Proposition 1A: The budget fix California needs

It took the greatest drop in state revenues since the Great Depression to crack it open, but California’s dysfunctional budget process has finally been laid bare.

Now the question is, how can we fix it permanently? That consideration should frame the way voters analyze the initiatives being offered on the May ballot.

Time and again, California has committed to spending hikes during good times that it can’t afford when bad times come. This cycle needs to be broken.

If we had kept spending at the level of Gov. Gray Davis’ first budget in 1999 (adjusted for inflation and population growth), our budget would be balanced today, despite the economic downturn. Instead, spending (especially on healthcare) grew dramatically, and we again find ourselves in crisis.

Proposition 1A would smooth out our budget cycle. Excess revenues collected during boom years would be put into a reserve fund that could be used only to fill budget gaps in years when revenues fall or to pay off bonds. If Proposition 1A had been enacted 10 years ago, we would have faced only a $5.4-billion problem, instead of a $42-billion one.

Some tax opponents are advocating a “no” vote on Proposition 1A because it would also extend for up to two years temporary tax increases passed to alleviate the current crisis. But we should not reject a chance to permanently curb government overspending and higher taxes because of temporary tax increases. Yes, higher taxes mean fewer jobs, but so does a broken budget system.

Proposition 1B, on the other hand, would be bad for the state. The measure came about as the result of a complicated deal to keep the powerful teachers unions from opposing Proposition 1A. It resolves an ambiguity in existing law in favor of the unions’ interpretation, guaranteeing schools $9.3 billion from the rainy-day account, as it is funded over time.

Implementing Proposition 1B would thus delay the day when the reserve fund could really function as such, and it would mean that all other needs of state government -- medical care for the poor, state universities, law enforcement -- would take second place.

Gov. Arnold Schwarzenegger cannot advocate against Proposition 1B, because that was the agreement he reached with the unions. But Californians can vote against it, even while voting for Proposition 1A.

Three other proposals on the ballot are being cast as necessary to solving our immediate crisis. But they too are a mixed bag.

Proposition 1C would borrow $5 billion in future revenues from the state lottery. The problem is, it’s a one-time salve for a recurring problem. Proposition 1C does nothing to reduce state spending -- the chronic cause of our budget woes. The $5 billion would have to be repaid, with interest, from lottery sales in future years. It’s terrible public policy to postpone reckoning in this way.

Propositions 1D and 1E aim to help close the current budget gap by redirecting funds raised from taxes that were imposed specifically to be spent for health benefits for children and mental health. Funds that voters approved for those causes would be diverted on a temporary basis to the general fund instead. Both of these initiatives involve taxes that Californians voters approved in order to fund specific projects. In an economic crisis, voters should be allowed to redirect those funds if they wish. But together, these propositions will bring in only about $1 billion over this budget year and next.

In the end, even passing all the propositions would leave an estimated budget gap of $8 billion. If propositions 1C, 1D and 1E are defeated, the gap would be $14 billion. So we’ll clearly need a backup plan no matter what happens in the May election.

Further cuts in state spending or sales of assets are the only steps left that don’t require a two-thirds vote of the Legislature. Democrats who control the Legislature are unlikely to agree to $8 billion in further spending cuts, let alone $14 billion. (In the budget deal that was just concluded, they agreed to $17 billion in spending cuts.) They might try a gasoline tax hike, calling it a “freeway user fee” to avoid the two-thirds vote requirement. That would be unconstitutional, but it might take a couple of years to be decided by a court. When it is undone, the state will have to pay back the tax hike, with interest. (Keep your gasoline receipts.)

So that leaves the sale of state assets. California could sell state office buildings and lease them back. But that’s a terrible idea: The state would sell into a depressed real estate market and saddle taxpayers with rent forevermore. It would be only a temporary fix and would leave us with fewer assets. We’d have to sell $8.6 billion worth of assets before the first dollar went to the budget, because that’s the amount of “economic recovery bonds” outstanding, and they have first call on the proceeds of any state asset sales.

However we work out this short-term problem, to prevent this kind of budget nightmare recurring every time there’s a downturn in the economy, the most important initiative to pass in May is Proposition 1A. Create a rainy-day fund in good times, and draw from it in bad.

Tom Campbell is a former congressman and former state finance director. He is now a visiting professor of law and economics at Chapman University. He has formed an exploratory committee for the Republican nomination for governor.