Pete Rates the Propositions
May 2009

Proposition 1A: State Budget Stabilization – YES

This is a close call. Prop 1A is far from perfect. It contains inflexible formulas and spending earmarks, both of which I find hard to swallow. And it is not a complete solution to our painful state budget woes. Nevertheless, Prop 1A will result in net improvement. It will dampen the enormous year-to-year swings in General Fund revenues, addressing a major cause of our annual budget problems. Even with its warts, Prop 1A offers progress, and boy, do we need progress.

Prop 1A attacks the budget problem on three fronts: increasing the size and protections for the "rainy day" fund, extending tax increases, and allowing the Governor to make mid-year spending cuts when there's a revenue shortfall.

Rainy Day Fund. The idea of a rainy day fund is to set aside a portion of revenues in good years to make up for shortfalls in lean years to come. The fund smoothes out year-to-year peaks and valleys in state revenues, providing the stability and predictability needed for long-term planning and continuity.

	Sources: Dept. of Finance; Comm. Coll. Sys. Office

Smoothing out income is a critical issue for California because our General Fund relies so heavily on highly cyclical revenue sources, such as taxes on personal capital gains and business profits, which can cause General Fund revenues to fluctuate wildly from year to year. For example, in 1999-2000, revenues zoomed up 23% from the previous fiscal year. Four years later, they plummeted 5%. More recently, in the two fiscal years following 2006-07, revenues grew from $95 billion to $103 billion (a gain of 7.5%), then shrank back to $91 billion—11% smaller. As you can see in the chart, while the state's population and cost of living (gray bars) have increased at a steady 3% to 7% every year, General Fund revenues (red bars) have jumped up and down unpredictably by as much as one fifth.

These enormous, volatile swings in revenues wreak havoc with long-term planning, and are a root cause of painful budget stalemates in Sacramento. Legislators, eager to believe any uptick will be permanent, too easily commit the state to long-term spending programs or permanent tax cuts. When the upticks turn out to be temporary spikes, the following years become nightmarish as spending must be slashed and taxes restored. It's agonizing.

It turns out that we already have a rainy day fund, passed in 2004 as part of Prop 58. But it has been a total failure, because the Governor and Legislature can withhold contributions and raid its reserves whenever they like, and they have not been shy about doing so. In fact, the existing fund's balance has been zero since 2007.

To prevent this from continuing, Prop 1A will create a new, better-protected rainy day fund. Contributions to the Prop 1A fund can be suspended and reserves tapped only when state revenues (adjusted for population and inflation) are actually down from the previous year. When revenues are flat or up, the new fund will have 1.5% of revenues pumped into it until it reaches a balance of 12.5% of the General Fund (about $11 billion this year).

Once the new rainy day fund is in place (I'm guessing it will take over a decade to fill it), we'll be in a position to weather temporary income troughs by tapping into our healthy reserves. Even better, though, is the deterrent to new, long-term spending and/or tax cutting during good years. By taking 1.5% of revenues off the table, Prop 1A will prevent new commitments that we wouldn't be equipped to handle.

In fabulously good years, such as that 23% spike in 1999-2000, Prop 1A directs "unanticipated" extra revenues to be spent on the following, in order of precedence:

1. Meeting Prop 98 education obligations
2. Filling the rainy day fund to 12.5%
3. Paying off Prop 57 bonds
4. A combination of infrastructure projects, one-time tax relief, overfilling the rainy day fund, paying off general obligation bonds, and public employee health care liabilities

I'd rather not have this list written into the Constitution. These may be our priorities in 2009 (and that's debatable), but it's very unlikely they'll still be our priorities in ten, twenty or fifty years. What about health care for our aging population? What about higher education? Prison reform? Personal space capsules and household cold-fusion generators? We're talking about the deep future here, and it's impossible to predict how we'll need to spend that money. Prop 1A straitjackets the state for long term with a constitutional amendment, dictating how windfalls can be spent.

But the straitjacket, while unpleasant, is minor compared with the security we'll get from the new, stronger rainy day fund. On balance, this feature of Prop 1A is a winner.

Tax Increases. This year we're all being treated to increases in the state income tax, sales tax, and vehicle license fee. Party on! These increases are helping to close the yawning budget gap. They're set to expire by 2011. Prop 1A will extend these increases about two more years.

Why do we need to do this? Because there is no indication that the current recession will end anytime soon. We should expect General Fund revenues to be even lower next year than they are this year. Extending the tax increases will mitigate the pain of cutting essential services even further, even as it prolongs the pain of a highly regressive sales tax. I'm not happy about it, but it's better than the alternatives.

