Prop. 1A opponents: short-term revenue, long-term problems

Posted April 10, 2009

Proposition 1A is one of six measures on the May 19 statewide ballot. It would enlarge the state's "rainy day" budget reserve, impose a cap on expenditure of revenue that exceeds projections based on an adjusted 10-year average, and extend for one or two years the tax increases adopted in the February budget deal. Opponents of the measure visited The Times' editorial board on April 7 to make their case; below is a partial transcript of their remarks.

Janis R. Hirohama, League of Women Voters: Obviously we represent three different organizations with three different perspectives on these ballot measures, but I think we're all united in thinking that they're basically not the budget solution that California needs, for a variety of reasons. If I could just speak for the League first, since that's the position I know best, we are really concerned with the fact that it's a short-term solution that doesn't address the structural deficit that we have or any of the budget dysfunction that we've been contending with. It's not real reform.

We also are concerned about the fact that it takes away flexibility from the Legislature and the governor by imposing the spending cap, by specifying how the money in the reserve fund can be spent, and we really believe that flexibility is an important aspect of the budgetary governance function of government. We think that there are a lot of unkowns to these measures that we're very concerned about, for instance, how does the education funding piece really work in a test one year? Would we be able to actually sell those securitized lottery bonds? Things like that, so we feel that it's kind of a shot in the dark. And we feel that it fails to maintain proper checks and balances by giving the governor the ability to make these cuts in [cost-of-living adjustments] and some programs costs unilaterally, but also taking away the governor's ability to make adjustments as well.

So we are concerned about these measures and the whole budget deal as being bad public policy and also ultimately something that is going to make us fiscally worse off as a state in the long term. It's a short stop-gap measure, and we don't think it addresses the real structural problems or brings about the reforms that are needed to address these issues.

Jim Newton, L.A. Times: Do you oppose all six measures, or just [Proposition] 1A?

Hirohama: The League itself opposes 1A, 1C, 1D and 1E. We have no position on 1F because we don't have a position on legislators' salaries, and we've taken a neutral position on 1B because in our view it doesn't stand alone, it's tied to 1A and we ... oppose 1A.

Anthony Wright, Health Access California: For the purposes of this conversation we're focused on 1A. My organization is focused on opposition to 1A, and I think it's very important to tease it apart. I know that the supporters are trying to lump them all together, but it's very important to tease it apart because the other measures, especially 1C through 1E, are meant to have immediate impacts on May 20 what the budget looks like. Frankly 1C is the main one; 1D and 1E are relatively small in the overall picture of things. ...

1A actually does not have an impact on this year, on the next-year budget or even the budget after that. Because of the revenues that are tied to it, it will have an impact in 2012 for two years. But what we're really concerned about is the long-term implications of Prop. 1A, that the constitutional changes that 1A has, and that is, I think, why we're focused. We recognize, and we more than anybody have been vociferous in talking about the impacts that some of these budget [are having on] healthcare, to other services. But we recognize that we're in a really tough situation right now, with regard to the budget, how to make it all pencil out.

The question is whether in addition to the very tough decisions that we had to make and that we're going to have to make as a state, do we also want to tie the hands of future generations in the California Constitution, with regard to the limits and restrains and formulas and other things that Prop 1A puts in there?

Newton: So do you have a position on C, D and E?

Wright: We have a formal position opposed to 1D and 1E.

Newton: But not C?

Wright: But we have not taken a position on 1C. I mean, we're against.

Newton: Oh, well (laughs). ...

Wright: As a healthcare organization we focused on 1A, which we think has a big impact on healthcare into the future, and 1D and 1E, which have direct impacts on healthcare. ...

We had a very ugly budget process, a budget process of closed-door negotiations, passed in the dead of night, we were not even able to see what they were voting on at 2 a.m. while we were there. And there was not a single public hearing and not a single independent analysis before this was voted on, and I don't mean to bring up the process issues for their own sake, but to say that I think there was a flawed process ... and that there were significant problems with the formulas and with the content of Proposition 1A that I think might have remedied if it had actually gotten a more broad vetting process -- in particular, the fact that it seeks to divert money, it would divert money from General Fund spending priorities, not just in good years, but in bad years. So in a time when we're already making cuts, it would force even additional cuts because of restrictions. ...

