The controller’s office in August published an audit of the account that collects tax revenue generated from both a temporary tax on annual incomes of $250,000 or more and a quarter-cent sales tax and then disperses the funds to K-12 school districts, charter schools and community college districts.

With the exception of a $59.7 million accounting error the Department of Finance made when transferring funds (but is set to be corrected in an upcoming adjustment), the program was deemed to have used and accounted for the revenue appropriately.  

Still awake? Here’s some background

The Education Protection Account was created to ensure the money is used as intended — meaning to make it so lawmakers couldn’t raid education funds for other purposes — when voters approved Prop 30 in 2012. The audit was one of several accountability provisions.

The audit noted that the $59.7 million error did not affect funding to schools because of another law (Prop 98), which guarantees a certain level of education funding. The Department of Finance told the Controller’s office the error did not hurt schools because the Prop 98 guarantee was met through other accounts.

The fact that the guarantee was met regardless of the error raises questions about the need for Prop 30. But a spokesman for the Department of Finance said Prop 30 has “provided a direct benefit to schools” since it provided additional revenue streams and increased the amount of the Prop 98 contribution.

And while $59.7 million is a lot of money, it’s only a fraction of how revenue much Prop 30 has generated. Since its inception in 2012, it’s estimated to have generated around $31.2 billion.  

Why is CalWatchdog telling me this?

In April, CalWatchdog discovered the Education Protection Account had not been audited, despite the fact that voters are set to consider a 12-year extension in November (it’s now called Prop 55, and the extension is coming two years early).

Prop 55 would only extend the income tax provision, while the sales tax provision will expire in two years.

Why audit this obscure account and not how the schools are spending the money?

Auditing this account is important because it verifies that lawmakers (or anyone else for that matter) weren’t dipping into Prop 30 funds. The audit could also catch something like a $59.7 million accounting error.

And other audits have been done. There’s actually plenty of audits of the different school districts, charter schools and community college districts located on the controller’s website.

Isn’t more education funding a good thing? Seems like a no-brainer.

The Prop 30 and Prop 55 debate has never really been about the need for more education funding. Instead, it has to do with the source of the funding. 

Many experts, including Moody’s, Standard & Poor’s and Gov. Jerry Brown’s budget, argue the state is too reliant upon income tax revenue from top earners, mainly because of its volatility.

In fact, nearly half of the state’s revenue comes from the top one percent of earners (approximately 150,000 individual tax filings). Critics of Prop 30 and Prop 55 say these measures only perpetuate the problem.

Also, Prop 30 was billed as a temporary tax. But if it Prop 55 passes, it would extend the program until 2030, which critics say is not “temporary.”

Of course, if voters down Prop 55 in November, the program will expire in 2018. There would certainly be a loss of revenue for schools (and healthcare), but Brown said he’s prepared to proceed either way.  

By Brian Calle

CalWatchDog.com’s Katy Grines reveals the wealthy activist who is not only behind Proposition 39, but who is most likely to profit from its passage. For more information, check out our articles on Prop. 39 at CalWatchDog.com.

By Dave Roberts

California’s governing process is broken. Just some of the maladies afflicting Sacramento: Perennial billion-dollar budget deficits. Endless tax hike demands. Hyper-partisan legislation and bickering. All-day and late-night sessions in which barely read gut-and-amend bills are rushed through on party line votes. And the perception that unions are actually calling the shots.

Proposition 31 doesn’t aim to be the cure-all, but it is a step in the right direction, according to Bill Hauck. He’s a board member of California Forward, the government reform organization sponsoring it. Prop. 31 is multi-faceted and complex, but it essentially takes some power away from the state Legislature and gives it to the governor and local governments, while also creating new regional quasi-governments. Hauck presented the case for Prop. 31 at a recent informational hearing of the Assembly Budget Committee.

“I don’t think it’s any secret to any of you that voters and citizens in California believe that Sacramento is broken, and in many instances badly broken,” said Hauck. “It’s not functioning in the best interests of all of our citizens. Proposition 31 is a modest but good first step toward bringing our state’s governmental functions back to a level of functionality that will work for our citizens.”

One of the main reforms is two-year, performance-based budgeting with regular reviews of the effectiveness of state programs.

“If you hearken back to your discussion [earlier in the hearing] on Proposition 30, the entire discussion revolved around spending,” said Hauck. “There was absolutely no discussion about performance of programs. Nor was there any discussion about outcomes that generate from the billions that you all appropriate each year to all of these programs. And I would expect that you would appreciate sitting in budget committees here in Sacramento with the legislative analyst being able to speak to you about the performance of a program or outcome of a program in relation to your priorities.

