How Good a Spending Limit?

Joel Fox
Editor and Co-Publisher of Fox and Hounds Daily

Throughout the budget negotiations, Republicans were set on achieving a spending limit to prevent the crazy rollercoaster budget ride from paralyzing the state again. Despite fierce opposition from some Democratic legislators, public employee unions, and interest groups that support greater spending, a limit is part of the final package.

Specific details on the limit are not widely known, but someone with knowledge of the negotiations confirmed details of the limit so we can get a sense on how well it might work.

The limit is based on a 10-year revenue trend line. The budget limit for any fiscal year will be set using a mathematical formula that uses data points from the previous 10 years of actual revenues. Any revenues above the limit will be transferred into a rainy day fund. That fund will also receive an annual transfer of three percent of the general fund. Half of that general fund transfer will be used to repay education funding until a $9.2 billion debt is paid off.

The rainy day reserve will be considered full when equivalent to 12.5% of the general fund. Once the reserve reaches capacity, any revenue above the yearly limitation only can be spent on specific one-time items such as retiring bonds or tax rebates.

The rainy day fund, of course, can be drawn down during tough economic times. If the fund had been in place the past ten years, my source tells me there would be over $9 billion in the reserve in 2008-9.

During tough economic times, money can only be taken from the reserve fund if revenues are inadequate to meet the current year budget adjusted for population and CPI growth.

This trend line spending limit is not as simple as a hard cap that some had called for. Such a cap would limit spending increases to population and inflation growth. For those desiring a return to the Gann Limit hard cap-type spending restraint that was in full force for about a decade until modified in 1990, they will be disappointed. The trend line spending limit is designed to stabilize spending, remove the legislature’s ability to spend wildly in good revenue times, and set up a reserve to deal with future short falls.

Whether this spending limit is tough enough for legislators to vote for we shall see. It’s a marked improvement over the now weakened Gann Limit. The proposed limit will probably please voters who are clamoring for a spending limit. In last month’s Public Policy Institute of California poll, a spending limit reform received overwhelming support from across the political spectrum with 71% of likely voters approving the idea.

With that kind of support (including 67% approval from Democrats) the public employee unions and special interests will get little attention in their protestations against the limit. That means a major goal of the Republicans to bring some sanity to the budget process will have been achieved if the budget pact passes.

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