Popping the Cork on Spending Cap

There was good reason for long faces on the Republican side after Governor Arnold Schwarzenegger agreed to last week’s state budget deal: The hardcore conservatives considered true Republicans by California Republicans had lost.

They had come so close to institutionalizing tax cuts, to permanently shrinking the size and scope of state government, and oh-so-near to tying the hands of Democrats and anyone else who thinks of government as a solution rather than a root problem. The Republican budget cap would have embodied the philosophy that the best destination for a tax dollar is to remain in the pocket of the taxpayer.

This plan, once championed by their champion Schwarzenegger, would first have shrunk the government budget by 16 percent, from $86 billion to $72 billion, then permanently kept it at about that level or even lower in real dollars. Thus, these libertarian-leaning Republicans had almost succeeded in using the budget crisis to reshape the very concept of government in California for years to come. Even when the economy improved and tax revenues rose, the collected dollars could have gone only to a “Budget Stabilization Fund,” for such purposes as retiring debt or tax refunds. But not for expanded services or programs.

More funding for education when the economy improves? Forget about it. Expanded health care for the poor? No way. Single-payer health-insurance reform? Who are you kidding?

For the fiscal die-hards, the spending cap’s beauty was that Democrats could either like it or risk a ballot-box drumming from the populist governor in November, when the right could offer voters an even more draconian spending cap. That was the prospect after budget negotiations collapsed on December 5, the announced deadline for a budget deal. At that point, many conservatives were ready to bring it on. And so were some Democrats, notably state Treasurer Phil Angelides, who was willing to gamble that he could turn opinions around and build a bid to oppose Schwarzenegger in 2006.

But then the ground shifted. California Secretary of State Kevin Shelley, under sudden political pressure, extended the deadline for crafting a March ballot measure, while moderate voices in the Legislature reopened negotiations with a suddenly flexible Schwarzenegger. The former Mr. Universe was so flexible, in fact, that it was like he’d traded bodybuilding for yoga, especially when his spending cap got twisted around more than an inverted lotus.

“The reporters who haven’t read the budget agreement are the only ones who are calling it a spending cap,” said Jean Ross, of the nonpartisan California Budget Project. There is no spending cap, she said, but rather “a mechanism for funding a reserve.”

If voters approve the plan in March, this rainy-day fund would debut in 2006, when 1 percent of all revenues would go in. By 2008, the contribution would grow to 3 percent a year, where it would remain until reserves reach 5 percent of the budget or $8 billion, whichever is greater. At that point, contributions could be suspended. The reserve fund could be tapped only for deficit-bond payments, or if the governor and two-thirds of the Legislature agree that a fiscal emergency exists. But nothing would stop the Legislature from spending more if more money came in, through either a healthier economy or even — gasp — tax increases.

Current law already requires a balanced budget, but the proposed revisions would make it harder to balance future budgets by borrowing money. This year, then-Governor Gray Davis ended up borrowing money through deficit bonds after Republicans blocked tax increases. Schwarzenegger also will depend on deficit bonds this year, though the new governor hopes to replace Davis’ borrowing with voter-approved bonds. Schwarzenegger’s $15 billion bond plan will appear on the March ballot in tandem with the rainy-day-fund initiative.

Come March, Schwarzenegger won’t have to worry about his initiatives being targeted by the majority party. Nearly all the Legislature’s Democrats voted for the plan, including state Senator Sheila Kuehl (D–Los Angeles). “We were never really opposed to the $15 billion bond, because it primarily takes the place of the bonds we already passed,” she said. As for the spending cap, “I think he came way over to the Democrat side. He moved enormously. There’s no question.”

In the Legislature, at least, Schwarzenegger disarmed the opposition through compromise, but state Treasurer Phil Angelides didn’t sign off on anything. He’s quickly established himself as the Democrats’ consistent opposition voice, a good place to be if he follows through with plans to run for governor against the actor-turned-politician. And while Angelides risks looking foolish or shrill when Schwarzenegger’s fortunes are up, what’s the real risk? After all, no one will beat Schwarzenegger anyway if he continues to ride high. But if he stumbles, Angelides could be first in line to benefit. It’s the same logic that Howard Dean figured out at the national level in his campaign against President George W. Bush. The opposition can only beat Bush if it’s truly willing to oppose him. It’s why Dean’s Democratic rivals are chasing their tails when they attack Dean for not applauding the invasion of Iraq in the wake of Saddam Hussein’s capture.‰21