“We could raise every single tax we could think of in California and reduce spending at a level that we would all agree we shouldn’t reduce it, and there would still be not enough resources for the legitimate demands that could be put in front of this Legislature and the governor. Even when the economy comes back, that will be true. So this Legislature has always and will continue to function in an environment where resources are scarce. As a consequence, you all need the best information you can get on which programs are working and where you are getting the kind of outcome for expenditures that you need in order to establish priorities each year. We believe you need to look at this issue on a longer term basis. You need to get yourselves out of the situation where you’re constantly trying to plug a deficit.”

Provisions

Prop. 31’s reforms also include:

* Local governments would be allowed to devise plans for providing services to the public, including economic development, education, public health and social services. About $200 million of state sales tax revenue would be transferred to local governments to pay for development and implementation of the plans.

* Local governments would be able to create functionally equivalent alternatives for administering state programs financed with state funds. The Legislature (in the case of laws) and the appropriate executive agency (in the case of regulations) could reject those alternative provisions. Otherwise, they would be in effect for four years.

* Pay-as-you-go (or pay-go) restrictions would require the Legislature to show how bills that increase spending or decrease revenues by $25 million or more in any year would be paid for with either spending reductions or revenue increases or a combination of both. Exemptions to pay-go include bills authorizing one-time expenditures and those that restore funding to a program or agency whose budget was cut in response to a budget shortfall.

* All bills and amendments to those bills would be made public for at least three days before voting on them.

* If the governor declares a fiscal emergency and the Legislature does not act to resolve the emergency in 45 days, the governor can reduce General Fund spending enough to balance the budget, provided he does not cut spending that is required by the state constitution or federal law. The Legislature could override the governor’s cuts with a two-thirds vote.

Prop. 31 “goes against many of the status quo interests that exist in Sacramento,” said Hauck. “As a consequence, it’s become controversial. But I would argue that you all would be in much better shape if you began to function in the way that Prop. 31 would start you. The measure is not perfect. I don’t know of any measure that is perfect. But I think it has all of the right ingredients to get you going in the right direction, and most importantly to begin to restore the trust of Californians and voters in their state government.”

Attacks from the Left

Much of the 90-minute hearing consisted of attacks from the Left by committee Chairman Bob Blumenfield, D-Los Angeles, and Lenny Goldberg, executive director of California Tax Reform Association, which advocates for increased business taxes.

“The intentions are all good, there’s no question about that,” said Goldberg. “We do have a mess of a budget process. We do have a mess of a governance process in California. [But] I would argue that if you think we’re tied in knots now, what Prop. 31 does is to add another layer of knots that ties up the process here in a way that makes it more difficult to function rather than less difficult to function. One of the questions about having a flawed document, is that you’re putting it in the constitution. You’re not allowing flexibility about a number of important areas. You’re making this hard and fast constitutional language.”

Goldberg is particularly concerned about the pay-go provision because it makes it easier for the Legislature to make budget cuts, which requires only a majority vote, in order to pay for a tax cut or a new program, than it does to increase taxes, which requires a two-thirds vote, to pay for a new program. He argued that providing $200 million from the state sales tax to local governments to better provide services violates pay-go because it’s not offset by a tax hike or budget cuts.

19th century

Blumenfield asked Hauck what the exact problem is that Prop. 31 is trying to solve and how does it solve it.

“At the state level, we are trying to bring you out of the 19th century when it comes to how you go about doing your budget,” responded Hauck. “I don’t know of any other organization in the world, government or private, that does its budget the same way California does today. You enact a budget, which you all know is not in balance when you enact it. This has been true now for many years. And about three to four months later you have to go at it again. And by six months you’ve enacted some changes in the budget, either revenues or deductions, that you then have to revisit six months from that point when you get into a new fiscal year and the governor proposes a new budget.

“The fact that you are not planning the budget out over a longer period of time, that you are not reviewing spending and revenue probably even quarterly and adjusting either spending or revenue in relation to funds that are coming in, is a practice that businesses and other governmental organizations follow on a regular basis. California hasn’t followed that system ever. Other states have enacted performance and outcomes measures for their budgets, and have been very successful in doing that.”

Goldberg said he’s concerned about providing the governor the power to cut the budget during fiscal emergencies. The voters twice have rejected that idea, he said, calling it “unilateral” and “non-transparent.”

