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Proposition 76 - A Conservative Argument for Voting “NO”

Introduction

In prior years, California has had many deceptive Propositions pass (and even more proposed). Take for example Proposition 111, the "Traffic Congestion Relief and Spending Limitation Act.,” backed by conservative Republican Governor George Deukmejian and passed in 1990. What voters didn’t realize in passing this measure is the fine print of the Proposition also obliterated the strict Gann Spending limit that was in place since 1979, something that would have avoided the fiscal woes that we have today. Ted Balaker of the Reason Foundation wrote the following article in 2002, offering sage advice in evaluating California propositions. The advice still applies today.

Such a Deal: Californians Have a History of Buying Ballot Measures that are Deceptively Written and Advertised
(snip)
Shady sales jobs and unfulfilled promises are part of today's reality in politics.
Californians must walk into voting booths on March 2 like they would walk onto a used car lot. Expect deception, don't listen to fast talk and watch your wallet.

Many voters choose to vote by identifying a group or leader that they support and then following their recommendations. Others may choose to follow party recommendations. Still others look for the position of groups they usually oppose, then simply take the opposite position. But none of these approaches are truly adequate as many of those leaders stray from the ideals or principles in which one believes. We are seeing battles between big business and unions. Is either position necessarily good for the average taxpayer? The fact that a union is opposing something vigorously does not mean that it is necessarily a good thing for John or Jane Californian. The fact that the CA GOP is backing something also offers little solace to conservatives, as they are also backing new social programs like Proposition 78. The only answer is for voters to read as much as they can from all sources and sift out the truth from the flurry of campaign-speak. The full text of the proposed new law is the only non-biased information voters will find.

The following links are provided to assist in understanding Proposition 76 and as support for many of the issues discussed below.

Legislative Analysts Office - Proposition 76: Key Issues and Fiscal Effects, September 30, 2005
Proposition 76. State Spending and School Funding Limits. Initiative Constitutional Amendment.
[Includes summary, ballot arguments (pro/con), the first LAO Analysis dated ..., and the full text of the proposed law]]
Legislative Analysts Office Analysis of Budget Initiative, as submitted to Attorney General’s Office, March 17, 2005.
(Also included with Ballot Summary and full text of law, linked above)

While generally presented by proponents as a "spending control" measure, Proposition 76 is much, much more than that. In a report by the Legislative Analysts Office - Proposition 76: Key Issues and Fiscal Effects, September 30, 2005, they state:

Proposition 76 on the November Special Statewide Election ballot is a complex measure that would have far-reaching effects on the state budget.

It is indeed complex. While it does provide for a spending cap, it also gives the Governor new powers for mid-year budget actions in the event of a "fiscal emergency," changes the formulas for education funding, defers certain debt, authorizes new bonds, places limits on some future fund transfers and makes various other changes.

The following discusses some of these complexities and some reasons why a conservative might choose to oppose Proposition 76. While there are also some additional positives in this measure, they need to be weighed against the negatives.

Background - Inflating the Expenditure and Revenue Base

Two years ago, conservatives supported a Recall effort to oust a fiscally irresponsible Governor from office, largely in anticipation of getting spending under control (i.e. reduced--or at least to eliminate the structural imbalance and deficit spending.)

Much to the dismay of many fiscal conservatives, spending has not been reduced and we have continued over the past 2 years to spend more than the State generates in revenues. The rate of increased spending has grown, with budgets showing a growth of 16% over the two past fiscal years (2004-05, 2005-06). The continued deficit spending under the new administration was largely made possible by the $15 billion Proposition 57/58 bonds, bonds to pay for pension contributions, tribal gaming bonds, and other internal borrowing and transfers which supplemented revenues. In short, the State is spending way beyond its means.

