Gov’s idea for rainy day fund is all wet

Yesterday, Governor Arnold Schwarzenegger offered, what he calls a “Compromise Budget” that he says, “responsibly addresses California’s remaining $15.2 billion budget shortfall and reforms our broken budget system.” (Click Here to See his Press Conference)

The truth is that his current budget plan is not new, not a compromise, does not contain budget spending reform and does not address the current budget deficit.

The Budget Reform measures being offered by the governor include:

A Strong Rainy Day Fund

• Increases the size of California’s Budget Stabilization Account (BSA) from 5 percent of General Fund expenditures to 12.5 percent -or approximately $13 billion dollars today.

• Requires annual transfers to the BSA of 3 percent of General Fund and eliminates the ability to suspend those annual transfers. In years when the BSA is full (at 12.5%), the annual transfer is reduced to 1.5 percent. During economic downturns, when funds can be drawn out of the BSA, the transfer would not occur.

• In addition to the annual transfer of 3 percent of General Fund to the BSA, the compromise proposal requires that all current-year revenue above the amounts included in the Budget Act be transferred to the BSA, after first providing funding to education as required under Proposition 98. This would mean that any unexpected spike in revenues that occur during the fiscal year – normally recognized in the Governor’s May Revision – would be transferred to the BSA.

• Funds could only be transferred out from the BSA under the following conditions: 1) actual revenues during the Fiscal Year must be below a specified level: prior year spending adjusted by population growth and per capita personal income growth; 2) funds transferred from the BSA back into the General Fund must be appropriated in a stand-alone urgency bill, subject to a 2/3rds vote of the Legislature. The amount transferred out of the BSA during a fiscal year would be limited to the amount which would bring revenues up to prior year spending adjusted by population and per capita personal income growth.

• When the balance in the BSA reaches 12.5 percent, the excess would be available for one-time purposes only. One-time purposes would include: paying down debt, paying off outstanding General Obligation bonds, investing in infrastructure and capital outlay projects, paying for “settle-up” dollars owed to education, pre-paying health care liability for retired employees (OPEB), and tax relief.

Mid-Year Reduction Authority

• Authorizes the Director of Finance to do the following when s/he determines, mid-year, that revenues have fallen below specified levels:

• Reduce state operations budgets by up to 7 percent without modifying or suspending the law.

• Freeze Cost of Living Adjustments (COLAs), rate increases or increases in state participation in local costs, as designated in the Budget Act, for up to 120 days.

• Requires the governor to submit urgency legislation to permanently suspend COLAs and other rate increases. If the governor fails to act within the 120 days, or the Legislature fails to adopt the suspension, the COLAs and other rate increases are reinstated.

There are several problems with this proposal. First, there is noting in it that addresses the issue of overspending. All it requires is for the state to contribute 3% of whatever they spend to the reserve, thus increasing the amount that goes to the rainy day fund as spending increases. But it does not limit spending!

A firm spending cap would limit the argument for future tax increases as long as revenues are in line with spending. But under this proposal, Democrats will be free to increase spending as they wish as long as they offer tax increases to help cover the cost.

Secondly, what good is it to allow the governor to make mid-year reductions that will last only 120 days? That’s right! Unless the 2/3 of the legislature votes to make the reductions permanent, then spending goes back to normal levels.

Maybe I am mistaken. But I don’t think there are any Democrats who would vote to make such cuts permanent. And it is highly unlikely that Republicans will get a supermajority in both houses of the state legislature anytime soon. Thus, the offer of mid-year reductions as offered in this proposal is all smoke and mirrors.

It is regretful that the Governor has caved on the idea of a spending cap. I believe that legislative Republicans could legitimately consider supporting his proposal if it truly addressed the issue of out of control spending.