Blumenfield agreed, asking, “Are we ceding too much authority to the governor? And is the public losing in that process in their ability to oversight and judgment that we have through the vetting process in the budget? There’s always going to be a governor that you like or don’t like. This newfound power might be quite frightening, depending on if you like or don’t like the governor.”

Hauck responded, “I would disagree with that. This is a modest authority for the governor, which the Legislature has the ability to over-ride. The governor would also not be able to cut constitutionally driven spending. So what we’re talking about here is a small percentage of the General Fund. The idea here is if there’s no action at all, why do you want to get yourself deeper and deeper into the hole? We just continue to dig ourselves in deeper and deeper over the last 12 years, defying the rule of holes: when you get in one, stop digging.”

Attacks from the Right

But Prop. 31 has also come in for criticism by some on the Right who fear that its local government provisions for strategic action plans would establish regional budgeting that would rip off suburbs to fund big city waste. “Prop. 31 would end up with regional proxy governments around California that would require sharing tax revenues between wealthy and ‘disadvantaged’ areas,” wrote CalWatchDog.com’s  Wayne Lusvardi in a recent article. “Strategic Action Plans is a term for regional government like the socialized European Union, not like county governments in the United States.

“Prop. 31 would authorize the formation of SAP committees to undertake regional projects and programs.  A SAP would be run by a committee appointed by a group of local governments that wanted to run their own programs by their own rules.

“Such committees would not be miniature legislatures that could pass their own laws, however.  They would still have to appeal to the union-controlled California Legislature to relax rules or pool revenues for joint programs.  This is where the Legislature would mandate that every local regional henhouse would have to include a fox.”

After several other objections were raised at the committee hearing, an exasperated Hauck said, “If you like the status quo, don’t vote for Proposition 31. If you think things are working very well today in California, you don’t need to vote for this. We concluded that that’s not the case, and it’s not been the case for some time. I concede that this is not a perfect measure. Lenny raises a lot of things that are not likely to occur. But I understand why he does that. But he also concedes that all of the provisions in the measure are well intended. The idea here is to make this work, not to find the nits and nats that may need correcting.”

A recent Field poll indicates that Prop. 31 will be a tough sell. Forty percent said they intend to vote no, 21 percent said yes and 39 percent were undecided.

By Dave Roberts

Proposition 33 is either a common sense way to increase competition in the auto insurance market, thus lowering rates for many drivers, or a ploy to raise rates on those who can least afford to pay. Those were the main arguments in the Prop. 33 debate at last month’s hearing of the joint Assembly/Senate Insurance Committee.

There’s potentially a lot of money at stake if Prop. 33 passes. California had a $21 billion auto insurance market in 2011, accounting for 40 percent of all premiums collected by insurers in the state, according to legislative analyst Jeremy Fraysse. Insurance companies paid about $500 million of that into the state General Fund for the privilege of selling insurance in California.

Since 1988, insurance companies have been regulated by Proposition 103, which requires the state insurance commissioner to review and approve rate changes. Three main factors are considered in rate-setting: the driver’s safety record, the number of miles driven each year and the number of years the person has been driving. There are also 16 other optional rate-setting factors that companies may consider, one of which is a discount for motorists who remain with a company for an extended period of time.

Prop. 33 essentially does one thing: it allows drivers to switch from one insurance company to another and retain their continuous coverage discount with the new company. Currently the discount expires when the driver leaves his insurance company.

The measure also allows the discount to apply to certain motorists who have allowed their insurance to lapse based on the following criteria:

* Anyone whose insurance lapse was not more than 90 days in the previous five years for any reason.

* A lapse of not more than 18 months in the previous five years for those who are employed due to a layoff or furlough.

* Any lapse, regardless of how long, for those in active military service.

The continuous insurance discount could also be provided on a proportional basis based on the number of years in the previous five years that the driver was insured. For example, if a motorist had coverage for three of the past five years he could receive 60 percent of the continuous coverage discount.

The proponents say that Prop. 33 will be a boon to the average motorist looking to save on car insurance.

Discounts

“Consumers love discounts,” said Michael D’Arelli, executive director of the American Agents Alliance. “As an independent agent, I love to be able to pit carriers against each other to drive prices down. Under current law, companies cannot give you a discount for having prior insurance with another company. We think that’s wrong. We think consumers should be rewarded for following the law [requiring auto insurance]. And if they follow the law, they should be offered a discount. Companies should be able to lure you from your current company by offering you something better. We believe in that competition.

