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RESEARCH : California, New Jersey, Hawaii

Is State Debt Constitutional?

State Budget Solutions | by Kristen De Pena | February 6, 2012

A recent Rasmussen Report found that sixty-eight percent of voters view Congress' job performance as poor. Failure in the eyes of the public doesn't belong only to federal representatives. Many stat legislatures face equally dismal public approval ratings. In California, the Legislature's approval rating is just twenty-two percent. At the end of 2011, Hawaii Governor Neil Abercrombie earned the dubious distinction of the worst job approval rating among governors at just thirty percent. Oppositely, a majority of Garden State voters approve of the job performance of New Jersey Governor Chris Christie. In a recent poll, Christie's job approval rating is fifty-three percent, and has not dipped below fifty percent since August 2011.

California, Hawaii and New Jersey have diverse approval ratings, yet the three states have one commonality: debt. In a recent State Budget Solutions study, California, Hawaii and New Jersey are among states in the worst fiscal situation. The study examines how total state debt is affected by state size, including population, among other factors. However, the study does not include analysis regarding the Constitutional limitations that each state developed to limit their respective debts.

The approval ratings in these three states may drop further if each constituency knew that Constitutional violations are being overlooked. Why would a state go to the trouble of amending its Constitution to limit spending powers if the legislature cannot assure citizens that spending will, in actuality, be limited? Below is an analysis of these provisions and the debt that these states face. 

California

Placing first among the states with the largest total deficits is California, with $117,747,412 in outstanding debt. According to the American Enterprise Institute (AEI) data, the economic outlook ranking of California is just 47th out of the 50 states, indicating dismal future economic performance. Interestingly, the California Constitution is one of the longest in the world. The length is attributed to a number of factors, among them, a lack of faith in elected officials. The California Constitution includes individual rights that are broader than in the federal Bill of Rights, suggesting that Californians placed a lot of emphasis on protecting individual liberties and ensuring the government does not have an undue influence on the people.

The California Constitution specifically addresses debt in Article 16, Section 1. Here, the Constitution states, in part:

The Legislature shall not, in any manner create any debt or debts [...] which shall, singly or in the aggregate with any previous debts or liabilities, exceed the sum of three hundred thousand dollars ($300,000), except in case of war to repel invasion or suppress insurrection, unless the same shall be authorized by law for some single object or work to be distinctly specified therein which law shall provide ways and means [...]. [Emphasis added].

Unless California is at war or suppressing an insurrection unbeknownst to Californians and Americans alike, the California legislature is violating their own Constitution. An additional breakdown of the subsections of the study, including the definitions of "accumulated state budget deficit," "single object or work," as well as bond allowances may offer some Constitutional cushion, but the intent of the provision is clear: limiting the legislature from accumulating excessive debt.

Historically, the California legislature has spent in excess of 100% of its revenue for nineteen of thirty-six years since 1976. Not only does this overspending violate the Constitution, it depleted the Budget Stabilization Account (Proposition 58). Since constitutional debt limitations do not apparently suffice, voters approved the Budget Stabilization Account (BSA) in March 2004 to require the State Controller to transfer a specific percentage of estimated General Fund revenues from the General Fund to the BSA. Theoretically, the proposition was meant to help balance the budget.

However, since FY2008-09, the Governor has issued an executive order each year to suspend the transfer to the Budget Stabilization Account. Strategically, in the 2012-13 Governor's Budget, the expenditures from the account are labeled "Proposition 98 Expenditures," while the empty transfer line item is labeled "Budget Stabilization Account." Despite overwhelming public support to limit the debt California is rapidly racking up, it seems that the appropriators are happy to suspend efforts attempting to accomplish that end and will even use labeling techniques to help cover up these efforts.

Even more alarming, Governor Jerry Brown proposed in January that the state plug $5.4 billion of deficit by borrowing from other internal state funds, shifting property tax revenues from redevelopment agencies to counties and taking money from voter-approved funds for services for mentally ill and for young children.

So, how can Californians reconcile excessive spending with the violation of the Constitution and a voter-approved proposition meant to curb spending? It is readily apparent that tricky budgeting and below-the-radar executive orders indicate that the provisions mean little to California lawmakers.

New Jersey

Although the majority of people approve of their New Jersey leadership, the state of the state is less than admirable. In fact, New Jersey takes second place (behind California) for the largest outstanding debt, with $57,933,956. Only five states have a worse economic outlook than New Jersey, based on data examined over the past 10 years used to forecast future performance.