(An aside: Prop 1A is supposed to be about rainy day funds. So why does it contain a seemingly unrelated tax increase extension? Because Prop 1A was born as a legislative compromise, hammered out behind closed doors in February with an eye toward satisfying just enough people to secure passage. Those who support costly programs wouldn't accept a spending cap unless the tax increase was extended, providing funding for those programs; those who oppose taxes would agree to extend the tax increases only if a spending cap was put into place. Nobody wins, but we get to move on.)

Unilateral Mid-year Spending Cuts. Prop 1A will activate a separate law that allows the Governor to make mid-year spending cuts whenever his Director of Finance determines that General Fund revenues will fall short of the original estimates, or that expenditures will increase substantially above revenues. Cuts could be made to most areas of state operations, capital outlays (up to 7%), and non-salary cost of living adjustments.

I look at this as an extension to the Governor's existing line-item veto that he can exercise when signing the budget bill. It's an improvement, in that the Governor will presumably have more accurate information on revenues, cost overruns, and the state's true needs as the fiscal year progresses.

You may read elsewhere that Prop 1A adds a new spending mandate. That's not its real effect, however. Under Prop 1A, whenever the state makes a contribution to the rainy day fund, it must also make an equal contribution to a special fund for one-time capital projects and paying off bond debt. However, in all likelihood these programs would get funding anyway; Prop 1A will simply make the Legislature recategorize the spending so it uses the special fund. (If Prop 1B passes, for the first six or seven years this special fund would instead repay recent Prop 98 education underpayments. See below.)

There remain many reasons to oppose Prop 1A. Here are a few, with my responses.

• It imposes an effective spending limit for most programs, and the list of programs exempt from the spending limit is arbitrary and permanent.
  • Pete sez: The spending limit is the point of the whole proposition. The list of exemptions is pure politics, and I dislike it, but not enough to vote down the whole thing.
• It extends increases in the harshly regressive sales tax and unpopular vehicle license fee.
  • Pete sez: As long as California is constitutionally required to have a balanced budget, we must have this income.
• It doesn't address the structural deficit—the fundamental imbalance between income and spending.
  • Pete sez: It doesn't cure cancer either, but that's no reason to oppose it. The net of Prop 1A is an improvement.
• It doesn't allow reductions in spending for "walled-off" portions of the budget – voter-approved funding guarantees for education, after-school programs, mental health services, and so on.
  • Pete sez: Those are starting to crumble. See Props 1D and 1E.
• It uses a mathematical formula to force contributions to the "rainy day" fund when it might not be appropriate. In low-revenue years, it uses a mathematical formula to determine whether reserve funds can be drawn, and how much.
  • Pete sez: If we've learned anything from these gruesome budget stalemates, it's that there's not enough fiscal discipline in Sacramento to control spending without a mechanism like this.
• It is written into the Constitution, making it very difficult and slow to revise if a course correction becomes necessary.
  • Pete sez: Sad but true. If there were another way, I'd be all over it.

Prop 1A is a difficult, enigmatic beast. There's no way to be certain exactly what its effect will be. There are many parts I would change. But, as I like to say, we can only vote "yes" or "no"; there is no essay section. Taken as a whole, Prop 1A will be good for the state, making budgets more manageable by reducing violent swings in the General Fund.

Proposition 1B: Restoration of Education Funding – NO

Prop 1B will settle a disagreement between the Governor and education advocates over a complicated part of Prop 98, the school funding guarantee. In essence, the question is whether the budgets for 2008-09 and 2009-10 "underfunded" the Prop 98 guarantee, creating an obligation for the state to repay schools in the future. You can read the details in your Proposition Fun Book. Unfortunately, the language of Prop 98 is ambiguous, so the state Superintendent of Public Instruction is threatening a lawsuit.

Prop 1B will settle the issue in favor of the schools. Under Prop 1B, the state will pay about $1.4 billion extra to elementary, high school, and community college districts for six or seven years, starting in 2011-12, until the total reaches $9.3 billion. The money will come from the Prop 1A special fund (see above). If Prop 1A fails, Prop 1B won't go into effect.

So the question to you, really, is this: Should the state earmark $9.3 billion for schools, or should the courts decide?

If you are involved in public education, you will feel a strong pull to vote for Prop 1B. I certainly feel it. My friends include teachers, administrators and trustees; my children are in public schools; and my wife is a PTA president. I want the best for them, and for all 7 million students in the state.

However, Prop 1B is budgeting by ballot box, and that's dangerous. Because when you vote for an earmark like this, you're also voting to withhold that money from everything else the state could fund, since the state must balance its budget on limited income. Measures like Prop 1B force voters to consider just one program at a time, in a vacuum, without even knowing what other worthy programs are competing for that funding. Prop 1B will take away the Legislature's ability to decide whether to use that money for education or for other, more pressing needs. This lack of flexibility, along with the income fluctuations addressed by Prop 1A, is the root of California's chronic budget problems.