“Current law punishes the military. If you lapse your policy for a single day for any reason, you lose the discount. How does that help consumers? We also reached out to children living at home with their parents. Fifty percent of kids graduating from college can’t get work. What happens? They move home with mom and dad. They are probably still on their [family] policy in the first place. When they do leave the nest and get their own policy, under current law they don’t qualify for a persistency discount at all. Our initiative allows them to capture the same discount that the parents are entitled to, giving them a fresh start when they get out on their own.”

Helping the poor

Although opponents criticize Prop. 33 for hurting the poor, D’Arelli argued that many of the poor actually will be helped by the measure. Eighty-five percent of California drivers have auto insurance. About half of the remaining 15 percent have insurance for a while, then let it lapse, he said.

“As an insurance agent, I had a lot of customers who were very low income, and they would come in and pay cash every month dutifully. And often times these customers are making hard choices: Do I pay my auto insurance premium or do I feed my family? It’s understandable that they come in and out of coverage. Those people will be given a proportional discount. We thought we needed to create an inducement for people who have lost their insurance to come back in the marketplace. If they had insurance two of the last five years, they’ll get two-fifths of a discount. Today they get zero. They have no incentive, other than to comply with the law, to get insurance. We wanted to create an incentive for people who are currently uninsured to get service credits for the insurance that they actually did have in the last five years. That’s a marked improvement over current law.”

But the opponents aren’t swayed by that argument. They consider it a smoke screen for what they believe Prop. 33 actually does: remove the ban on insurers from charging higher rates to drivers who have not had insurance coverage.

“This was a specific provision that was a central anti-discrimination provision of Prop. 103,” said Carmen Balber, representing Consumer Watchdog. “Because insurance companies were using that factor alone to deny coverage for drivers or to price them out of the market. What isn’t justified, and what proponents haven’t been able to show, is that there is in fact any sort of reduced risk for drivers simply because of a history of prior insurance coverage.”

Playing the race card

Richard Marcantonio, representing Public Advocates, implied that Prop. 33 is racist.

“The provision in Prop. 103 that Prop. 33 seeks to overturn was put in place to end rampant redlining in many low-income communities of color back in the 1980s,” he said. “And weakening that provision will definitely bring that discrimination back. There are estimated to be 3.5 to 4 million uninsured California drivers. About 50 percent of them live in just two percent of the state’s zip codes, according to a report by the California Department of Insurance. Those are characterized by very low median incomes and by minority populations of 65 percent or greater. So any burden on uninsured drivers as a group is going to fall disproportionately on the lowest income drivers of color.

“Proposition 103 [mandates that] you can’t exclude drivers just because they have previously been uninsured, and you can’t charge them more for that reason. That protection will be lost if Prop. 33 passes. And that is why this is an issue of such great importance to many civil rights groups that remember that history.”

Marcantonio also argued that insurance companies will have to raise rates on the uninsured because they will need to recoup the lost revenue from the discounts they are expanding to continuously insured motorists.

“By expanding the pool of those eligible for the discount, the impact on those two percent of California communities who have long been plagued by this redlining practice is going to be even worse that it would under Prop. 17.”

Prop. 17 was a precursor to Prop. 33, which did not expand the discounts as widely as Prop. 33 and which was rejected by voters.

But Steve Lehmann, an actuarial consultant for the Yes on Prop. 33 campaign, refuted the allegation that insurance companies would have to raise rates on previously uninsured drivers. He said that an insurance company’s lost revenue from expanding discounts for those with prior coverage would be offset by the reduced risk of loss that those motorists provide.

“This company has to go to the California Department of Insurance and file statistics to justify that those people who have a long history of continuous coverage have lower losses and present a lower risk to the insurance company,” he said. “They will have a decrease in their premiums, but they will also have a decrease in their losses to charge those rates.”

That resonated with committee member Sen. Ted Gaines, R-Roseville, who argued that Prop. 33 will actually be fairer to motorists who play by the rules and obtain insurance.

“I think what’s happened as the result of Prop. 103 is that the cost shift has gone to the 85 percent who are insured in order to reduce the rate to the 15 percent who are not,” he said. “Even if the statistical risk is higher for the 15 percent who are not [insured]. If you’ve got a good driving record and are developing a discount that can be proven actuarially as a result of keeping your coverage in effect for periods of time, why shouldn’t you have that ability to shop the market and get the most competitive rate amongst your competition?”

