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Proposition 2: The Latest Attempt to Fix California's Unpredictable Budget

Gov. Jerry Brown is pushing a ballot measure he says will institutionalize fiscal responsibility and saving. The complicated amendment will be up to voters this fall.

ELECTION 2014: This article is part of our coverage of ballot measures to watch.

In California the only budget certainty is that there is no certainty. The state is notorious for its wild revenue swings from year-to-year. That's resulted in an unstable funding for many of the state’s programs. But Gov. Jerry Brown, who in his re-election campaign is touting himself as the state’s financial steward, is pushing through a constitutional amendment that he and supporters say will institutionalize fiscal responsibility and the habit of saving. Meanwhile, the amendment’s opponents argue that the change would weaken the state’s education funding structure. This fall, voters will be asked to take a side.

Attempts thus far to corral the state’s volatile revenue structure into something manageable have largely failed while the state’s revenue volatility has only worsened with each economic recession. Most recently, during the year before the 2008 recession, the state enjoyed a revenue spike of more than $7 billion. Rather than stocking away the excess, the legislature spent every penny of it, resulting in a final budget of nearly $103 billion that year. The following fiscal year, the stock market crashed and revenues plummeted to just under $83 billion, a 20 percent drop in a single year. Thanks to a weak budget reserve policy, the state’s meager savings were not nearly enough to save it and lawmakers went in search of cuts, slashing roughly $8 billion from education that year alone.

The proposed amendment, called Proposition 2, requires lawmakers to set aside 1.5 percent of General Fund revenues each year for the state’s budget stabilization fund until the fund reaches a full 10 percent of general fund spending. Unlike the current reserve funding requirement, which can be waived annually by the governor, suspending deposits or making a withdrawal from the fund would require that the governor declare a state of fiscal emergency. Additionally, for the next fifteen years, half of that 1.5 percent will be used to pay off long-term debt so California is balancing its need to save with its need to pay down growing liabilities.

The ballot measure also calls for deposits to be made from excess capital gains revenues in years where revenues exceed 8 percent of all general fund revenue -- a way of harnessing that revenue's volatility. From 2004 to 2014, the state exceeded that threshold seven times. The spread has ranged from 10.7 percent of general fund revenue to as low as 3.5 percent. A newly created separate reserve account for education would also benefit from these deposits.

Credit agencies view the proposal favorably because it means California would start saving more money when times are good, instead of simply spending more. “It’s a very reasonable rationale,” said Standard & Poor’s analyst Gabe Petek, adding that cementing the state’s deposit rules in its constitution would help institutionalize a good practice. "We don’t automatically lower ratings when states make a withdrawal [from their rainy day fund],” he said. “But on same token, we look for them to make deposits when times are better.”

But critics of the education funding component of it said that the way it is structured is too weak. That’s in part thanks to California’s complicated rules for education funding -- the state formulas typically result in about 40 percent of general fund revenues going toward public education funding each year. In down years, when the state’s budgeters aren’t able to meet that requirement, California goes into a debt of sorts and must make up the difference by funding in excess of 40 percent in good times. Economic recessions are followed by years of make-up payments by the state to public schools.

In relation to Prop. 2, if the state still owed school districts funds from previous years (which it will for the next several years), it wouldn't have to make a deposit in the state’s education reserve. The result, said California Common Sense Executive Director Autumn Carter, would be that transfers to the school reserve fund would happen rarely. The parent-led group Educate our State is running a strong opposition campaign against the proposition, the group said that the amendment would essentially allow the state to “save money on the back of public education funding.”

But, pointed out Chris Hoene, executive director of the California Budget Project, the level of understanding required to digest the opponents’ arguments works against them. With Gov. Brown still riding high as the governor who marched the state from a deficit into a surplus, Californians will likely see their vote on the measure as a thumbs up or down on Brown’s fiscal policies.

“If voters tried to drill into the details of this, its likelihood of passing would be much lower,” said Hoene, “because it’s too complicated to understand.”

Liz Farmer is a former GOVERNING fiscal policy writer.
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