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California Considers a Cap on Spending

August 5, 2005

California’s colleges have seen the (possible) future – in Colorado – and they don’t like the looks of it.

If Gov. Arnold Schwarzenegger has his way, Californians will vote in November to put strict constitutional limits on growth in state spending. The “California Live Within Our Means Act,” as the measure is called, would restrict what the state government spends in any fiscal year to what it spent the year before plus the average rate of growth in certain spending over the three previous years. The governor and other proponents of the ballot initiative say it will ensure that the state, yes, lives within its means, reining in what critics (and national antitax groups, which are pushing similar measures in other states) believe is out of control spending that outpaces tax revenues. 

But the likely result, according to analysts in California's legislature and most others who have studied the proposal, is that over time, the measure would not just restrict spending, but lower it. "This is because during periods of decelerating revenue growth, the state would not have the revenues available to spend up to its limit," the nonpartisan Legislative Analyst's Office wrote in March. "As a result, spending could ratchet down below levels that otherwise would have occurred." 

That deeply concerns higher education officials in the state, who faced budget cuts -- including midyear reductions -- during California's economic downturn in the first several years of this decade before a slight upturn this year. By restricting growth in general fund spending, the measure would ratchet up the already intense competition for the relatively small proportion of "discretionary" state funds -- about 8 percent of the total -- that the legislature can decide how to spend. In that fight, colleges are up against certain health care programs, money for prisons and the like.

In addition, higher education officials note, the budget initiative would give the governor broader powers to make midyear cutbacks if state revenues fall short and the Legislature does not come up with a plan for addressing the gap.

"Our concern is about our ability to plan," said Patrick Lenz, assistant vice chancellor for budget development at the California State University system, which has not taken a formal position on the ballot initiative. "Those midyear budget reductions are extremely difficult to manage, when you've already admitted students and hired faculty. We have a 'contract' with students, and you can't say, 'We admitted you in the fall, but we can't keep you in the spring.' "

The spending-cap measure poses a far bigger potential threat to California's community colleges. Besides its restrictions on spending, the ballot initiative would also erode the state's current obligation, through a law known as Proposition 98, to provide a minimum level of funding each year to elementary and secondary schools and community colleges. Under current law, if the state fails to hit the minimum level -- which occurs with some frequency -- it is required to make up the difference when the funds become available in future years, and the floor remains. 

Under the ballot measure, though, if the state fell short of the minimum payment in a given year, any "catchup" payments it made would be treated as "one-time funding" that could be paid off over 15 years, and the lower amount that the state paid in that year would become the new floor. So the "guaranteed" level of funding for schools and community colleges could very well decline over time, community college officials fear.

"The measure gives the governor the ability to make cuts in the middle of year, even to Proposition 98," said one community college administrator. "The state gets to ignore the fact that there's a minimum funding guarantee, and there's no requirement that funding gets back up to where it was. So we could have permanent downward movement in the base of the guarantee."

The Colorado Example

California's measure is similar to a constitutional amendment adopted more than a decade ago in Colorado, and the resemblance are likely to trouble college officials in the Golden State. The so-called Taxpayer's Bill of Rights (or TABOR) in Colorado, though technically more a limit on the revenues the state can use in any year than it is a restriction on spending, has functioned to ratchet down the pool of funds that flow to colleges. 

In the 1991-92 fiscal year, before the law took effect, nearly 20 percent of state funds went to higher education; that proportion is now down to 10%. There's been a decline in real dollars, too; from the 2001 fiscal year to the 2005 fiscal year, general fund appropriations for higher education fell by $160 million, or 21 percent, according to a study by the Bell Policy Center, a nonprofit group that advocates for progressive causes in Colorado.

College officials in Colorado have lobbied in recent years to have funds for higher education protected from being covered by TABOR, and the state's adoption of a "voucher" program that provides some state funds directly to students instead of to institutions was driven, in part, by a desire to protect tuition revenue from consideration under the budget restriction. 

But it's not just colleges and liberal groups like the Bell center that have come to see the law as a liability in some ways. Gov. Bill Owens and legislative leaders agreed this year on a measure -- which will require passage in November by state voters -- that would let the state retain more revenue than allowed under TABOR for the next five years to "provide a more stable means of funding state budgetary needs," according to the National Conference of State Legislators.

The fact that even Colorado, the state that has advocated budget caps most strongly, is essentially looking to waive it for five years does not suggest that other states like California should abandon the idea, which could actually help higher education, says Neal McCluskey, an education policy analyst at the Cato Institute. 

"Would the crunch from having spending limit requirements be any worse than when the state chronically overspends and then has to ratchet back" funds for colleges, as California and others frequently do, he asks. And even if spending caps were to result in some restraint of funds for colleges, that might not be such a bad thing, McCluskey argues, if it "forced higher education in California or other states where they pass this to focus on the essentials" of educating students, rather than on really nice dormitories or fancy student centers." He adds: "It might force them to compete for money rather than having it handed to them."

Predictably, higher education advocates don't see it that way. Christine Walton Siley, a senior research and policy analyst at the American Association of State Colleges and Universities, says the California ballot measure "could have detrimental effects for higher education, which is just trying to make up for the last few years of being cut." 

Colleges "are having a hard enough time as it is, and this could cut off the recovery," she added.
To the extent supporters and critics of the spending cap approach are looking to California as a possible harbinger for other states, local politics may intervene. College officials expressed some optimism that the state may call off November's special election, given that two of the four ballot measures that Schwarzenegger hoped to have on it have fallen by the wayside, and public support for the spending cap initiative is under 50 percent right now.

Said one college official in the state: "We've got some hope the darned thing just goes away."

 

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