In comparison to the lengthy, detailed provisions of its California counterpart, the New Jersey Constitutional provision regarding debt is shorter, but its purpose is clear. Article VIII, Section II, Subsection (2), states in part:

No general appropriation law or any other law appropriating money for any State purpose shall be enacted if the appropriation contained therein, together with all prior appropriations made for the same fiscal period, shall exceed the total amount of revenue on hand and anticipated which will be available to meet such appropriations during such fiscal period, as certified by the Governor. [Emphasis added].

In the face of a constitutional violation, how do legislatures continue to practice arguably illegal spending? Determining the fiscal state of the states is a difficult task. States use a variety of accounting and budgeting methods, and many of these methods are riddled with gimmicks that result in unreliable findings and rankings. The most detrimental effect of these questionable accounting practices is that is that they make it very difficult to calculate the fiscal health of many states.

For example, here, the Constitutional provision includes the phrase " shall exceed the total amount of revenue on hand and anticipated [...]." Many states inflate anticipated revenue projections in order to substantiate excess expenditures, as may be the case in New Jersey. Suggestive is the separation of the two clauses, revenue on hand and anticipated, indicating that there may be significant leeway to increase the size of "legitimate, anticipated" revenue. In addition to inflating revenue assumptions, it is also possible to inflate savings projections for a fiscal year. New Jersey is "saving" money by failing to make the actuarially recommended payments to their pension plan since 1998. In 2011-12 alone, lawmakers underfunded pensions by $3.1 billion.

Even if New Jersey is finding creative accounting maneuvers to balance their budget, it violates the purpose and the spirit of the Constitution, and repercussions should be assigned accordingly. If lawmakers refuse to incorporate reality-based budgeting methods based solely on their fiscal health, might the violation of Constitutional provisions provide the impetus for change? With the dismal outlook of New Jersey's economic future, it might be in the best interests of the government to change accounting techniques before the approval rating of state leaders follows in the footsteps of the fiscal health.

Hawaii

Comparatively, Hawaii's outstanding debt is less than its New Jersey and California counterparts, at $6,171,708. But despite its debt size, small population, and enviable location, Hawaii ranks among the lowest in future economic performance rankings at 46, and Hawaiians are obviously displeased with their governing body.

Revised in 1978, Article VII, Sect. 5 Expenditure Controls of the Hawaii Constitution succinctly limits the rate of expenditure, stating in part:

No public money shall be expended except pursuant to appropriations made by law. General fund expenditures for any fiscal year shall not exceed the State's current general fund revenues and unencumbered cash balances, except when the governor publicly declares the public health, safety or welfare is threatened as provided by law.

Accusations of Constitutional violations are not new to Hawaiians. In August 2010, state budget director Georgina Kawamura told the Senate Ways and Means Committee the state generated $14.6 million more than it spent in FY 2010, but because the year began with a $36.8 deficit, the state actually finished the 2010 fiscal year $22.3 million in the hole, facing a Constitutional violation allegation. Similar to its New Jersey counterpart, Hawaii managed to stave off a deeper debt by utilizing accounting tricks. Hawaii deferred Medicaid payments and delayed tax refunds, which were absorbed by the 2011 budget. The allegations fizzled, but some defended the expenditure.

A common defensive argument regularly asserted is that the Hawaii Constitution addresses "budget" violations, not "actual" violations; As long as the proposed budget is balanced, it is Constitutional. The nature of a budget requires future predictions, and some leeway is reasonable with regard to future predictions.

It is, however, offensive to suggest that the drafters of the Constitution intended to allow increasing, unfettered "actual" debt under the rouse of a balanced "budget." Arguing semantics delays facing the issue and fails to excuse reckless budgeting. Let's be clear, neither courts nor constituents accept logically unsound defenses, such as this, to Constitutional violations. This argument will almost certainly fail. By operating in a deficit for a number of years, the state government is in violation of the Constitution.

Looking Forward

In Hawaii, as in most states, no repercussions exist for wanton violations of constitutional debt provisions. How can citizens hold their state governments accountable for responsible budgeting if there are no repercussions for poor decision-making and reckless spending?

A majority of states have constitutional, as well as statutory, provisions limiting the accrual of debt and citizens and lawmakers should respect and adhere to these rules. States should implement a system of consequences meant to enforce these laws and better hold appropriators accountable for spending.

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