Copyright© 2003 by School Services of California, Inc.

Volume 16                   For Publication Date: December 19, 2003             No. 25

Deal Struck on State Budget Deficit Bond and Spending Limit  

Following two weeks of intense negotiations between the Schwarzenegger Administration and the Legislature, agreement was reached Thursday evening, December 11, 2003 , to place a $15 billion deficit reduction bond and a spending limit initiative on the March 2004 ballot. On a bipartisan vote, the Assembly voted “overwhelmingly” (65 to 13 for the bond measure and 80 to zero for the spending limit) and adopted the two ballot measures on Thursday, December 11, and the Senate is expected to adopt the measures on Friday, December 12. The two measures are joined, so if voters reject either one, both will fail to become law.

 The good news for schools is that the spending cap language in the final version of the bill does not impact the constitutional provisions of Proposition 98, which would have had profound consequences on future funding for education. Agreement was reached to keep any changes to the Proposition 98 funding formula out of the bill.  

The $15 billion deficit reduction bond measure will replace the $10.7 billion bond approved by the Legislature to balance last year’s budget, which is currently being legally challenged. The repayment period of the $15 billion bond would be between eight and 13 years—less than the Governor’s desired payback period of 30 years and more than the Democratic leadership’s plan for seven years.  

The spending cap proposal prohibits the state from borrowing in future years to balance the State Budget and includes provisions that would require the Legislature and Governor to adjust spending to match revenues. The agreement also requires the creation of a special reserve fund by using 1% of state revenues beginning in 2006 that would increase to 2% in 2007 and 3% in 2008. It would stay at that level until the reserve fund equals 5% of the State Budget or $8 billion, whichever is greater.  

Also, this deal—if approved by the electorate in March—would reduce the 2004-05 State Budget shortfall to about $12 billion (compared with the $17 billion shortfall recently forecast by the Legislative Analyst), due to the higher level of state borrowing and also the longer payback period then under the current $10.7 billion bond. But this deal does not say how that $12 billion remaining shortfall will be addressed. For that we’ll have to wait for the Governor's 2004-05 Budget Proposal, which will be released by January 10, 2004 .

—Nancy LaCasse