An Oct. 11 California Business Roundtable poll shows Prop. 33 winning handily 54-34 percent with 12 percent unsure.

By Brian Calle

CalWatchDog.com’s Capitol reporter, Katy Grimes, describes what’s really going on with Proposition 31, a budget initiative.

By Wayne Lusvardi

On Nov. 6, voters face a number of  initiatives on the ballot targeted at California’s endemic budget and tax problems. All promise reforms embraced by both liberals and conservatives.  Some even are being marketed as libertarian reforms.  Here’s a rundown.

Props. 30 and 38 tax increases

Proposition 30 is called, grandly, the Schools and Local Public Safety Protection Act of 2012. And Proposition 38 is called, even more grandly, the Our Children, Our Future: Local Schools and Early Education Investment and Bond Debt Reduction Act.

Prop.  30 is Gov. Jerry Brown’s $8.5 billion income and sales tax increase, purportedly for public schools and police that mainly would tax the “rich.”

Prop.  38 is attorney Molly Munger’s proposed alternative, a $10 billion income tax increase on nearly all income levels except the poor to fund schools and pre-school programs.

Except that public schools have been overfunded the past few years. Some $4 billion was “borrowed” from public education to plug the state budget deficit since 2008.  Despite this loss of funding, no core teachers had to be laid off statewide.  In other words, public schools didn’t need the money.  On top of that, statewide enrollments in public schools have declined 1 percent and are projected to continue to decline.

The $4 billion borrowed from education funds was “internal borrowing,” not bonds.  These borrowings could be paid back in the long run with cost savings by shifting from politically protected “categorical” jobs programs for ancillary school personnel to block grants.

Sure, taxes from either Prop.  30 or 38 will go to public schools. But that would only free up already guaranteed education funds for other programs that are running deficits.  This is called “fungibility”: funds are interchangeable and can be used for education, social services, or road repairs.

School children are only political poster children to fund less popular programs such as Medicaid and public employee pensions. President Obama’s policy of shifting 1.5 million of the unemployed nationwide to Social Security Disability has put a $5 billion hole in California’s general fund budget, by this writer’s estimate.  Brown’s and Munger’s school tax proposals are just false fronts to cover up Obama’s financially ruinous policies to California, along with paltry state pension reform.

Proposition 98 already guarantees public schools about 43 percent of the entire state general fund budget no matter if attendance is declining or they didn’t even need $4 billion over the past few years.  Voters need to be informed that Props. 30 and 38 do not specifically earmark new funds for public schools.

Prop.  31 on the budget

Proposition 31 is called the Government Performance and Accountability Act. It promises five budget reforms:

1. A two-year budget cycle instead of annual budgets;

2. A requirement to identify funding for all legislative bills more than $25 million;

3. Authorization for the governor to declare a fiscal emergency;

4. Authorization for the governor to exercise line-item budget veto;

5. Requires performance budgeting in all state agencies.

The undisclosed problem with all of the above so-called reforms is that they already are on the books or can be implemented without voter approval or a constitutional amendment.   They are just an enticement to entice voters into approving the creation of an unelected new layer of government called Strategic Action Plan Committees — SAPs.

These committees supposedly would be able to relax environmental laws and other regulations to get public projects and programs done more cost effectively.  But then why do we need such phony committees in the first place?  Why not just deregulate the revenue sharing funds that flow from Sacramento to local cities and counties?  What Prop. 31’s Strategic Action Plan Committees are all about is tax sharing between financially strapped big cities and wealthier suburbs.

Let’s look at just the provision in Prop. 31 that funding needs to be identified before passing any bill in the legislature of $25 million or more.  This can be so easily gamed by creating only $24.9 million expenditures, fudging the numbers of spending cuts to afford new programs, using projected revenues that never materialize for new spending programs, and padding expenditure bills so that the governor can appear to reduce them with his veto.

Prop. 31 is a pretense for elites to grab public funds away from local governments for their pet projects and programs.  It would undermine representative government and the cost savings are artificial.

Proposition 39: Interstate protectionism

Proposition  39‘s title seems so wonderful: the Tax Treatment for Multistate Businesses, Clean Energy, and Energy Efficient Funding Initiative Statute.

It is a proposition being funded by another billionaire, “hedge-fund king” Tom Steyer, who has bankrolled it with $20 million.

