Results mixed when voters set spending caps

Results mixed when voters set spending caps
Backers of Proposition 1A say it would control state spending, but similar plans elsewhere don't always work as intended.
By Evan Halper

9:27 PM PDT, May 15, 2009

Reporting from Sacramento — The centerpiece of Tuesday's ballot is pitched as a simple concept and as the path toward ending California's repeated flirtations with financial ruin.

Voters are being asked to force Sacramento to build a huge savings account available for withdrawals almost exclusively in times of fiscal crisis. No longer would lawmakers be allowed to spend the windfalls the state receives when the economy is humming and revenue soars. Those extra billions would be socked away under Proposition 1A.

Similar plans are already in place in other states. They haven't always produced the desired effect, though, and experts say it is impossible to predict whether the proposed spending controls would achieve the intended goal in California.

"It is challenging to get it just right," said Susan Urahn, managing director of the Pew Center on the States. "There are a lot of unanswered questions about whether or not [spending limits] are a useful tool."

The California measure is trailing in the polls, though not necessarily because voters oppose financial restraint. Many don't like the fine print: As part of a deal lawmakers and the governor rushed together in the Capitol's back rooms, Proposition 1A would also extend for up to two years billions of dollars in temporary tax hikes that recently took effect.

That very large caveat aside, even some supporters of the plan hedge when asked how effective it would be.

Former Assembly Speaker Bob Hertzberg, now co-chairman of California Forward, a think tank focused on solving the state's budget problems, says voters should support the measure because a well-stocked savings account is always a good thing. But they should be under no illusion that it's a cure-all.

"These spending caps are just artificial ways to not deal with the underlying problem," he said.

An outdated and unpredictable tax structure that relies too much on windfalls of income, a dysfunctional and complex relationship with local governments, and the absence of stringent oversight on government spending are among the fundamental problems that Hertzberg says the state needs to tackle.

Some states that have experimented with spending controls found that they forced spending down so much that there was not enough money for basic government services.

In Colorado, for example, many of the same fiscal conservatives who sold voters on tough spending limits came back to the electorate several years later, asking that the controls be relaxed. Voters obliged after being warned that the state would otherwise be forced to abandon the repair of some essential roads and be deprived of other fundamental services.

California went through the same exercise decades ago. Voters capped state spending, through what is known as the Gann limit, in 1979 in the midst of a taxpayer revolt. The cap forced down spending so much that people panicked about school funding and voted to ease it in 1988, and relaxed it further in 1990.

Now the Gann limit allows so much spending that Sacramento didn't come close to reaching it as the state ran up the latest deficit, projected at $21.3 billion if Tuesday's ballot measures don't pass.

In other states, lawmakers have found ways to step around spending controls without asking voters. Escape clauses are typical, providing governors and lawmakers with the option to raid their reserve funds or delay deposits.

Jean Ross, executive director of the nonprofit California Budget Project and an opponent of Proposition 1A, says Nevada and Arizona have spending caps on the books, yet their financial condition is as bad as, or worse than, California's right now.

She says that of the five states with the smallest budget gaps this year, only one has a spending limit.

"These limits don't always result in a better fiscal outcome," she said.

Supporters of California's bipartisan proposal say they have learned from the mistakes others have made in crafting spending controls.

Gov. Arnold Schwarzenegger and legislative leaders tried to strike a balance with Proposition 1A, giving it some of the teeth of the earlier tough spending limits enacted here and in other states while providing release valves intended to keep the measure from strangling government.

Under the plan, yearly state spending could grow only as much as state revenue grew, on average, during the previous 10 years. Analysts say that would allow for a roughly 5% annual increase.

If tax collections exceeded the sum the state was permitted to spend, the extra money would go to the rainy-day fund. The fund would be considered full when it reached 12.5% of overall state spending. That would currently amount to about $12 billion.

Once the fund is full, excess revenue could be used only for one-time purposes such as paying debt or rebates to taxpayers -- not for long-term programs.

However, lawmakers could dodge the spending controls by raising taxes. That new revenue would not be subject to the cap for several years and could be used to boost spending beyond the 5% or so allowed.

The proposition would permit the state to tap the rainy-day fund for education if voters pass the accompanying Proposition 1B on Tuesday. It also would permit lawmakers to raise the amount they spend on public works -- opponents say that could include pork projects -- at the cost of healthcare, social services, law enforcement and other government programs.

What would the long-term effect of all this be?

1A and 1B are among six proposals that include the diversion of hundreds of millions of dollars from early childhood education and mental health programs, borrowing against the state lottery, and a salary freeze for elected state officials in deficit years. Experts say it's fairly simple to predict the effects of most of the measures. But not so with the ballot's signature proposal.

"There is no question it would have been a lot more helpful to have $12 billion in the bank this year instead of near nothing," said Michael Cohen, chief deputy at the nonpartisan Legislative Analyst's Office, which lawmakers look to for financial advice. "But it is hard to know how this would play out.

"There are a lot of moving parts here," Cohen said. "The formulas in this proposal might not make sense for situations the state finds itself in in the future."

Backers of 1A say that, at the very least, the measure would require more financial planning in a state that seems incapable of managing its books. California is the only state that never really closed its budget gap from the last recession -- the deficit that helped move voters to throw Gov. Gray Davis out of office in the 2003 recall.

The state has since been pushing the problem into the future with accounting maneuvers and borrowing, and now finds itself -- again -- with a projected deficit that dwarfs those of other states.

Scott Pattison, executive director of the National Assn. of State Budget Officers, said he is not taking a position on Proposition 1A. But he did say the state might benefit from "anything that creates some discipline and a little more long-term thinking."