Delivered to
Senate Budget and Fiscal Review Committee
Assembly Budget Committee
October 6, 2005

On November 8, California voters will decide the fate of Proposition 76, the “Live Within Our Means” Act. The initiative promises to live up to its title by restricting state spending and fixing California’s lingering fiscal problems.

Since 2001, California has experienced sizable budget deficits and has accumulated a considerable amount of debt. Though most of the blame for this was placed on the post 9/11 recession decline in revenue, constant increases in expenditures are the biggest culprit.

These perpetual spending increases are due to two factors: formulaic spending mandates that require categorical expenditure increases regardless of the state’s fiscal health and an absence of fiscal responsibility on the part of the state’s elected officials.

California is in a state of unregulated government growth. The costs are borne by the taxpayers in the form of tax hikes and lower economic productivity. Reform is needed if California is to improve its fiscal climate.

Proposition 76 is one opportunity for reform. It aims to restrain California’s state expenditures by limiting its growth, controlling the state’s autopilot spending mandates, and permitting the governor to make mid-year expenditure cuts. It also contains a number of provisions dealing with expenditure allocation and the budget-adoption process.

Though the initiative fails to prevent potential abuses that could lead to government expansion, it would instill some fiscal discipline that could reduce the size and severity of the state’s budget problems.

On the positive side, Prop. 76 would:

• Reduce budget volatility by smoothing out revenue peaks and valleys.
• Reduce deficit spending by controlling spending mandates and granting the governor new executive powers.
• Reduce debt accumulation by requiring the state to repay its debts.

Unfortunately, Prop. 76 also has the following negative characteristics:

• It would retain deficits, because the three-year revenue average will not necessarily reflect current revenues or expenditures.
• It retains legislative power to increase taxes and fees.
• It contains no guarantee to rebate excess revenues to the taxpayers.

Prop. 76 does provide a framework for limiting the growth of government, something that has been lacking in California for many years. With its spending reduction and budget balancing provisions, Prop. 76 is a good first step towards decreasing the level of government spending relative to the state’s output.

Yet the initiative also contains some loopholes that if exploited could lead to possible government expansion. Since the legislature would retain its power to tax at will, any increase in taxes would in turn influence the spending limitation, and thus increase the amount of expenditures permitted each year.

Therefore, Prop. 76, if adopted, should be strengthened by subsequent legislation/initiatives that would close the loopholes. This can be achieved by granting voters direct approval of special fund designations and tax and fee increases via ballot initiative. Also, the state should require that a portion of the excess revenues collected during high-revenue years be given back to the taxpayers.

With these additions, California’s spending limitation will resemble the many successful spending caps of various states, especially Colorado’s Taxpayer Bill of Rights (TABOR). Since its adoption in 1992, Colorado has experienced a stable fiscal environment, reduced government growth, and rebated billions of tax dollars back to its residents.

Out-of-control spending and annual deficits have hampered California for years, bringing it to the brink of bankruptcy. Fiscal restraint is needed to limit government, keep its elected officials accountable, and protect the earnings of the public.

James Madison wrote: “In framing a government, which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed, and in the next place, oblige it to control itself.” On November 8, California voters will decide whether they want to impose the needed controls on state government through Proposition 76.

Anthony Archie is a public policy fellow in Business and Economic Studies at the Pacific Research Institute. He can be reached at aarchie@pacificresearch.org.