Prop. 39 is a sort of new version of the Smoot-Hawley Act of the 1930’s that was blamed for triggered the Great Depression. The Smoot-Hawley Act raised U.S. tariffs on imported goods.  Likewise, Prop.  39 will increase taxes on out of state businesses trading with California.  Ballotpedia.com more accurately calls Prop.  39 the “Income Tax Increase for Multistate Businesses Initiative.”

Prop.  39 supposedly would level the playing field between businesses inside and outside of California.  But it would be ripped off by well-connected elites, such as Tom Steyer, to reap a windfall on overpriced alternative energy schemes. This will only add to the cost of higher energy under California’s Cap and Trade program to be rolled out in January 2013.

And it will raise the price of consumer goods from out-of-state suppliers.  So Prop. 39 may close a $1 billion tax “loophole” in “lost” revenues for California.  But this would be offset by increased costs for electricity and consumer goods from other states.

In short, the November election gives voters a choice on how they will structure state finances for years and even decades to come. Let’s hope they choose wisely.

By Wayne Lusvardi

When I recently spoke before an Orange County crowd of Republicans at a ballot forum as the “No on Proposition 31” speaker, I was not surprised to find opposition.  One person offered the observation that it was all those “country club Republicans” that stood to benefit from the corporate welfare of Prop. 31 who were in favor of it.  To the contrary, it is libertarian ideology that has blinded Republicans to what Prop. 31 really is all about.

Orange County has one of the most libertarian cultures in the United States.  Until recently, ts newspaper, the Orange County Register, was owned by libertarian R.C. Hoiles and his descendants. Its editorial page still has a libertarianphilosophy.

Orange County has had one of the few elected libertarian judges in the United States, Judge Jim Gray, who now is running for vice president as a Libertarian Party candidate. Orange County has a government water district that runs itself as a business and invests in real estate and stocks to reduce water rates.  Orange County has built its own tollways, instead of depending on Caltrans.  But more importantly, the entrepreneurial business culture in Orange County has always had a libertarian tilt to it.  Which brings us back to why Orange County libertarians would support Prop. 31. 

Prop. 31 is a Confidence Game

Perhaps the answer can be found in Tom Sowell’s column, “The Confidence Man,” from last week:

“The role of a confidence man is not to convince skeptics, but to help the gullible believe what they want to believe. Most of what Barack Obama says sounds very persuasive if you don’t know the facts — and often sounds like sheer nonsense if you do. But he is not trying to convince skeptics, nor worried about looking ridiculous to informed people who won’t vote for him anyway.”

What Prop. 31 would do is give libertarian-minded Republicans what they want to hear.  It promises:

* A two-year state budget cycle;

* New state laws of $25 million or more must identify the source of their funding;

* The can call a fiscal emergency and cut line items out of the budget;

* Performance budgeting would be required in all state agencies;

* State programs and projects could be deregulated if local governments join in forming regional “Strategic Action Plan” committees.

It’s what libertarian Republicans want to hear.  But it’s all phony.  None of the above provisions of Proposition 31 needs to get voter approval or a constitutional amendment to be implemented right now.

A two-year budget cycle can be done without voter approval.  And Prop. 31 does shift the start of the state government’s fiscal year to October 1 from July 1 to give more time for budget negotiations and review.

Gaming the system

The provision to identify sources of funding before passing a bill of $25 million or greater can easily be gamed by an irresponsible Legislature.  The Legislature can get around this provision by using some of the same budget gimmicks they use now, such as: creating programs that cost $24.9 million; fudging the numbers on spending cuts; using projected revenues from capital gains taxes that never materialize to fund new programs; and padding expenditure bills so the governor can use his line item veto to give the appearance he cut the bill in half.

The California Constitution already grants the governor a line item veto and authority to declare a fiscal emergency.

As someone who once zero-base budgeted a county agency in Los Angeles, I can say without a doubt that performance budgeting will only end up creating another costly layer of bureaucracy that will offset any cost savings.

Forming new unelected regional committees is not needed. The State Government Code already provides for the creation of Joint Powers Authorities to do regional projects and programs.

Now what social psychologists call “cognitive dissonance” is kicking in to all those libertarian readers.  Cognitive dissonance is a concept that one’s beliefs get stronger, not weaker, when presented with contradictory evidence.

Regional Government is Democratic Party “Dream Come True” 

Behind Prop. 31 is the California Forward political reform organization.  One of the co-chairpersons to Cal Forward is Robert Hertzberg, former speaker of the Assembly.  In 2002, Hertzberg created the Commission on Regionalism.  The Commission issued a report, the “New California Dream: Regional Solutions for 21st Century Challenges.”