I cannot, in good conscience, recommend this earmark for education while simultaneously asking you to weaken earmarks for early childhood development (Prop 1D) and mental health (Prop 1E). I love the public schools and want them to succeed. But Prop 1B violates a basic principle of good government – that budgets should be considered in their entirety, not put together piecemeal – and so I must withhold my support.

Proposition 1C: Borrowing Against Future Lottery Receipts – NO

Oh! The Lottery is come out of the west,
Through all the wide Counties its Scratchers are best;
Its Fantasy Five has a Second Chance Draw.
The biggest darned Jackpots that you ever saw.
To win Mega-Millions will buy much fine pottery,
So come! Buy some tickets for our fair state Lottery!

'Twas born of a ballot prop in '84,
So ubiquitous now that it's hard to ignore.
The Lottery raises one billion each year
That the government's always required to steer
To schools and to colleges, all Alma Mater-y,
Getting their funding, in part, from our Lottery.

The General Fund's now in crisis extreme.
To fix it, our Governor's hatched a daft scheme:
We shall from the Lottery five billion borrow,
And promise to pay it, with interest, tomorrow.
'Twould make this year's budget mess less of a slaughter-y
Borrowing future receipts from the Lottery.

The schools need not fear their perennial bucks.
That money'd be backfilled, in manner deluxe,
From the General Fund, using part of the loan
That this Prop authorizes. Still, I can't condone
Long-term loans to close budget gaps. That is sheer plottery!
Credit collateralized by the Lottery.

I usually follow my pros and my cons
With "My Semi-Biennial Lecture on Bonds",
Which states loans should never be used for fleet fluff,
But instead be reserved just for capital stuff,
Such as buildings, and bridges o'er passages watery;
Not what's proposed for this loan from the Lottery.

This odd proposition, entitled "1C",
Will take out a loan with which I disagree.
It's for salaries, motor fuel, office supplies,
Inappropriate short-term expenses, you guys!
Though it might make our crisis grow hotter and hottery,
We must turn down this wrong-headed loan from the Lottery.

Proposition 1D: Reducing Early Childhood Program Earmark – YES
Proposition 1E: Reducing Mental Health Earmark – YES

Props 1D and 1E deal with two "walled off" areas of the state budget. These programs have their own income streams, protected from the annual legislative budget process by voter-approved ballot measures. Props 1D and 1E temporarily raid these fiefdoms to provide relief for the General Fund's budget gap.

I generally oppose propositions that wall off parts of the budget. For example, in 2004 I was against Prop 63, which established a new top-tier income tax bracket and funneled all of the proceeds—on the order of $1 billion a year—into mental health services. While I firmly support these services, I cannot support a funding model that, in essence, elevates the priority of the protected program above everything in the General Fund, including law enforcement, clean water, healthy families, and the environment.

Here's what I wrote in 2002, in opposition to another example, Prop 49, which walled off $550 million for after-school programs:

Look, people, there's a distinction between "beneficial" and "untouchably sacred." I'm asking you to make that distinction right now. The programs Prop 49 funds simply aren't that much more deserving than the other things the state funds. Giving them top priority is neither fair nor honest.

Prop 49 is permanent; it has no sunset provision. You may believe that after-school programs are the best use of $550 million this year. But can you predict that will be the case five, ten, or twenty years from now? You'd better be sure, because the only way to amend Prop 49 will be with another ballot proposition.

As much as I would like them to, Props 1D and 1E will not tear down the walls protecting their programs. Far from it. All they will do is temporarily divert a portion of the revenue streams into the General Fund. In five years the walls will be back up, fully intact.

Prop 1D will temporarily reduce the set-aside for "First 5" early childhood programs established by Prop 10 of 1998. It will divert most of First 5's accumulated unspent reserves ($340 million), and roughly half of its revenue ($268 million) every year through 2014. The money will go into the General Fund, where it's badly needed to close a huge gap.

Prop 1E temporarily redirects the budget earmark for mental health programs established by Prop 63 of 2004. It will divert roughly one quarter of Prop 63's income stream ($230 million) into the General Fund for two years.

Early childhood development and mental health are certainly important. But so are most General Fund programs, which don't enjoy special revenue streams and spending earmarks. All programs are taking a hit this year, and these should be no exception.

You may hear arguments against 1D or 1E saying that they will "subvert the will of the voters" who passed the original earmarks. Huh? If the voters themselves cannot modify or overturn an earlier ballot measure, then who can? Nobody? I'm strangely inspired by this vision of a society where laws can never be changed, even by those who enacted them. My name for it: Ossifocracy.

