Commentary

Snatching Defeat from the Jaws of Victory

California Governor Arnold Schwarzenegger abandoned a core campaign promise recently when he signed a fiscal reform package that did not include a constitutional spending limit. The plan includes a bond sale to cover the state’s current budget deficit, but replaces the spending limit with a provision that merely strengthens California’s existing balanced budget amendment. The governor’s package cleared both chambers of the state legislature by wide margins and will be placed on the ballot for a March referendum.

Unfortunately, the package — assuming it’s approved by the voters — will do little to help California avoid future budgetary shortfalls. The state’s fiscal problems stem directly from the massive increase in spending during Gray Davis’s administration. Between 1998 and 2001, on Davis’s watch, spending increased by a whopping 48 percent. Because the state was running surpluses for most of this time, a more stringent balanced budget amendment would have done little to limit spending or solve California’s current fiscal woes.

Conversely, a well-designed spending limit would have halted this expansion of government and prevented the current fiscal crisis. If spending had grown by the inflation rate plus population growth since 1998, the 2003 budget would have been $14 billion less and the accumulated surpluses would have totaled over $50 billion. This would easily pay down the state debt and leave a tidy sum for tax relief.

Now, some would argue that the stricter balanced budget amendment up for a vote in March would still be a victory of sorts. Coupled with California’s two- thirds supermajority requirement for tax increases, it would theoretically prevent the legislature from issuing debt and force lawmakers to make serious spending cuts during fiscal shortfalls. However, this upbeat view may be misguided for a few reasons. First, unions have placed an initiative on the March ballot that would lower California’s supermajority threshold to 55 percent.

Secondly, California’s fiscal constitution contains a number of spending guarantees for education and other public services. When fiscal limits conflict with spending mandates, judges almost invariably rule in favor of the mandate. Because California courts have often issued rulings hostile to the tax limits included in Proposition 13, the supermajority provision provides Californians with a false sense of security. This makes the case for a constitutional spending limit even stronger.

This weekend’s signing ceremony capped an intense, highly unusual period of negotiations between Gov. Schwarzenegger and key legislators. During the recall campaign, Schwarzenegger, Tom McClintock, and other Republican candidates all vowed to strengthen California’s existing spending limit. Two weeks ago, Schwarzenegger made good on that promise. He introduced just such a proposal and began negotiations with state legislators.

The negotiations began inauspiciously, however. The governor’s original proposal established a limit that was identical in size to California’s current spending limit — the same limit that failed to stop the sharp increases in spending that occurred during the Davis administration.

However, subsequent statements by Donna Arduin, director of California’s Department of Finance, indicated that the governor wanted a lower limit, one that would restrict spending increases to the inflation rate plus population growth. This is identical to the rate of growth established by California’s original spending limit, known as the Gann Limit, which was in effect between 1979 and 1988. Furthermore, it is also the same limit set by budgetary caps in Colorado and Washington, which enjoyed success limiting spending during the 1990s.

Not surprisingly, however, most Democrats in the California legislature — which the party controls — were unwilling to support a strict spending limit. Most legislators tend to be reflexively hostile to any efforts that limit their autonomy, and California legislators proved to be no exception. The December 5th deadline passed and Gov. Schwarzenegger announced plans to launch an initiative campaign to place a reform plan on the November ballot.

There would have been a number of advantages to this approach. Schwarzenegger could have insured that his proposal enjoyed broad support among conservatives, Republicans and the business community. Furthermore, because his spending limit would have been placed directly on the ballot, there would have been no risk of it being corrupted through legislative compromises. That is what makes his decision to essentially surrender and agree to a fiscal package without a spending limit very puzzling.

All is not lost, though. In the aftermath of this weekend’s vote, several Assembly Republicans, dissatisfied with the compromise, promised to continue to promote a constitutional spending limit. Hopefully, one of California’s taxpayer groups can collect the necessary signatures to get a proposal on the November ballot. It still remains a worthy cause, even if the current administration has lost interest.

Michael New is an adjunct scholar with the Cato Institute.