Benjamin Franklin said the only two certainties in life are death and taxes. In California, add two more: drought and boom-and-bust tax revenues. What goes up often comes crashing down.
Boom-and-bust revenues have led the Legislature to expand ongoing programs with one-time revenues. When the inevitable economic downturn hits, those programs are cut—and enormous pressure builds to raise taxes. Fortunately on November 4, California voters can reboot the budget process by approving Proposition 2.
No One-Time Revenues for Ongoing Programs
Sponsored by Governor Jerry Brown and placed on the ballot by a unanimous vote of the Legislature, Proposition 2 will prohibit state lawmakers from spending one-time revenues for ongoing programs and place the money in a reserve to fund essential programs, such as education and public safety, when the economic bust occurs.
During the Great Recession, taxes were raised twice. School spending was slashed. And the Legislature resorted to loans, gimmicks and shell games to balance the budget. Those days are behind us for now. But without some solid guardrails against future legislative irresponsibility, we could be back in the ditch at the next recession.
Increased ‘Rainy Day’ Fund
Proposition 2 would increase the size of the state’s “rainy day” fund to $11 billion and would require minimum annual contributions into that reserve of $800 million—and even more if capital gains tax revenues are strong.
The measure would also require extra revenues be devoted to reducing budget debt, repaying funds borrowed from school districts, reducing long-term pension liabilities or investing in new infrastructure.
The Legislative Analyst’s Office has concluded that this measure would result in the state likely paying down its debts more quickly. Over the long term, that means greater budget flexibility.
How would Proposition 2 work in the real world? According to state Finance Director Michael Cohen, if it had been fully in effect at the beginning of the Great Recession in 2008, 62% of the budget shortfall would have been covered in 2008–09 and another 23% covered in 2009–10.
Nearly $6 billion in education cuts would have been avoided, as well as virtually the entire first year of the tax increases passed in 2009.
Help for School Finances
Some school officials are concerned the measure may limit the budget reserves that local school districts can hold. But this concern is overstated.
First, since the limit on reserves was passed as a statute, it can be easily changed if it’s found unworkable.
And the statute will only take effect in any year the state makes a deposit into the state’s education reserve, which itself would be used to protect school budgets from dropping state revenues. No deposits would be made into this state reserve unless and until state school finances are fully funded and all school debts are repaid. Only then would the restriction on local reserves go into effect.
Proposition 2 forces the state to save money and requires politicians to live within their means and protect against unnecessary tax increases. In good times, money will be placed in a constitutionally protected reserve and used to pay down debt. In bad times, the rainy day fund can be used to protect schools, public safety and other vital services.
Without a strong reserve and continued fiscal restraint, the state will face future deficits and could be forced to cut funding for schools, public safety and other critical services. Proposition 2 is our best defense against an uncertain and volatile future.
Allan Zaremberg is president and CEO of the California Chamber of Commerce. This commentary first appeared in The Sacramento Bee.