Also, to generate more near term revenue, the administration implemented a tax amnesty program, resulting in an acceleration of tax payments to the State. The State has also benefited this year with increased one-time revenues resulting from new federal rules governing offshore profits.
[See CA: Taxes from wealthy, corporations boost state revenue ]

All of the above has resulted in two things: Both revenues and expenditures have been inflated from what would have occurred under ordinary circumstances.

Which takes us to the Proposition 76 "spending cap."

Proposition 76 “Spending Cap”

In its simplest presentation, Proposition 76 is called a spending cap. Future spending will be limited to the prior year expenditure level, plus a percentage increase based on a 3-year-average of prior revenue growth. Given recent history, this means that the spending level (inflated by borrowing) and the revenue (inflated by one time increases) will be used as a basis to “limit” future spending. They are taking the best-of-the-best and presenting it as a fiscally responsible basis for “limiting” future expenses. What is responsible about using the highest revenues and the highest expenditures of all time as a basis to establish a "cap" for limiting future expenditures? While that will not always be the case in future years, it is the near term outlook as of today. At a time when fiscal conservatives expected to see spending cuts, this plan will, for the most part, lock in the high spending we have experienced in the past two fiscal years.

More Borrowing, Long Term Obligations and Approval of New Bonds

In addition to Proposition 57/58 borrowing and other bonds, state spending has been supplemented the past few years by internal borrowing--from education, from transportation, from local government, etc. Proposition 76 proposes to take the balance due on those borrowings and, instead of paying it back over the next few years from general fund revenues as would be indicated by current law, it proposes to defer those obligations, extending the repayment over the next 15 years. In the case of transportation funds, voting “yes” on Proposition 76 is giving voter approval for the issuance of new bonds for that purpose. By deferring these obligations, Proposition 76 frees up even more revenue whereby the State can increase spending in the near term, while adding to the mounting debt pushed into the next decade.

The Sacramento Bee reported [see Proposition 76: Curb on spending - or a 'power grab'?, October 12, 2005]:

"The strongest reason is the record of the last seven years, every one of which we've spent more than we've taken in," said Schwarzenegger's former finance director, Tom Campbell, who helped write the measure and is campaigning for Proposition 76.
"We are borrowed out. We've borrowed from every special fund that we can, and our state cannot continue this way."

They say they cannot continue this way, spending beyond their means, without either raising taxes or borrowing more money. In effect, Proposition 76 borrows more money and bails them out once again. Without that borrowing, there does not appear to be a back-up plan, other than to raise taxes, as both Governor Schwarzenegger and Tom Campbell have threatened.

Former Silicon Valley Rep. Tom Campbell brought the fight over Gov. Arnold Schwarzenegger's ballot initiatives to San Jose on Wednesday, warning members of the Silicon Valley Chamber of Commerce that new taxes are "highly likely" if a proposal to curb government spending is not passed by voters in the Nov. 8 special election.
[See Tom Campbell campaigns for Prop. 76, Contra Costa Times, September 15, 2005]
Asked ... what he might do to avert future budget deficits if the spending control is defeated, Schwarzenegger said: "Then we have to look at raising taxes, because this is the only option we have, in order to create the money. And this is why I tell people vote yes on Proposition 76 and make sure that we do everything that we can to pass this proposition so that we force our legislators once and for all to live within their means and not to continue spending money and to keep making promises to people that they can't keep."
[See Governor: Tax Hike Possible if Prop. 76 Fails, Los Angeles Times, September 2, 2005

But the state can't continue to borrow at this rate given the cost of the debt load.

The Los Angeles Times recently reported [See CA: State Weighs New Wave of Borrowing, October 4, 2005]:

According to the nonpartisan legislative analyst's office, the percentage of the state's budget that goes to pay off debt has reached 6%. Over the next few years even more debts will come due. By 2009, according to the analyst, paying back debt will account for nearly 7% of the state budget.

