Prop. 30 would make budget roller coaster more scary

Nov. 2, 2012

By Wayne Lusvardi

You probably have seen the photograph of the Casino Pier Roller Coaster on the New Jersey shore inundated by the ocean and in shambles from the impact of Hurricane Sandy.

In Sacramento, Calif. on the same day, the weather was described as a “beautiful fall day…on mostly sunny skies with highs in the middle 70’s.”   But a different type of storm — a budget cyclone — is about to hit the California capitol.

The pending California storm would send Gov. Jerry Brown’s roller coaster budget into a nosedive.  Recent opinion polls show support for Brown’s Proposition 30 tax rate increase has dropped to 48 percent.  And there are good reasons why.

The way California’s general fund budget is managed is to rely on giant upswings in unpredictable capital gains taxes every year.  Alternatively, a voter-approved tax increase is factored into budget revenue predictions if an economic recession indicates that capital gains tax revenues will be small.   Once a new higher revenue level has been established, then the budget is “balanced” high.  But the budget can be balanced low just as well as high.

This is California’s tax-and-spend roller coaster budget.  It creates artificial structural budget deficits each year that have to be met by higher and higher tax revenues. Gov. Brown already included revenues from his proposed tax hikes from Prop. 30 in this year’s budget.

How the Public School Budget Deficit is Contrived

When financial and real estate markets or voter-approved tax increases don’t deliver the projected revenues, then California declares a budget crisis.  Declaring that K-12 public school budgets would have to be cut is the way the state socially constructs and manages a budget crisis.  It is never portrayed that it is the Medi-Cal or public pension funds that are running a deficit. Public school children are used as poster children every year for any revenue shortfalls in health and welfare programs, pensions, or bond debts.

Annual public school budget deficits are a public ritual. School budget deficits are also the preferred choice of liberal policy makers, not a reflection of the stinginess of the taxpayers or conservative lawmakers. A “structural budget deficit” is always a public school budget deficit. But there is another apparent reason why the public schools are portrayed as the line item in the state budget that is running a deficit: the voter-mandated funding formula from Proposition 98 over-funds public schools.

How do we know public schools are over-funded?  Well, the California Teacher’s Association is suing the state to get paid back $3 billion that the state borrowed from the state education fund in 2004-05 to plug the general fund deficit in return for jobs protections for core teachers.  In other words, in the last seven years, public schools have lost up to $3 billion without having to lay off any core classroom teachers.

Additionally, in the past five years, total enrollment in state public schools has declined 1 percent and is projected to decline even further. But the budget formula for funding public schools is mostly based on a percentage of the state general fund budget, not on the overall attendance level.

Prop. 98 guarantees public schools about 43 percent of the state general fund budget.  What was cut out of the public school budget since 2009 is all the fluff of political earmarks — artificial jobs programs — that saved local school budgets but didn’t hurt the academic performance of the poor.

California’s General Fund budget was $102.98 billion in fiscal year 2006-2007.  Forty three percent of that for public schools was $44.2 billion.  In 2012-13, the General Fund budget is $92.55 billion, of which roughly $39.8 billion is guaranteed for public schools.  This deceivingly indicates that public schools have lost $4.4 billion in funding.

Indicated Change in Base of General Fund on School Spending

Year	General Fund (billions $)	Percent Public Schools Under Prop. . 98 Formula	Public School Funding (est.) (billions $)
2007	$102.98	43%	$44.2
2013	$92.55	43%	$39.9

General fund

The only way for the state to manage general fund budget deficits with 43 percent of funds locked in for public schools has been to lower the base or floor of the general fund.  The apparent way the state has managed this has been to shift monies from the General Fund to Special Funds. If you can’t reform the budget beast, the only apparent alternative has been to starve it.

In the last five years, the General Fund budget revenues have decreased by $10.4 billion.  But the Special Fund budget has increased by $13.15 billion.  Many programs have been shifted into the Special Fund to make it appear the General Fund is running a shortfall in funding for schools.

Looking at the entire state budget picture, Federal Funds have increased $16.57 billion from 5 years ago.  And the total of all expenditures in the General, Special, Federal, and Bond Funds has increased $15.8 billion over the past 5 years.

Change In State Budget Levels Per Fund from 2007 to 2013

Years	General Fund	Special Fund	Bond Fund	Federal Fund	Net Change
2007-13	-$10.4	+$13.5	-$3.45	+$16.57	+$15.84
Source: California Dept. of Finance

In the above table, it appears that the hole in the state budget is in the Bond Fund. This would include the liability for public pensions. Retirement benefit costs have increased from $1.4 billion in 1999 to $6.5 billion this fiscal year.

Tax cliff

As the Wall Street Journal editorial “Jerry Brown’s Tax Cliff” succinctly states it:

“The most important single vote in America next Tuesday, after the Presidential race, is Governor Brown’s attempt to stick Californians with another giant tax increase.  Mr. Brown and his labor allies say Proposition 30 will fix the state’s budget deficit and ward off education cuts.  But the real choice before voters is whether to issue Sacramento’s incorrigible spendthrifts another blank check.”

The problem is not a lack of funds, but budget management policies that intentionally shift guaranteed funds away from public schools. These funding shifts may be used not only to plug intentionally created school budget deficits, but to backfill unfunded pension liabilities or gaps in Medicaid caused by Federal Social Security Disability policies.

California’s voters are being taken on a roller coaster ride without a seat belt. They should be prepared to hold on for their life and their wallets.  The state “structural” budget deficit is not bad fate from uncontrollable market downturns, but a choice.

Voters also have a choice at the ballot box on Nov. 6.