Terminating Fiscal Conservatism

“For several years, we kept the budget wolf from the door,” said Gov. Arnold Schwarzenegger in his State of the State Address. “But the wolf is back.” Two days after this speech — January 10 — the governor declared a “fiscal emergency,” forcing the legislature to develop a plan within 45 days to close this year’s gap.

The plan was finalized on February 16, but many of California’s fiscal conservatives think the governor is acting more like Little Red Riding Hood than the hunter who fought and saved her from the Big Bad Wolf.

The plan allows the state to pay its bills through the fiscal year, June 30, by cutting $2 billion of spending on education and Medi-Cal and by delaying some payments to counties and providers. But the bulk of the package consists of borrowing and accounting gimmicks like selling $3.3 billion in bonds, delaying $1.5 billion in early debt repayment, and raiding $400 million in transportation funds. Not exactly what one would call fiscal discipline.

The governor should have fought harder for more spending cuts to the bloated budget and for suspension of, or changes to, automatic spending formulas.

Spending has increased 27 percent during Schwarzenegger’s administration, nearly double the rate under Gray Davis. Legislative Analyst Elizabeth Hill has suggested a good starting point for more cuts: scale back the education spending in excess of Prop. 98 requirements by $1.5 billion. This would not require suspension of Prop. 98.

Instead, the governor and legislature cut over-appropriations by only $500 million. The outlook for next fiscal year does not look much better.

On February 20, Hill announced that state revenues had slipped another $1.5 billion and that the deficit through June 30, 2009, would now be $16 billion minus the package above, or about $8 billion. The governor has proposed a 10-percent across-the-board spending cut, early release of 22,000 prisoners, shifting $2 billion of tax revenue to the coming fiscal year that would otherwise be counted in the 2009-10 fiscal year. He’s also proposed increasing at least two “fees.”

Many observers suspect the governor would agree to further tax increases in exchange for legislative support of his long-term budget-reform proposal. But there is good reason to doubt the governor’s own commitment to effective constitutional budget reform.

His proposed Budget Stabilization Act, if approved by voters, would create a Revenue Stabilization Fund. When tax revenues exceed a ten-year average growth rate, the excess revenues would be put automatically into the fund. They could be spent only when revenues are below the long-run trend line. If deficits emerge, they would trigger automatic, pre-designated spending cuts of 2 or 5 percent, depending on the size of the deficit. This constitutional reform sounds good, but we have been down this path before, only to be disappointed.

In 2003, I served as a member of a task force that drafted a constitutional tax-and-spending limit for the governor’s consideration after the recall election. The task force was co-chaired by former State Assemblyman John Campbell and Jon Coupal, president of the Howard Jarvis Taxpayers Association. The 2003 plan would have imposed a balanced budget requirement and restricted the growth rate of spending to the combined rates of population and inflation growth. This would have guaranteed a constant level of government services to a growing population — fair to both taxpayers and program recipients. Unfortunately, the governor and his political machine did not work to put this hard limit on the November 2004 ballot.

In 2004, the governor was the political golden child. He got workers’-compensation reform passed, and both the Economic Recovery Bonds (Prop. 57) and the Balanced Budget Act (Prop. 58), which he supported, passed. But he backed away from the hard spending limit, and because of that, we are stuck with huge deficits today.

The governor did introduce his California Live Within Our Means Act, which failed on the November 2005 ballot (Prop. 76). But that ballot measure was not a hard limit — it would not have prevented big jumps in spending during “sugar high” periods when state coffers are overflowing. The proposed Budget Stabilization Act is not a hard limit either, but it is superior to Live Within Our Means because of the longer ten-year averaging period and automatic spending cuts.

It is telling that Arnold Schwarzenegger alluded to “Little Red Riding Hood,” a morality tale about wandering off the path. The governor himself strayed from the path of fiscal discipline people thought they were voting to walk in 2003. Now the budget wolf is indeed back at the door.

This time the governor must be principled, persistent, and courageous, and focus his energy and political machine to the difficult and costly campaign ahead. Otherwise, the Big Bad Spending Wolf wins, and Californians will not live happily ever after.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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