March 03, 2004

Yesterday Californians went to the polls to vote on, among other things, several initiatives that will determine how California will conduct its economic affairs in the future. Two of the propositions were part of a campaign promise by newly elected Governor Schwarzenegger. Proposition 57 consisted of a one-time bond of up to $15 billion in deficit financing. It passed by a 63%-37% margin. The companion Proposition 58 required the enactment of a balanced budget and establishes a budget reserve. It was approved by an even larger margin of 71%-29%. The voters gave Arnold the mandate he needs for future action. But that is not all; the defeat of Propositions 56 sent an equally important signal. Proposition 56 attempted to reduce from a super-majority to a 55% threshold the percent of the legislature votes needed to enact budget related measures. The proposition went down in defeat 66%-34%. Passage of Proposition 57 and 58 and the failure of 56 makes it difficult to raise taxes in the future and that means that future spending will have to adjust to the long run projected revenues, not the other way around.

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