[the audio from today's newsmagazine is here]

In a search for some context as to how the governor's budget spending cap initiative Proposition 76 would really work, I asked the non-partisan Legislative Analyst's Office (LAO) a simple question: what would have happened if it was in place during this past year's budget debate?

The answer: it would have apparently prohibited $3 billion worth of spending agreed to by legislators and Governor Schwarzenegger.

The LAO has not published the above number, in part, to avoid wading into the heated political battle over the governor's initiatives. Nonetheless, it seemed a reasonable question to ask... and therefore is the focus of my report later today on the newsmagazine version of The California Report.

First, the facts. According to the LAO, the spending cap formula in Prop 76 (which uses data from the previous 3 budget years) would have held spending in the 2005-06 fiscal year to $110 billion. The Budget Act of 2005-06, on the other hand, pegs spending this fiscal year at $113 billion.

An important caveat to the LAO's theory is that it's just that-- a theory. Prop 76 would only kick in next year, and if it does, it's estimated that the cap will then be much more loose (thanks to this year's strong revenues being used as part of the formula).

Still, had it been in effect this year, it would have apparently forced the governor and legislators to find an additional $3 billion in cuts. That's because a tax increase (even if agreed to by Republicans) would not have been an option, because Prop 76 says if spending is already at the maximum level, then most tax revenues go into a reserve fund.

Some analyses even suggest something that seems counterintuitive: that if Prop 76 passes, in certain years lawmakers will have plenty of revenues for their desired projects... only to have Prop 76 force, instead, budget cuts because of the spending cap. All of those surplus dollars would have to be tucked away for the next recession.

So, how would spending have been reduced by $3 billion? Several sources, who work for varying interest groups, say one easy fix would have been to simply cancel this year's early payoff of car tax revenues to local governments. That alone would have downsized the $3 billion gap by $1.2 billion.

But where would the rest have come from? Social services programs? Higher education? K-12 schools? Those are some of the budget areas that were mentioned during the course of my reporting. None, however, would have been an easy sell.

In my on-air story, we also examine how-- again assuming it was in place as of January 1, 2005-- Prop 76 would have stacked up in comparison to the spending plan that Schwarzenegger proposed on January 10. (Hint: he would have had to go back to the drawing board)

In an extended interview (portions appear in the on-air story), outgoing Schwarzenegger finance director Tom Campbell took strong exception to using Prop 76's formula for this past year's budget. He asserted that it's unfair to apply it to any previous budget, even one that was pending when Prop 76 was actually written.

Prop 76's spending cap is, in the final analysis, an untested budget tool. If passed, all sides seem to agree that it would weaken or remove one budget balancing tool in years past (tax increases) and force more usage of another budget balancing tool (spending cuts).