California Budget Woes Underscore Need for a Tough State Spending Limit

Published March 1, 2008

Four years ago, California Gov. Arnold Schwarzenegger (R) rode into Sacramento brandishing the sword of fiscal discipline. He vowed to avenge the California taxpayer and end the budget deficit created by former Gov. Gray Davis’ (D) profligate spending.

“I will not rest until our fiscal house is in order,” Schwarzenegger proclaimed. Four years later, the budget is still far out of balance.

The Legislative Analyst’s Office warned several months ago that this year’s state budget faces a deficit of $10 billion to $11 billion, then in late December upped the estimate to $14 billion. In addition, California already has approximately $20 billion in debt related to previous budget problems.

Revenue Up; Spending Up More

Since Schwarzenegger’s first budget, revenue has increased by approximately 32.2 percent while general fund spending has increased by 36.6 percent. Increases in revenue have simply triggered more spending.

Elizabeth Hill, the state’s legislative analyst, tried to offer a measure of optimism, suggesting the budget crisis could nearly correct itself within three years if current projections hold.

But even the most sophisticated analysts have been unable to accurately predict an end to the current economic conditions, so it is unlikely current projections will remain viable in three years. The fiscal condition of the state has worsened by $6 billion since August–the state has trouble with three-month projections, let alone three-year forecasts.

Schwarzenegger has proposed leasing the California State Lottery to a private operator for a lump-sum payment, estimated at $14 billion to $37 billion. That cash should be used to eliminate the current deficit and create breathing room to achieve permanent budgetary reform, rather than finance his universal health care proposal.

Reforms Already Identified

The governor has already identified many of the needed long-term reforms in his landmark California Performance Review, which he can immediately implement.

For example, the Performance Review plan included an ambitious effort to trim some of the fat out of state government by consolidating similar departments, which would allow the state to take advantage of a continuing wave of employee retirements to reduce its workforce gradually without firing anyone. This could save more than $3 billion over five years, according to the report.

Similarly, the plan identified several billion dollars in surplus or questionable real estate owned by the state that could be sold to a more productive private use within the next two years or so. This could easily add more than $1 billion to the state’s coffers while reducing ongoing state maintenance costs for the sites.

During this fiscal transformation, California also could shift to a performance-based budget, where spending decisions are based, not just on what was spent last year, but on performance measurements of state programs. Just because a program got money last year doesn’t mean it deserves money this year.

Spending Limits Essential

To be truly successful, Schwarzenegger must limit the state’s ability to spend recklessly. He can reform all he wants, but if he does not put in place reasonable limits on state spending, the state will inevitably find itself in this position again.

Spending and revenue limits are effective because they force lawmakers to prioritize spending and make choices, the way normal families live every day. This is precisely what California needs–a fiscal policy that forces smarter spending.

Even former governor Davis, recalled by the voters in 2003 for his tax-and-spend ways, has seen the light. In a November 2007 speech, Davis said, “[E]very governor who serves more than just a couple years will experience both the good and the bad that comes with our economy. … The answer, of course, is to adopt a spending limit, which stockpiles money in good years that you can draw down in bad years.”

George Passantino ([email protected]) is senior fellow at the Reason Foundation and served as a director of the California Performance Review in 2004.

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