The report is full of buzzwords meant to mask its purpose of calling for coerced tax sharing between Big Blue cities and Little Red suburbs.  Prop. 31 is the product of Hertzberg’s “California Dream” of usurping local governments with new unelected regional governments.  The Strategic Action Plan committees created by Proposition 31 would be the culmination of this socialist dream.

For those who still aren’t persuaded, there is a real world model of Prop. 31 already operating in California. It is Senate Bill X2-1 by Don Perata, D-Oakland, the Water Quality, Flood Control, Water Storage, and Wildlife Preservation Act of 2008.

SB X2-1 was originally enacted as SB 1672 in 2002, the same year that Robert Hertzberg was Assembly Speaker and issued his regionalism study.

SB X2-1 has a provision to include “Regional Water Management Groups,” which are similar to Prop. 31’s “Strategic Action Committees.”  SB X2-1 mandates that such groups be composed of the “disadvantaged, environmental and social justice organizations” and must be cut in on at least 10 percent of the action in order for a regional project to get water bond funding. These groups are funded in 48 accepted regions under the “Integrated Regional Water Management” program of the Financial Assistance Branch of the California Department of Water Resources.

Since 2002, “Regional Water Management Groups” have received $1.8 billion in water bond funds to serve “disadvantaged communities” that do not have safe drinking water, as well as other projects.  Illegal trailer parks that have violated local land use laws can get water piped to their door steps on demand at the state taxpayer’s expense.  This money has gone for vague planning and water management activities of these groups, not for hard water infrastructure.

Moreover, since “disadvantaged” groups are likely those low-income households that do not pay income or property taxes in California, they are not even stakeholders.  Some are apparently scofflaws as to local zoning and subdivision laws.  SB X2-1 is a wealth transfer program masquerading as a local citizen participation water management program.  For those who want to see how Prop. 31 would work, look no further than SB X2-1.

The Political Costs of Prop. 31

Under Prop. 31, regional public transit projects would likely have to pay a legal bribe to a Strategic Action Plan committee to get project funding.  As a condition, they may also be required, for example, to accept an affordable housing project in their community to get funded.

Prop. 31 creates no new taxes.  Neither would SAP committees be mini-legislatures allowed to make their own laws.  They would still have to appeal to the union-controlled Legislature to get laws relaxed.  But the Legislature is likely to mandate that disadvantaged persons and union representatives be put on the regional SAP committees.

Culture and ideology, not only power politics and legislation, are still a powerful force in California.  It can be expressed as a socialist dream of regionalism.  Or in a Republican notion that a last bastion of libertarian-oriented government can be maintained in a political environment where Republicans have been reduced to irrelevancy by redistricting and the elimination of their blocking power in the Legislature.

Republicans seem to not have caught on that Prop. 31 is not about good government reforms.  It is about co-opting Republican local government.  Co-optation under Prop. 31 means revenue sharing by coercion (“join us or we will punish you”).  Apparently, many Republicans are willing to say, “If you can’t beat them, join them.”  Prop. 31 is targeted at neutralizing libertarian-oriented government, with Orange County as the bull’s eye.

And that is why the Democratic Legislature and governor are holding siege over four communities in Riverside County and withholding revenue sharing of vehicle license fees.  Once dissolved, these cities will be ripe to be manage by regional government committees under Prop. 31.

Prop. 31 is a tax-sharing scheme for deficit-plagued big cities and school districts to be bailed out by the suburbs. It would undermine representative government and create another costly layer of unaccountable government. The proverb “be wise as a serpent and innocent as a dove” would seem to apply to those considering how to vote on Prop. 31.

By Wayne Lusvardi

Carles B. Warren, a real estate economist and appraiser in Pleasant Hill, California, asks: “In the Los Angeles region, who will be Greece and who Germany” if California voters approve Proposition 31 on the November ballot?

Warren once was a visiting professor at Istanbul Technical University in Turkey. He was referring to the European Union, where solvent Germany has been bailing out the overspending of Greece, Italy and other countries.  After more than a dozen years of regionalized money and shared taxes, the European Union is coming apart. Many countries are going bankrupt.

Something similar would eventually happen in California under Prop. 31, where the regionalization of taxes would just postpone the inevitable.

