The more times I read the bill, the more I’m left scratching my head at how little Gov. Schwarzenegger seems to have extracted from Democrats in exchange for a huge concession: his decision to drop any plans for writing a spending cap into the state constitution. Once he dropped that demand, he should have been able to run the table on the rest of the negotiations to establish a real balanced budget requirement, a bullet-proof reserve for economic downturns and a solid process for making mid-year corrections to stop a deficit from growing out of control. These are all sensible, good-government ideas to which the Democrats should not have even objected. But Schwarzenegger seems to have let them pick away at the details until they reached the point that they were barely more than symbolic gestures. As several senators said Friday, this measure probably doesn’t do any harm. But it doesn’t do a whole lot of good, either. Examples:
--The reserve isn't big enough. The level of the proposed reserve dropped from 10 percent to 5 percent in the final version of the bill. While Schwarzenegger said all along he wanted a “never again” provision, a 5 percent reserve would not have been enough to keep the state from the deficits it has encountered the past few years, especially when combined with the bill’s other provisions.
--There's no guarantee that the reserve will be funded. The governor doesn’t have to fund the reserve if he doesn’t want to. He can just skip the required transfer of 3 percent of the general fund revenues by issuing an executive order. This perhaps makes sense when you consider that the reserve shouldn’t be funded at the same time that revenues are dropping and a deficit is emerging. But the law should have set some standard for when the governor could decide to skip the reserve payment. As this bill is written, a governor faced with revenue growth of 15 percent who wants spending to climb by more than the 12 percent that would be allowed can simply decide to shift the 3 percent reserve payment to ongoing spending instead. Does that make fiscal sense?
--The reserve isn't protected from routine raiding, even in good times. The Legislature can shift money out of the reserve and into the general fund with a majority vote. This should not have been allowed short of a declaration of emergency by the governor, and probably only under certain conditions defined in the law.
--The governor didn't get sufficient authority to intervene when a deficit emerges. The authority to cut the budget mid-year was weakened to the point of being almost meaningless. Schwarzenegger probably over-reached by asking in his first proposal for the right to change state law without a vote of the Legislature. But it would have been reasonable to give the governor, when a deficit emerges, the same kind of blue-pencil authority he has now to reduce spending when he signs the budget. Instead, Schwarzenegger settled here for a fig leaf, a provision that does little more than restate current law while allowing changes approved by the Legislature to take effect immediately.
--The balanced budget provision isn't mischief-proof. The only future borrowing explicitly outlawed is the kind of deficit bond the Legislature and Gray Davis approved last year and hoped to sell without a vote of the people. But the measure is silent about borrowing from special funds, local government subventions and all the other tricks and gimmicks lawmakers use to artificially increase revenues to hide a deficit. And while the bill appears to ban other forms of long-term borrowing, say pension obligation bonds or tobacco litigation bonds, it does so only if they are used “to fund a year-end budget deficit.” I don’t see anything that bans such borrowing if the loans are justified as needed to prevent a year-end deficit. Medi-cal obligation bonds, anybody?
The outcome suggests that Schwarzenegger is not as good a negotiator as he thinks he is, or at least those skills weren’t evident in this round. He was smart to demand more than he needed and then scale back from there. And he was smart to abandon the concept of a formula-driven spending cap. But in the end, he swung too far in the other direction. This looks as if his only bottom line was ending the negotiations with a deal, any deal. And now, to make it worse, he has begun to try to sell this package as more than it is. He should just admit the truth: this is the best he could get from the Democrats. It’s a harmless first step but not nearly enough to achieve the goal he set for himself and the state. More work will have to be done.