Spending cap may not fit in June (Contra Costa Times)

By Steven Harmon
MediaNews Sacramento Bureau
02/13/2009

SACRAMENTO — A spending cap, one of the linchpins to what could be a $41 billion budget agreement that lawmakers will be voting on today, has been touted as key to reining in the soaring costs of state government.

Republican leaders in the Legislature insisted on enforced spending limits in exchange for having to ask a handful of their caucus members to vote for $14.4 billion in tax increases on sales, vehicles, gasoline and personal income.

One problem: It may not survive the political onslaught sure to unfold once it becomes a ballot issue. Changing the way the Legislature appropriates money requires voter approval, and political observers expect opposition to come from both ends of the partisan spectrum.

"It's a very real problem," said Tony Quinn, a former Republican staffer who co-edits the California Target Book, which analyzes legislative races. "It will be a hard sell. I can see anti-tax people and labor actually getting together to defeat this. It's a delicate deal, not popular, and it will take a lot of selling to get it approved."

If voters reject the spending cap, the tax increases would die after two years. If voters approve it, the tax increases would stay intact for four years.

Critics call it an unfair bargain: Conservatives would have to choose between more taxes and spending limits, while liberals would have to choose between more short-term revenue gains and long-term pain.

Gov. Arnold Schwarzenegger and other Republicans have sought a spending cap for years, arguing it would be a long-term solution to the state's volatile revenue stream and would force lawmakers to be disciplined in their spending choices — keeping them from wild spending during boom years and forcing them to put money aside to be spent in down years.

The mechanism for keeping spending in line wouldn't be as exacting as Republicans prefer. Democrats softened the reform by making it so that future increases in spending wouldn't be based on this year's extremely low revenues but on a rolling average of the previous 10 years of revenues — which would roughly be 4 percent to 6 percent increases each year.

All revenues that come in above that 10-year "trendline" would go into a rainy-day fund. Once the reserve is built to 12.5 percent above that base, money could be spent for one-time purposes such as paying off debt, capital projects or tax rebates.

The cap also avoids major impacts on Proposition 98, the constitutionally required formula for school funding. Before money goes into the reserve account, legislators would be required to use it to meet minimum school funding requirements.

Advocates for government services say a spending limit would exact a devastating toll, particularly for the poor and elderly.

"This cap will limit the state's ability to respond to a host of challenges facing the state," said Jean Ross, executive director of the California Budget Project, which advocates for spending for the poor. "You're starting from a very low base. Of the last 10 years, nine have been very bad revenue years. Next year likely will be worse, and we'll lock that into the future. It's tying you into what is certainly a low point, the bottom of an economic downturn.

"If you like where we are now, this is for you," Ross said. "If you want more kids with health coverage, improvements in public education, kids who want to go to college to be able to go to college, then you have a problem."

The plan makes no sense, said Republican activist Jon Fleischman, because a voter who wants to cap spending also is likely to think taxes are too high.

"It's not fair to create a scenario where they're almost blackmailed," said Fleischman, a Republican Party official who publishes the Flash Report blog. "Anyway, we have a spending cap right now. It's supposed to be our Republican legislators. Once you have a spending cap, why do you need Republican legislators?"

Democrats may appear to have emerged victorious on this issue if it seems voters would reject the cap. But the risk they are taking is that voters, shown in polls to favor spending caps by a large margin, may approve it.

But both parties have incentives to support a spending limit deal, Quinn said.

"If it doesn't pass, Democrats will have only two years of a tax increase, which barely covers the current deficit, and the down economy will probably still be with us," Quinn said. "They'll have to go through more budget cuts if they don't have the taxes in place."

Republicans, on the other hand, should love to see spending curtailed over the long term.

"They will remember this five, 10 years down the road and will see that they stopped the runaway train of spending outracing revenues," Quinn said. "That's a big win for Republicans."

Sen. Mark DeSaulnier, D-Concord, said he plans to vote for the spending cap today but will vote against it once it hits the ballot — which could be in June.

"I don't like voting for it because the demand for services will go up in the future," DeSaulnier said. "But the redeeming part of it is that voters get to decide. It'll be worth it to get two years (of tax revenues) to see if the economy will turn around."