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Daniel Weintraub: A new tack is needed to end state's rough financial ride

October 27, 2003

Sacramento Bee

By Daniel Weintraub
Bee Columnist

(Published October 26, 2003)

Never again.

That seems to be the sentiment shared by big-government Democrats and small-government Republicans, outgoing Gov. Gray Davis and newly elected Arnold Schwarzenegger. Nobody wants California to ride this nauseating fiscal roller coaster one more time.

In a Capitol wracked by partisan discord and shell-shocked by the success of the Davis recall, nearly everyone agrees the state needs some kind of spending cap to ensure the next time California has an unexpected surge in tax receipts, it doesn't end up with a massive deficit.

The state's $8 billion to $10 billion structural budget gap -- the annual difference between revenues coming in and spending obligations going out -- can be traced to the California's huge tax windfall at the height of the 1990s dot-com boom.

As taxes on capital gains and stock options filled the treasury, Davis and lawmakers from both parties couldn't resist temptation. They expanded government services, from schools to health care, and added new programs. They also shrunk the size of the more reliable, underlying tax base.

When the technology tax burst ended, the state was left with commitments it could not sustain.

Gov.-elect Arnold Schwarzenegger will now be responsible for erasing what remains of the structural gap, and he says he will call the Legislature into special session in November to begin work on that task. But he also promised during the campaign to push for reforms that will prevent the state from getting into a similar fix the next time the economy grows and then swoons.

On the campaign trail, Schwarzenegger repeatedly said he thinks the state should follow the same advice he gives to his 6-year-old son: "Not to spend more money than you have." That seems simple enough. But in California government, nothing is so simple.

The state has had a spending limit on the books since 1979. At first, that law limited the expansion of government to the combined growth of population and inflation, and in 1987 the spending limit forced lawmakers to send rebates to taxpayers. But when voters passed a measure in 1990 to raise the gas tax, they amended and loosened the spending limit, effectively rendering it meaningless.

State Sen. Tom McClintock, a Republican candidate for governor this year, says the earlier spending limit, had it remained in place during the Davis years, would have allowed state government to grow by 21 percent while still leaving a surplus.

Assemblyman John Campbell, R-Irvine and a close ally of Schwarzenegger, has proposed a constitutional amendment that would restore the old limit and make it even more restrictive.

Campbell's approach, however, would conflict with Proposition 98, the voter-approved constitutional provision that sets minimum spending levels for education.

With one measure keeping the overall growth in government down and the other driving the growth in school spending up, public education, already the largest single program, would take up more and more of the budget each year. Eventually, education spending would crowd out everything else.

Either voters have to repeal Proposition 98, which seems unlikely, or any new spending limit, to work over time, has to recognize the conflict and address it.

Two other lawmakers -- Republican Assemblyman Keith Richman of Northridge and Democrat Assemblyman Joe Canciamilla of Pittsburg -- are working on a proposal that would do just that.

Their plan, while still in the drafting stage, would establish a three-member commission of the governor, the legislative analyst and the controller to estimate how much tax revenue the state could expect, and then prohibit the Legislature from budgeting more than 97 percent of that amount. This would reduce suspicion about possible manipulation of those revenues number and automatically create a 3 percent annual cushion.

The measure would limit spending growth over time to population plus inflation. But the limit would be adjusted in years when the constitutional minimum for education spending exceeded it -- effectively making the proposal a limit only on the growth in the non-education side of the budget and preventing the schools from gobbling up everything else.

Finally, revenues in excess of the spending limit would go into an economic reserve that would grow until it equaled 5 percent of the state's general fund. Additional revenues, up to another 5 percent, would be for a pay-as-you-go infrastructure fund. Any money beyond that would be divided between the schools and taxpayer rebates.

That sounds a little complicated. But unless voters are willing to repeal some or all of the fiscal mandates they have placed on lawmakers and allow California to start over with a clean slate, simple solutions are going to be hard to come by.


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