of recent cuts and prevent the state from investing in public services and institutions that are essential to a competitive future.
  • The choice of an inflation factor. As we’ve written before, tying spending to the Consumer Price Index (CPI) is incompatible with the Proposition 98 school spending guarantee, which in normal years – “test 2” – increases based on per capita personal income growth. Per capita personal income typically increases at a significantly greater rate than the CPI. Thus, tying spending to the CPI turns education funding into a budgetary “Pac Man.” Use of the CPI is also problematic with respect to health care. Nationally and here in California, health care costs typically rise more rapidly than the CPI.
  • Whether it is really a cap masking as a budget reserve. Proposition 1A of 2009 and ACA 4 of 2010 both functioned as spending limits, but masqueraded as budget reserves. Both were designed to use complicated statistical formulas – linear regression – to prevent revenue growth that typically accompanies an economic recovery from being used to restore budget cuts made during an economic downturn.
  • Whether it is really a new infrastructure funding program masquerading as a spending limit. Both Proposition 1A and ACA 4 created new funding streams for infrastructure spending, masquerading as spending “restraint.” Rumors currently floating around the Capitol suggest that this year’s version may include similar provisions. The problem with this is two-fold. First, money ostensibly destined for a budget reserve may not be there when it’s needed, having been spent, rather than deposited in a savings account, or used to pay down debt that might otherwise be paid from the General Fund. Second, such provisions embody a bias towards investment in “bricks and mortar,” rather than the state’s people, historically California’s greatest asset. While ACA 4, which is slated for the 2012 primary ballot, has been touted as a tool to pay down the state’s “wall of debt,” the infrastructure loophole will likely limit the measure’s impact on debt and minimize accumulation of a budget reserve.
  • The voters have spoken. Some spending cap proponents also opposed extending the temporary taxes noting that the voters have spoken. By that standard, a spending cap is a “no go” – voters have spoken twice in six years, defeating former Governor Schwarzenegger’s Proposition 76 in November 2005 and Proposition 1A in 2009. As public opinion research suggests, no on Proposition 1A voters supported a balanced approach to balancing the budget, but viewed a permanent straitjacket on state spending to be too large a penalty to pay for a minimal extension of temporary taxes.

California’s recurring budget crisis since enactment of the “Gann Limit” in 1979 should cause anyone who thinks that constitutional spending limits prevent budget problems to take a second thought. As Rudolph Penner, the former head of the Congressional Budget Office, once noted, “The process isn’t the problem; the problem is the problem.” The only realistic solution to California’s budget problem is a balanced one that closes ineffective tax loopholes and provides the revenues necessary to support our core public services and institutions.

– Jean Ross

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