Proposition 1F: Freezing Legislator Salaries when Budget's Busted – NO

Proposition 1F won't work. Worse, it's petty, vindictive and childish.

Proposition 1F naively hopes to prevent budget deficits by withholding raises for legislators and elected state officers if the state budget does not balance.

This is just plain silly. Everyone wants our state government to be fiscally healthy. But this measure will never do the trick. For Proposition 1F to work, our legislators would have to be so selfish and immature that the possibility of a modest salary increase could induce them to betray their core values.

Of course they're not that selfish. Regardless of party, members of the Legislature are deeply caring, diligent, patriotic people who truly love the communities they represent and serve. Our state's structural deficit, if anything, has been caused by their over-eagerness to serve too many constituencies, rather than the kind of selfish greed that would make Proposition 1F effective.

Freezing salaries will not loosen politicians' commitment to their ideologies. You cannot get conservative legislators to support tax increases just by threatening to cancel their raises. Similarly, liberal legislators will never agree to cuts in social programs just to increase their pay.

It's ludicrous to think that the mere threat of a salary freeze will somehow cause our polarized elected officials to rush into each others' arms and magically overcome their political differences. Proposition 1F will never do what it promises.

You may be thinking, "Okay, maybe Proposition 1F won't do any good. But it will make me feel better, and it can't do any harm!"

Not so. Proposition 1F freezes the salaries of not just the Legislature and Governor, who are responsible for passing and signing the budget, but also innocent bystanders such as the Insurance Commissioner and the Superintendent of Public Instruction. This collateral damage will hurt some fine public servants and help no one.

And how good will you feel about freezing legislators' salaries when you know that their votes wouldn't change whether their salaries were frozen, reduced, or entirely eliminated? After all, they're clearly not in this for the money.

The current salary for nearly all legislators is $116,208. In most of California, this is solidly middle-class compensation. Many small business owners, doctors, lawyers, engineers, and managers make far more. You may earn more or you may earn less, but you've got to admit that our elected leaders aren't getting rich on their salaries.

Now consider that we ask these officials to run an enterprise with annual revenues exceeding $100 billion. That's roughly the income level of large corporations such as AT&T, Ford, and Hewlett-Packard, whose executives are paid millions of dollars. When you think about it in those terms, paying salaries such as $169,743 for a Treasurer and $133,639 for a Speaker of the Assembly is a terrific bargain.

Let's not make that discrepancy even worse just for an empty, childish, feel-good moment. Vote no on Proposition 1F.

That's what I wrote for the ballot pamphlet on February 22. Since then, a few additional thoughts have occurred to me:

I've heard many purposes for this measure. It's to save money. No, it's to hold legislators "accountable". No, it's to motivate them to agree on a balanced budget. No, it's to allow voters to register their frustration. Listen: if there's no consensus on the problem that the measure solves, it has no business being on the ballot.

Now, if the proponents claim that the purpose is to...

• Save money: The amount of money is trivial -- maybe $1 million in a budget of $100 billion, or one thousandth of one percent. Why not withhold legislators' salaries instead? That would save many times more. One is tempted to conclude that this proposition is purely symbolic.
• Hold legislators "accountable": Legislators are already accountable to the voters in their districts, and judging by the rates of reelection, you'd have to say they're performing fantastically well! Or maybe there's some other definition of "accountable" at play here. If it means that they should suffer as much as state employees who go on unpaid furlough every other Friday, then Proposition 1F is far too weak – rather than reducing pay 10%, it merely withholds raises.
• Motivate legislators to agree on a balanced budget: The current system of powerful parties, gerrymandered districts and six-year term limits rewards legislators who are obstinate and short-sighted. No salary freeze can overcome that.
• Allow voters to vent their frustration: Proposition 1F is a constitutional amendment, not an opinion poll. Everybody is frustrated with the budget process. But you don't amend the constitution every time voters are frustrated. That can lead to horrible laws, passed in moments of public outrage, that are impossible to repeal except with another brutal proposition fight. Proposition 1F should instead have been a simple statement of voter dissatisfaction.

Let's not forget that legislators' salaries are in the hands of the California Citizens Compensation Commission. As of this year, the entire Commission consists of appointees of Gov. Schwarzenegger. The Governor has indicated his support for salary freezes when the budget doesn't balance. But why would he need a constitutional amendment? Won't his commissioners accede to his wishes anyway? If we really need Proposition 1F, then the Governor ought to look again at whom he's appointing.

 
 
 
Copyright © 1980-2024   Peter L. Stahl
Your comments are welcome at pete@peterates.com