California’s budget problem is chronic, and driven by two factors: The state historically spends all the money it takes in during years of high revenue growth, leading to unsustainable spending levels in the long run.

California has not slowed spending growth fast enough. Automatic formulas will increase spending in FY 2007-08 by 7.3 percent, unless we take action now. Each month California spends $600 million more than the state takes in.

The majority of spending in the budget is set on auto-pilot. Currently about 90 percent of the budget is tied up with contracts and statutory requirements.

“Excess revenues” are defined as state tax revenues above a reasonable, long-term average rate of growth. The state Department of Finance will calculate and release this revenue projection two times each year: in January and May. This amendment will require that the state deposit excess revenues into the RSF. The RSF will make these savings automatic—thus ensuring that California does not again fall into the trap of spending all its revenues in prosperous times.

In years when tax revenues are below average and California cannot meet its spending obligations, the state will transfer the difference from the RSF into the General Fund. Transfers will only take place when revenue grows at a rate below the long-term average. The state cannot transfer funds just to avoid deficits.

The Budget Stabilization Act will allow California to reduce spending when necessary. Right now, California doesn’t have this flexibility. Once the Governor signs the budget, spending is locked in unless the Governor declares a fiscal state of emergency and calls a special session. Under this Act, automatic reductions in state spending will be triggered by the Governor if the Department of Finance predicts a year-end budget deficit.

The Department of Finance will calculate and release this projection three times each year: in November, January and June. If a deficit is predicted, state agencies must reduce their spending by either two percent or five percent, depending on the deficit’s projected size. If the deficit is projected at one percent or less, agencies will reduce spending by two percent. If the deficit is projected at greater than one percent, agencies will reduce spending by five percent.

This amendment requires that the legislature enact a statute specifying how the state will reduce spending by two and five percent to meet Budget Stabilization Act requirements as soon as a deficit is projected.

If the legislature does not specify the reductions—or if their reductions are insufficient—the amendment allows the Governor to waive state law and regulations in order to achieve the savings needed to bring California's budget into balance. Debt service, contracts and other constitutionally-protected payments are exempt.

Spending changes enacted by the Budget Stabilization Act remain in effect until a new budget or other statutory change is enacted by the legislature. Tax increases, urgency measures and most General Fund appropriations will still have to be enacted by two thirds majorities in both houses of the legislature.

Governor Schwarzenegger campaigned and was elected on the promise of greater fiscal stability and and reforming workers’ compensation. The spending limit was not included in the final proposition package that went before California voters.
 

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