The State is becoming a new borrow-and-spend machine. Notwithstanding the ever-increasing debt-load, the current administration is reportedly launching a new era of borrowing. The Ventura County Star reported [see Reform, rebuild ... repay - Schwarzenegger's vision involves trips to the bank, September 28, 2005]

It's no secret, Campbell said, that an infrastructure bond will soon be in the offing and it will not be modest.
Schwarzenegger, he said, has told his advisers that they shouldn't blink at talk of a $9 billion or $10 billion bond when "we should be talking about $60 billion or $70 billion."

When will we truly cut up the credit cards? It is clear that those in Sacramento haven’t got the message yet--the answer is to CUT spending, a message clearly sent to Sacramento through the Recall election.

Smoothing Expenditures

“Smoothing” is not a new concept. It is a budgeting practice used every day by responsible businesses, organizations and individuals. In good years, money is set aside to cushion the blow in bad years.

Jon Coupal of the Howard Jarvis Taxpayers Association recently told the Daily News that Proposition 76 "will have the effect of smoothing out the peaks and valleys so if we ever undergo another dot-com boom, we won't just go out and spend that money like drunken sailors." [See PROP 76 PRO: Fiscal woes need action now, 10/12/2005]

The state could employ this method without new laws, simply choosing to spend less in good years and building up a surplus or reserve to carry forward into future bad years. Instead, irresponsible legislators and Governors decided to spend every dollar they could find (and then some), despite bad years looming on the horizon.

One could try to argue that Proposition 76 now forces the State to set aside that reserve. But under Proposition 76, surplus dollars (those that exceed the already inflated “spending cap”) would only partially be used to establish this reserve fund. Only 25% would be set aside as a reserve for future lean years. Another 25% would be used for road, highway, and school construction projects. The remaining 50% would be used for debt payments. But those debt payments already must be included in the budget, so, in effect, by using the surplus to pay for the debt, they will free up even more dollars to spend on other items. They aren’t paying off the debt early; the language specifically prohibits that (except for any amounts going toward the Economic Recovery Bonds). They are simply paying their annual debt payment using funds that exceed the “spending cap.”
[See page 3: Legislative Analysts Office Analysis of Budget Initiative ]

Governor’s Powers for Mid Year Spending Cuts

Proposition 76 provides for increasing the Governor’s powers to effect mid-year spending cuts, an act that would currently require legislative approval. Under current law, the Governor proposes the budget and has final approval power, including line-item veto power. He has shown little will to cut spending through use of either power. What we have seen is record spending increases combined with continued deficit spending. If he won’t use the powers he has today, what hope is there that he will use these additional powers, if granted. Also, the major deficit California is experiencing does not result from overspending that occurred only from mid-year changes, but overspending--period.

Effect to Local Governments

Mid year spending cuts means cuts in appropriations. That means, that one of the actions the Governor can take is to simply cut appropriations to local governments. This would not relieve the county of performing their tasks, it just leaves the counties without anticipated funding for responsibilities they are still obligated to perform, thus shifting the burden and creating a pressure for increased local taxes. The LAO states: [See Legislative Analysts Office - Proposition 76: Key Issues and Fiscal Effects, September 30, 2005]

“The additional spending limit and new powers granted to the Governor would likely reduce state spending over time relative to current law. These reductions also could shift costs to local governments (primarily counties).”

Mid Year spending cuts--in times of "Crisis"

The Sacramento Bee, reporting on a campaign event in Orange County quoted Schwarzenegger as saying:

"Shouldn't the governor of the most ... populous and the most diverse state, with the biggest budget of any state in the union, have the same ability to respond to crisis as other governors?"
[See Proposition 76: Curb on spending - or a 'power grab'?, October 12, 2005 ]

But what is a “Crisis”? According to the Legislative Analysts Office, a "crisis" as defined by Proposition 76 would be rather commonplace.
[See Legislative Analysts Office - Proposition 76: Key Issues and Fiscal Effects, September 30, 2005]

How Often Could a Governor Declare a Fiscal Emergency?
The specific thresholds set forth by the measure for declaring fiscal emergencies are not particularly high. For example, a 1.5 percent deviation on revenues could occur frequently, given the volatility of revenues, especially in individual months within the fiscal year. Thus, the frequency of emergency declarations would largely be at the discretion of the administration.

