Proposition 1A - Spending Cap and Increase in Rainy Day FundMay 1, 2009
What it does
Proposition 1A is a legislative amendment to the state Constitution. It would impose a limit on the amount the state can spend each year based on revenue growth over the previous 10-year period. Spending for each year would be limited to the amount spent the prior year, plus inflation and population growth. Above-average revenues would be saved in a rainy day fund with a much higher cap than present for use during economic downturns, emergencies and limited other purposes.
However, if Prop. 1B passes, for about six years half of the rainy day money would go to the state’s public education fund to cover a disputed $7.9 billion difference between the amount the Governor’s office estimates is due to the education fund, and the higher amount education groups believe is owed.
In addition, the sales and personal income tax increases already approved by the Legislature for the next two years would be extended one additional year, and the increase in the Vehicle Registration Fee would be extended for an additional two years, adding $16 billion to the General Fund over those years.
Fiscal effects depend on many factors that will change over time and are hard to predict. Thus, effects may differ greatly from year to year. One known effect is to reduce the amount available in high revenue years and increase the amount available in low revenue years by using the 10-year trend of revenues to fix the amount that can be spent in that year, thereby reducing spending volatility.
Effect on near-term budgets
Prop. 1A will have no significant effect on the 2009-2010 budget. Most provisions begin in 2010-11 or later. Some highlights:
- Tax revenues will increase $16 billion from 2010-11 through 2012-13 due to the extension of the taxes and fees.
- Revenues that exceed the 10-year revenue trend must be transferred to the rainy day fund. Amounts are difficult to forecast, but this requirement could add billions of dollars to the rainy day fund.
- Mandatory education repayments of $1.5 billion annually are required to be made for 5-6 years, assuming Prop. 1B passes. The Governor cannot suspend these education repayments, again assuming Prop. 1B passes.
- Net result: Difficult to determine for a particular year. The extension of the tax increases is likely to make the 2011-12 budget easier to balance, but the effect in other years is unknown.
Effect on long-term budgets
Higher taxes, education repayments and bond payoffs required in Prop. 1A each last less than a decade. After that, Prop. 1A could continue to have substantial budgeting impacts. Factors to consider are:
- Prop. 1A does not cap the total level of authorized spending as long as alternative revenues are approved. Legislation can increase taxes above existing revenues. In some years, Prop. 1A could restrict access to revenues, making it harder to increase spending.
- Funds placed in the rainy day fund would be available to fill in during years when revenue is less than expected or needed. However, in some years, total revenues in the rainy day fund could drop if legislation allows 1.5 percent of General Fund revenues to be spent on infrastructure.
Why it is on the ballot
Prop. 1A is the result of a compromise between ideological opposites in the Legislature after months of negotiations to close the $42 billion budget shortfall. In exchange for an extension of the tax increases for a couple of years, a permanent spending limit was imposed. Money was dedicated to education spending to win the support of education supporters.
- Prop. 1A addresses the state’s problem of nearly annual budget deficits by smoothing the ups and downs of state revenues, capping spending, and expanding the rainy day fund to cover shortfalls in bad years.
- Checks and balances are central to America’s model of governance, but the Constitution’s requirement that the governor and the Legislature agree on mid-year budget corrections when revenues fall precludes fast action. Since the governor is elected by all the state’s voters, it seems reasonable to allow him or her the responsibility, and accountability, for relatively limited mid-year cuts.
- Had Prop. 1A been enacted ten years ago, this year’s deficit would be $14 billion instead of $42 billion, and the deficit would have been covered by a $90 billion rainy day fund. The state would have paid off $32 billion in one-time debt and would have a much stronger bond rating.
- Prop. 1A will tie the hands of the Legislature and governor as they face changing needs for state and local government services. It will keep our elected officials from taking into account the state’s changing demographics such as our aging population, and growth in the actual cost of important services like health care.
- Prop. 1A removes needed checks and balances, by allowing the governor to make mid-year cuts and suspend cost of living adjustments in state programs without legislative oversight.
- After the deep cuts made during these strapped times, Prop. 1A could lock in a reduced level of services by failing to properly take account of increased caseloads and program costs.
- There is no urgency to pass Prop. 1A, because most of its provisions will not take place for two years, giving us time to find a better solution. California should abandon the two-thirds vote requirement for passing budgets and raising revenues. A new tax commission is considering ways to stabilize our revenues.
SPUR has long supported giving elected officials the flexibility to adjust budgets as resources and public needs change, and has opposed set-asides for special interests, even very worthy ones. In that respect, Prop. 1A runs counter to the principles of good government.
But the underlying problem is a gridlocked Legislature which under-represents the political center. That issue won’t be addressed until the open primary proposal appears on next year’s ballot, with uncertain prospects. In the meantime, the state faces mass layoffs and culling of important, even vital programs.
SPUR recognizes that Prop. 1A is a partial, short-term solution. One month after it was put on the ballot, the state’s revenue shortfall is already $8 billion worse. Yet we also doubt the current Legislature’s ability to write a better measure, and believe it may have some impact on neutralizing the volatility of a broken budget process.
SPUR recommends a “Yes” vote on Prop. 1A.