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Why California's "Budget Wolf" Has Returned
by Lawrence J. McQuillan 2/28/08

On February 16, Governor Schwarzenegger approved the California legislature's plan to deal with the "fiscal emergency" that the governor declared on January 10, two days after he said that the "budget wolf" that California had managed to avoid for two years was now back at the door.

The Feb. 16 plan allows the state to pay its bills through the fiscal year by cutting $2 billion of spending on education and Medi-Cal, and delaying some payments to counties and providers. But the bulk of the package consists of borrowing and accounting gimmicks: selling $3.3 billion in bonds, delaying $1.5 billion in early debt repayment, and raiding $400 million in transportation funds.

Lawrence J. McQuillan

John R. Graham is Director, Business and Economic Studies, Pacific Research Institute.

Pacific Research Institute

Legislative Analyst Elizabeth Hill has suggested a good starting point for more cuts: scale back by $1.5 billion the education spending in excess of Prop. 98 requirements. This would not require suspension of Prop. 98. Instead, the governor and legislature cut over-appropriations by only $500 million. The outlook for next fiscal year is not much better.

On February 20, Hill announced that state revenues have slipped another $1.5 billion and the deficit through June 30, 2009, is now $16 billion minus the package above, or about $8 billion. The governor has proposed a 10-percent across-the-board spending cut, early release of 22,000 prisoners, shifting to the coming fiscal year $2 billion of tax revenue that would otherwise be counted in the 2009-10 fiscal year, and increasing at least two "fees."

Many observers suspect the governor would agree to further tax increases in exchange for legislative support of his long-term budget reform proposal. But there is good reason to doubt the governor's own commitment to effective constitutional budget reform.

His proposed Budget Stabilization Act, if approved by voters, would create a Revenue Stabilization Fund. When tax revenues exceed a 10-year average growth rate, the excess revenues would be put automatically into the fund. They could be spent only when revenues are below the long-run trend line. If deficits emerge, they would trigger automatic, pre-designated spending cuts of two or five percent, depending on the size of the deficit. This constitutional reform sounds good, but California has been down this path before, only to be disappointed.

In 2003, I served as a member of a task force that drafted a constitutional tax and spending limit for the governor's consideration after the recall election. The 2003 plan would have imposed a balanced budget requirement and restricted the growth rate of spending to the combined rates of population and inflation growth. This would have guaranteed a constant level of government services to a growing population - fair to both taxpayers and recipients. Unfortunately, the governor and his political machine did not work to put this hard limit on the November 2004 ballot.

In 2004, the governor achieved reform in workers' compensation and two ballot measures he supported passed: Economic Recovery Bonds (Prop. 57) and the Balanced Budget Act (Prop. 58). Unfortunately, he backed away from the hard spending limit, and because of that we are stuck with huge deficits today.

Spending has increased 27 percent during Schwarzenegger's administration, nearly double the rate under Gray Davis. Who would have thought that, of the two, Gray Davis would be the fiscal conservative.

It is telling that Arnold Schwarzenegger alluded to "Little Red Riding Hood," a morality tale about wandering off the path. The governor himself strayed from the path of fiscal discipline and now the budget wolf is indeed back at the door.

This time the governor must be principled, persistent, and courageous, and focus his energy on the difficult campaign ahead. Otherwise, Californians will not live happily ever after, and another opportunity for meaningful budget reform will be lost. CRO

copyright 2008 Pacific Research Institute



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