Spending Limits Don’t Balance Budgets

Press reports and the rumor mill are once again hinting that some type of new-fangled spending limit may be under consideration as part of negotiations over extending temporary taxes needed to balance the state’s budget. Thus our interest was piqued when we read that State Treasurer Bill Lockyer had developed a packet of charts and graphs analyzing the impact of various types of limits on future spending. The Treasurer’s analysis clearly documents the harsh impact that ACA 4 of 2010, placed on the ballot as part of the October 2010 budget agreement, as well as other types of caps might have on future spending.

If approved by the voters – the measure will go on the 2012 primary ballot – ACA 4 would require deeper spending cuts than even an “all cuts” 2011-12 spending plan. ACA 4, similar to Proposition 1A of 2009, uses a statistical technique known as a “linear regression” to limit future years’ spending. Beginning in 2013-14, ACA 4 would restrict the use of “unanticipated revenues,” defined as the lesser of the difference between:

  • Estimated General Fund revenues for a given fiscal year and an amount determined “by a linear regression” of the prior 20 years’ General Fund revenues; or
  • Esimated General Fund revenues, transfers, and available balances and the prior year’s estimated spending adjusted for population and the Consumer Price Index (CPI) for California.

We’ve written about many of the problems inherent in this type of approach before in our analyses of Proposition 1A of 2009 and Proposition 76 of 2005. We’ll also release an analysis of ACA 4 in the near future. While no details of measures that may be under consideration as part of the current debate are publicly available, there’s every reason to suspect that such a measure would impose an even more stringent straightjacket than ACA 4.

At the end of the day, it is important to remember that California has had a constitutional spending limit since 1979. Moreover, California’s limit is arguably one of the toughest in the nation. If spending limits balanced budgets, California wouldn’t be where it is today. In fact, spending caps simply limit lawmakers’ options for responding to shortfalls in tough times and limit states’ ability to respond to an increasingly competitive global economy.

Voters have defeated additional limits on state spending twice in less than a decade: first with the defeat of Proposition 76 in 2005 and again with the defeat of Proposition 1A of 2009. That should send a clear enough signal. As we’ve said before, and will no doubt say again, a balanced approach is the only reasonable approach to solving California’s budget problems.

— Jean Ross