And then secondly, with regard to restorations, that the formula for using any of those funds is based on a formula that is population and inflation, which simply does not take into account the very real and existing needs that this state has with regard to an aging population. We're going to have a significant increase in the percentage of the population that is over 65, which will have a big impact on the budget as well as healthcare costs, as well as other things just to maintain existing programs.

So the formulas that we're writing into the state Constitution will handcuff us as a state to invest in priorities, invest in needs, whether it is to make even the restorations of some of the cuts that we've made previously, or to do health reform or other things that we would want to do. But I think that it would hamstring us from even maintain existing programs because it doesn't take into account the needs of a changing state.

And finally, I just want to reinforce what Janis was saying about the change, the fairly significant shift in checks and balances with regard to giving the governor unilateral authority to make mid-year cuts without any legislative approval, hearing, notice, anything at the whim of a finding by the governor's own appointee. This is a fairly dramatic shift in terms of the natural checks and balances of the very important budget document that is a reflection of California's values, and that's a big problem for us as well.

Jon Healey, L.A. Times: But that doesn't happen unless the Legislature fails to do --

Jean Ross, California Budget Project: No.

Healey: It happens regardless?

Ross: Yes. If the budget goes, and I forget if it's substantially or significantly out of balance, but it's not defined -- $10,000 in my mind is a substantial amount. No, that is not at all linked to a failure of the Legislature to act; it's ministerial. ...

Hirohama: And I would say that we are not starry-eyed romantics who are looking for some ideal solution. ... We have serious reservations on a policy level about multiple aspects of the budget deal and these propositions, so it's not a question of, "Oh, we're looking for some perfect pie-in the sky thing." I think, just speaking for the League, for instance we would be very interested in a good, healthy reserve, but we don't feel that Prop. 1A, which does build up the reserve fund, is the solution, because of the other undesirable things that were tossed in there.

Wright: I would say ... all three of our organizations were supporters of Prop. 56, which included a rainy-day fund. We're not opposed to rainy-day funds as a concept, but it's an issue of, is this really a rainy-day fund, or is this a limit in our Constitution. ...

Ross: I was reading back through the transcript of when the governor and the legislative leaders came to meet with you a few weeks ago ... and I thought that it was interesting that the governor said there wasn't a rainy day fund, since just five years ago he supported a measure that did put a rainy day fund in the state Constitution. And if you look at the effective contribution rate as a result of Proposition 1A, it would actually be a smaller contribution into the rainy day fund than what we currently have.

And I think it is important when you look at the ballot measures to look at all of them independently. I think there has been an effort to sell them as a package. In fact, only half of the measures that will be voted on in the special election would have an immediate impact on the budget; this isn't one of them. And I do think that they represent a variety of different efforts, some that are temporary, some that are permanent. I think the permanent changes should certainly be held to a higher standard than some of the temporary measures would be held.

I think in the end -- and you will meet not stronger supporter of the concept of a rainy day fund and budget discipline than me or my organization -- but I think when you really begin to look at what this measure would do, and it's wickedly complicated. ... It had not just one new autopilot spending formula, but a number of them. I think the recipe, the potential for unintended consequences is high, I think incredibly high. ...

I had a question about how Proposition 1A would relate to, allow for an increase in fees, and potentially even sort of a massive increase in fees such as that envisioned by the so-called revenue-neutral budget plan –

Robert Greene, L.A. Times: Right, which is alive again.

Ross: Which we're now reading about again. So I e-mailed two of the legislative staff who were most directly involved in drafting this measure and somebody at the [Legislative Analyst's Office], who's also spent a lot of time looking at this. I got three different answers, and the two from the legislative staff were diametrically opposed. One said, "Designed to prevent spending of an increase in fees; that's what we intended to do, and it gets to the heart of what you can do by majority vote versus two-thirds vote." The other person said, "Oh easy: We'll have to move the money around, do some shell games here and there, but we can do fees." So who's right? And I think the reality is, it is a recipe for litigation, a recipe for attempts to try and work around a greater complexity in the future. ...

