California Voters Reject Spending Cap Initiative

Published December 1, 2005

California voters on November 8 trounced an initiative designed to control state spending, voting 62 to 38 percent to reject Proposition 76, the “Live Within Our Means” Act supported by Gov. Arnold Schwarzenegger.

The measure would have restricted state spending and addressed many of California’s lingering fiscal problems, according to the governor and the measure’s supporters.

Spending, Revenue Unrelated

The proposition aimed to restrain state expenditure increases by limiting them each year to no more than the average rate of growth in revenue over the three prior years. That limitation would have capped spending in high-revenue years and provided reserves in low-revenue years. In years when revenues outpaced expenditures, 25 percent of the excess revenues would have been allocated to a “rainy day” fund.

The initiative also would have controlled spending mandates that are currently “on autopilot” and permitted the governor to make midyear expenditure cuts to balance the budget.

Barbara Kerr, president of the California Teachers Association, which opposed the measure, told the San Francisco Chronicle, “This is a victory for all of the children and students, and it just reaffirms the fact that people support Prop 98 and are committed to adequately funding our schools.” Prop 98, passed in 1988, provides a funding guarantee for public education in the state.

‘Lost Opportunity’

Bill Hauck, president of the California Business Roundtable and one of the authors of Prop 76, told the Chronicle, “I think this was a tremendous lost opportunity and will permit the state to spend–if it chooses–money we don’t have. I think a lot of the measure had voter support, and it was defeated solely on the basis that they think it would cut education.”

Since 2001, state spending in California has outpaced state tax revenues, creating annual operating deficits and increasing cumulative debt. The budget crisis reached a boiling point in 2003, when the state had a cumulative deficit of more than $38 billion–the worst budget deficit any U.S. state had ever seen. The state teetered on the brink of fiscal insolvency, as witnessed by its abysmal credit rating, lowered to just above junk bonds.

Since then, the situation has improved slightly–the credit rating moved up a step in July 2005–but annual deficits continue.

Public Employees Led Opposition

Fed up with out-of-control spending and annual deficits, Schwarzenegger pushed for the initiative to force the state to live within its means. The governor’s opponents, mainly the state’s public employee unions, were particularly active in trying to defeat Prop 76 and other proposed reforms. Estimates show the unions outspent the governor’s team 5 to 1. Opponents focused on asserting the proposition would shrink essential government programs, especially K-12 education.

Ken Masugi, director of the Center for Local Government at the California-based Claremont Institute, said he believes Prop 76 and three other government reform initiatives backed by Schwarzenegger failed because they were too moderate.

“They were just enough to aggravate the public sector unions and other interest groups, but they really weren’t that conservative,” Masugi said. “They were really pretty moderate. The ‘red’ counties had lower turnouts than the more liberal counties. This shows that conservatives were not mobilized. The liberals were mad enough to get their troops out.”

Anthony P. Archie ([email protected]) is a public policy fellow in business and economic studies at the California-based Pacific Research Institute.