Thursday, October 27, 2005 | When the dot-com boom was upon us, the state was taking in huge amounts of income tax from capital gains on stock options. When the dot-com bust hit, the spending had been locked into permanent formulas. This fundamental problem – one-time money going into permanent spending formulas – is at the heart of Proposition 76, Live Within Our Means.
Because we haven’t been living within our means, we’ve spent more than we had for each of the last six years; we’ve tapped out our state credit card, raided funds intended for schools and roads and bump along with the worst bond-rating of the 50 states, costing us hundreds of millions of dollars in extra interest every year. The tired, defeatist answer is just raise taxes. But we’ve spent more than we received in taxes every one of the last
There is a better way. Proposition 76 requires that state expenditures grow more smoothly. Rather than allowing a one-time spike in revenues to add to permanent spending formulas, Proposition 76 specifies that the state can only increase its spending over the previous year by a percentage equal to the previous three years’ revenue growth. We’re still paying for having put our spending into high-gear based on one-time money at the end of the 1990s. This will stop that. If a year is exceptionally high in state revenue, the extra will go into a reserve to be available for leaner years.
Proposition 76 requires an honest call on what the state’s revenues and expenditures actually are, made at least every quarter. If we’re off by a significant amount, the legislature gets 45 days to fix it. If they fail, then the governor must act. If the legislature does not like some of the governor’s cuts, they can put the money back in; but they’ve got to find an equal amount elsewhere to reduce.
Proposition 76 makes one other important reform. Every year, the state ends the year without an on-time budget. School districts, vendors to the state, cities and counties cannot plan as payments from the state are reduced or frozen. Instead of this chaotic situation, Proposition 76 continues the previous year’s budget until we get a new one.
You’ve probably seen the attack ads on TV, saying Proposition 76 will cut education funding. They are false. The non-partisan California Taxpayers Association has estimated that education funding will increase under Proposition 76, as compared with current law. Indeed, under existing law, no payment above the minimum is required for education unless per capita growth in revenue exceeds per capita growth in personal income, a situation that is unlikely to occur next year, and not guaranteed to occur in any given year.
Proposition 76 smoothes out education funding, so that in the low-revenue years, more money will go to education. During high revenue years, the legislature can choose to add more to education, without making the increase automatically go into the base forevermore. For that very reason, it’s likely the legislature will add more than the minimum.
One-time money should go for one-time purposes, not permanent spending formulas. That’s what Proposition 76 does, and it will improve every aspect of our state’s finances, especially those for education.
For more information on Proposition 76 you can visit www.joinarnold.com.
Tom Campbell is the director of finance for the state of California. He can be reached at