I think the most fundamental here -- and again, I was looking at the transcript from you interview with the legislative leaders and the governor -- looking back to the Prop. 58 campaign, this will not cure California's budget problems. It does absolutely nothing to address the fundamental imbalance between revenues and spending. If you look at the Legislative Analyst's long-term budget forecast -- long-term meaning five to six years, which assumed that Proposition 1A and all the other ballot measures have passed -- we're still looking at budget shortfalls on the high side of $25 billion in the next few years. This does nothing to stop that. And I think because of the fact that it is being sold as the solution to California's budget problems, it's just a recipe for more and more voter cynicism.

Newton: Can I ask you, do you think this would make the state's budget situation worse, or is it just a missed opportunity to make it better? In other words, does this actually make our situation worse or just fail to improve it?

Ross: I think it makes it worse, and I think I'm supported. If you look at the Legislative Analyst's write-up in the ballot pamphlet, I think it makes it worse by taking money off the top of an already unbalanced budget -- at a minimum, one and a half percent of revenues even for a worthy cause would go off the top, but the problem is, it's money we don't have. The analogy I used with somebody yesterday, it's like telling a family who's headed into foreclosure that they out to put more money into the 401(k) plan. Yes, they know they need to save for retirement, but if you're losing the house maybe that isn't the best choice to make right now. ...

I think there is a squeeze on the non-protected side of the budget, and that's I think what Anthony was talking about. And I think healthcare, I think higher education doesn't get enough attention in terms of what's left unprotected. I think higher education will be extraordinarily vulnerable under this kind of a scenario.

There's certainly been a tendency as more and more parts of the budget get walled off through initiatives and ballot measures, that anybody else who has the ability to do so runs out and puts something on the ballot to wall themselves off; I think this will lead to that. I think there's been some suggestion that some of the proponents have already suggested to some interest groups that ... the solution to this is to go out an wall yourself off. And I don't think that's good for the long-term flexibility, the ability to respond to challenges that we can't begin to envision.

Dan Turner, L.A. Times: Isn't autopilot better than an incompetent pilot? We'd all rather have reasonable people make funding decisions about how to spend budget money, but we don't have reasonable people; we have what we have. And so is it better, given the bunch that we've got in there, to restrain them and make them get this done?

Ross: I'm inherently an optimist (laughs). ... I do think we need visionary, long-term leadership for California. I'm a native Californian. I worry, I wake up -- I'm too obsessed with what I do -- I wake up in the middle of the night worrying about it. ... But I do think California is capable of visionary leadership. I don't think autopilot is better than no pilot, and I think to take where you started to go with this, I think it is so complex, so wickedly complex, so fraught with the possibility for unintended consequences that in some ways represent where you're going now.

And there is a missed opportunity; I think there is a missed opportunity as well, and I don't think this is the solution. ...

Hirohama: Governing by formulas, that's not governance, and the responsibility of our elected leaders is to govern and for us to give them the flexibility to be able to meet the challenges of the changing economy and changing situations and exercise their judgment. And to impose more formulas, to put for God's sake a 10-year trend line based on a linear graph into the state Constitution, I mean, that's governance? This is a way to run the state? ...

Wright: Can I actually suggest that the precedent is actually reversed and actually more troubling? ... I don't think that it's necessarily a good precedent that for every budget vote from here on after, where it used to be a veterans' home in Redding which got you the two-thirds now it's a constitutional amendment –

Ross: Or multiple constitutional amendments.

Wright: Multiple constitutional amendments on subjects even not germane to the budget. I think at some level, the guy at the back of the car dealership needs to push back. There needs to be someone who says, "Wait a minute, that's a little bit, that's too far a price for simply a budget vote."

Ross: I think that's the message you get out of this, is that next time, you hold out for even more and you ask for even more. I think if the voters go along with it, I think that's the signal that the Legislature takes, or I would say the minority takes: You get whatever you ask for, so you might as well hold out longer, dig in deeper.

Greene: And should we make of this phenomenon where you are on the same side, whether you like it or not, with very staunch, anti-tax folks from the Howard Jarvis Taxpayers Association to more populist AM radio types, who say the reason to reject this is because the state wants to jack up you taxes, and they should not be able to jack up your taxes until the state gets its act together. Their definition of the state getting its act together is going to be very different from yours. Do you see a horizon at which the state gets its act together in a way that's acceptable to you or them, or anyone else?

