Perennial budget dilemma: What to do when spending outpaces tax revenue?

Proposition 76, the Schwarzenegger-backed “Live Within Our Means” Act on the
November ballot, might not inspire like the great works of Jefferson or
Madison, but it shares the same underlying principle: government spending
must be restrained.

Prop. 76 aims to control autopilot spending mandates and permit the governor
to make mid-year expenditure cuts. With these provisions in place,
California will see greater fiscal discipline and counteract increasing
reliance on deficit spending. Since 2001, California’s expenditures have
outpaced tax revenues, leaving the state with swelling deficits.

The budget crisis reached a boiling point in 2003 with a long-term,
cumulative deficit of more than $38 billion–the worst deficit the state, or
any state, had seen. California teetered at the brink of insolvency, with an
abysmal credit rating lowered to just above junk bonds.

Since then, the situation has slightly improved (the credit rating moved up
a step in July 2005 to just above Lithuania’s), but annual deficits loom.
One factor driving perpetual deficits is the formulaic spending mandates
that require categorical expenditure hikes regardless of the state’s fiscal
health. While there are spending requirements for a number of social
services, the biggest and most stringent is the education mandate prescribed
in Prop. 98 passed by voters in 1988.

Prop. 98 requires that the state provide a minimum level of education
funding in a given year and mandates that each year’s funding level be
greater than the previous year’s allocation. Currently, education spending
takes up the biggest slice of the budget pie–about 50 percent–with K-12 and
community colleges receiving more than $50 billion in 2005-06, up 6.4
percent from 2004-05. Projections of Prop. 98 funding show that it will
reach $62 billion by 2009: a 24 percent increase in four years.

Under state law, this mandate must be adhered to even when revenues cannot
support it. Forced to fulfill the obligation, legislators often turn to
sizable borrowing and tax hikes as it takes up more and more of the budget.
While the mandates severely handicap state budgeting, legislators still have
power to make discretionary cuts in the budget. Most lack the political will
to do so.

Instead, they cave in to the demands of special interests, regardless of
fiscal conditions. As always, taxpayers are forced to pick up the tab. Fed
up with out-of-control spending and annual deficits, Governor Schwarzenegger
pushed for a reform that would override the formulas.

Proposition 76 would still retain the Prop. 98 mandate, but it would tie
education spending to available revenues by allowing for decreases during
fiscal emergencies. Prop. 76 would also allow the governor to make
discretionary mid-year expenditure cuts to balance the budget if the
legislature cannot agree on cuts. This would decrease the need to raise
taxes and force an evaluation of spending priorities.

Prop. 76 isn’t perfect, but it would infuse the state with greater and
much-needed fiscal control. It will reduce the size and severity of budget
problems, control autopilot spending, repay debts, and instill some fiscal
responsibility on elected officials.

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 choose whether they
want to impose needed controls on state government through Proposition 76.