While one may not have concerns about this power under a Republican Governor, what about a Governor Phil Angelides or a Governor Warren Beatty?

Education - Minimum Guarantee

Many on FR have tried to argue that Proposition 76 eliminates the Minimum Guarantee included in the Proposition 98 Education funding formulas. It doesn’t. It changes it, but it does not eliminate it. In part, it eliminates one of the changes that voters passed in Proposition 111 to try to correct the overly generous formulas of Proposition 98. Quoting from the Legislative Analysts Office - Proposition 76: Key Issues and Fiscal Effects, September 30, 2005:

In 1990, voters approved Proposition 111. Among other things, this measure added an alternative, less generous, formula (referred to as “Test 3”) to Proposition 98. The alternative formula allows school funding to grow more slowly when state revenues are weak.
...
[Proposition 76] ... would eliminate the Test 3 and maintenance factor provisions of Proposition 98. Thus, school funding would no longer automatically fall during bad times and rise back up to the main guarantee level in good times.

As such, we currently have Proposition 76 proponents Governor Schwarzenegger, Tom Campbell, and the California Taxpayer’s Association all saying that education spending will go up in bad years, including next year. And where will the money come from? There are no established reserves for funding lean years. Why is the one provision that actually would indicate a decrease in education funding being eliminated from Proposition 98?

NBC11 reported [See Proposition 76 Could Change Education Funding, October 11, 2005]:

Gov. Arnold Schwarzenegger and his team insist schools won't lose money... "It actually increases education funding when the economy is down, that is unequivocal, that is without debate," said Tom Campbell, the governor's financial director. "Then when the economy is doing well, the legislature could put the money back in or not. It's up to the legislature. Its not automatic."

And, the California Taxpayer’s Association is also turning up the heat to prove that education funding will increase.

Cal-Tax Urges Yes Vote on Proposition 76 – Budget Reform That Will Increase School Funding, September 26, 2005
Why Proposition 76 Provides Schools with More Money Next Year, October 14, 2005

Lastly, we have this Schwarzenegger quote from an August interview with Hugh Hewitt:

No, no. We never want to cut anything. As a matter of fact, it's quite the opposite. We want to increase funding for education, because as you know, I'm an education Governor.

So, if we are to believe all of these proponents of Proposition 76, in a year when revenues turn down, formulas in this new Proposition will require that we dedicate even more funding to education. Is this good reform?

Tax Increases

The Orange County Register wrote:

Among the top of Schwarzenegger's reforms is Proposition 76, the Live Within Our Means Act, which would require the Governor to bring the budget into balance periodically by giving Governors sole authority to cut or raise taxes.
[See Governor: Ballot is for 'big stuff' , September 21, 2005]

When the author was questioned, they stood by their interpretation of the proposed law while declining to provide a specific citation. Perhaps their interpretation is what the Legislative Analysts Office referred to in their report:

“The Governor would have greater control over both the general nature of the solutions (for example, tax increases versus spending reductions) as well as the specific programs that would be reduced in order to balance the budget.”
[See Legislative Analysts Report - Proposition 76: Key Issues and Fiscal Effects, September 30, 2005 ]

While some may trust the current administration to not raise taxes, one has to acknowledge the shift in power and ask if it would be an improvement if a Democrat were in office. For example, if the above tactic was employed by say, a Governor Phil Angelides, tax increases would be inevitable and our Republican legislators, despite their current ability to block the 2/3 majority requirement today, could be unable to block such an action in the future.

Proposition 76 Gives Us More Formulas, Not Less

Governor Schwarzenegger used to rail about all of the "Formulas" in the budgeting process. He was right then. Unfortunately, Proposition 76 is creating a host of new formulas --and they look like they could be killers the first year revenue turns down.