Ross: At some point again this goes back to being an optimist. I think we have to hope that at some point we have visionary leadership in California. ... I think how the outcome of the election gets cast -- does it get cast as a victory telling the Legislature, "Don't make the voters do everything. Maybe we need to go back to the drawing table and start over again"?

If 1A fails, I think when people sit back and debrief the election, I hope it's not seen as a referendum on taxes. You're not seeing us, I'm assuming neither of them made that argument; we're not going to make that argument. I think it needs to be, and I think how opinion leaders including editorial boards cast the choices will play an important role in that.

Greene: Bust as a practical matter, if voters do what you're asking them to do, aren't they also doing what the other folks are asking them to do? And doesn't the state in fact go to that precipice without the additional one or two years of taxes?

Ross: We're at the precipice with it. If you look at the Legislative Analyst's forecast, we are at that precipice.

Wright: Before those revenues kick in.

Ross: With those monies, even if we get those monies.

Wright: And those revenues then go away in two years. So we're at it before those revenues kick in.

Ross: And we're at it afterwards. ... Yes, it's a lot of money; I'm not going to disagree, it's a lot of money there. But it's basically sort of allowing the state to make it through this governor's term of office, sort of this set of leaders' term of office, and kicking the can down the road until the next set of leaders comes in.

Greene: This is California, that's how we roll.

(laughs)

Ross: I as a Californian, I want better for my state.

Greene: I want better too, but that's the way it's been for at least a decade and a half. Isn't the choice before us right now whether we kick the can down the road for another year or two, or we don't and all disaster breaks loose?

Hirohama: I understand the argument or the concerns that people have that, well, the whole thing's going to go off a cliff we don't get at least even this much in there. But I have trouble with the concept that because this is all that's on the table and that they didn't do any better, that the Big Five and the Legislature could not come up with anything better than this, that this is what they're offering us and it's either take it or walk away. And I think that going for a bad budget deal that, as Jean pointed out, is actually going to make things probably worse for us down the road, is not an answer. And the fact that they said, "Well, this is all we could do. It was a miracle that we could get three Republicans even to vote for this, and we had no choice, and if you care about California you would support this." Actually, I have friends and relatives who are telling me that. ...

Healey: This is the Republican argument: We have sort of a perverse system by requiring a balanced budget, and that being the only requirement, we're spending every penny. And yeah, there is a provision for a rainy-day fund, but it isn't the kind of thing that encourages folk to scale spending increases every year with the size of the population and the size of the needs. Rather, it's OK, we have a boom year, so we can spend a whale of a lot more while still keeping that reserve instead of, we had a boom year, we're going to have a ton of money going into the reserve fund and maybe some of it going back to the public.

Greene: 2006 being the prime case in point.

Ross: And a lot of that had to do with some of the accounting gimmicks and the tax amnesty and the fact that we sort of bumped -- straightening out the money flows in the decade is incredibly tough to do. And some of that was a "windfall from the tax amnesty."

2006 actually had, if you go back and look at the budget that was signed into law, was a year where there were spending cuts. There were some accounting gimmicks, there were some other maneuvers, the economy picked up a little bit, we got some money. But by traditional standards, it was a bad budget year. And I think part of the unintended consequences of this is that when you come out of a prolonged downturn, you get a bump, and so your sort of higher than anticipated revenue growth is really a mathematical artifact of the fact that your revenues were so low that what would in normal times be sort of a decent amount of growth looks huge, and it's just that your denominator has been driven down so much that if you get a little decent sized numerator, it gives you a big bump there. But there were still a lot of budget cuts then.

That's a year when this would have required making deeper budget cuts to put money into a reserve. ... Same thing would have happened in the mid-1990s, years when the state was still making billions of dollars of cuts, you would have had to make billions of dollars of more cuts to put money into the reserve. I don't think that makes sense. ...

I think what's interesting to me is if you go and put the governor's talking points for this side by side with his Prop. 58 talking points, they're almost verbatim. And I think that's part of what makes voters cynical, is they get sold one thing -- this is going to solve your problems, and five years later the problems are still there. The same talking points are used to sell another solution, but in four years we're going to have the same set of problems.

New governor, same set of problems.