Prop. 31 is a Coercive Tax-Sharing Scheme

Prop. 31 is apparently intended for large public works projects such as the California Bullet Train.  Under Prop. 31, taxes could be pooled regionally to help fund large public works projects.  Under Prop. 31, environmental regulations and clearances could be drastically reduced or circumvented to overcome delays, lawsuits, and obstructionism.  But Prop. 31 could also be used for smaller local projects or the bailouts of insolvent cities or school districts.

Under the tax-sharing provisions of Prop. 31, suburbs could be coerced to “voluntarily” share a portion of their state road, school, and vehicle license tag revenues or forfeit them.  Unelected regional committees called Strategic Area Plans could divert the shared or forfeited taxes to plug budget and pension deficits in big cities and big school districts.

SAP committees would add an extra layer of government and its members would not be elected. They would not be authorized to raise new taxes. But they could shake down wealthy suburbs to pay for financially strapped cities and school districts.  And they could pledge confiscated tax revenues to pay for bond issues for public projects.

City councils, county boards of supervisors, and school districts mostly in the suburbs would lose home rule over zoning, transportation, housing, and even a portion of their property and income taxes for public schools. Unelected committees would determine spending priorities and how much money would be spent on affordable housing and where.

Additionally, such super committees could recapture a portion of property and income taxes from wealthy school districts that approved supplemental school parcel taxes and divert them to struggling school districts. A prime example would be wealthy school districts in Carlsbad or La Jolla in San Diego County sharing their property taxes with the Poway Unified School District and its $1 billion deferred interest on “capital appreciation bonds.”

Mostly wealthy school districts in Northern California that approved school parcel taxes could likely have an offsetting share of their property and income taxes diverted to “poor” school districts in Southern California.  Northern Californians that don’t like their water flowing to Southern California would end up having their share of school taxes flow south, too.

The above is not far-fetched speculation and hysteria. Former State Assembly Speaker Robert Hertzberg is the co-chairperson of California Forward, the sponsor of Prop. 31. In 2002, Hertzberg spearheaded a study, “The New California Dream: Regional Solutions for 21st Century Challenges,” proposing the financial regionalization of local governments by way of a voter-approved constitutional amendment.  Prop. 31 is the culmination of what that report inferred was Hertzberg’s “dream.”

Diluted Government and Voting

As Warren puts it, Prop. 31 would result in the “dilution of representative government, the dilution of voter power, decisions made regionally rather than locally, and the redistribution of tax revenue beyond what is already built into the system.”

Why? “Because some cities and school districts, usually in older central areas, can’t control spending, pensions being a salient example. Prop. 31 is basically a covert bailout initiative.”

Warren points out that this problem has been around for decades.  He says, “Even before President Lyndon B. Johnson’s War on Poverty in the 1960’s, government has attempted to solve problems in central cities without success, but at great expense.  The literature promoting regional government goes back at least to the 1950s. Greater expense is unlikely to yield greater success. In fact history suggests that top-down decision making is more likely to spread high priced failure.”

Numbers Transposed: Prop. 31 is Prop. 13 in Reverse

Proposition 13, the 1978 tax limitation initiative, has served as a circuit breaker against both monetary inflation and falling property values. Warren points out that, under Prop. 13, property tax revenues have grown faster than inflation.  Moreover, since the 2008 Mortgage Market Meltdown and Bank Panic, property tax revenue has fallen more slowly than property values.

But Prop. 31 would be Prop. 13 in reverse, both numerically and fiscally.  This is because Prop. 31 would circumvent the supermajority vote requirements of Prop. 13 by tapping taxes from other cities without any requirement for voter approval.  No new taxes would be raised. Suburbs would just have a share of their existing taxes siphoned elsewhere.

Suppose Santa Monica Thinks It Will Be Switzerland

Like Prop. 31, the European Union involves fiscal regionalization, while leaving existing political boundaries and governments in place.

According to Warren, it is the opinion of the Economist magazine that the weakness of the European Union has been the enforcement of fiscal discipline on the Southern and other high-spending governments.  That is because fiscal regionalization — tax sharing — creates what is called the “free rider” problem, where weaker economies have no incentive to grow and only want to live off the wealthier economies.

The way Warren puts it: “Voila! — Greece.” In the pre-European Union era, the Drachma, Greece’s currency, had higher interest rates than the German currency, the Deutsche mark, to capitalize currency depreciation. The same things happened with Italy and, to an extent, France.  Locking them all together without enforceable means of controlling their taxation and spending only worked in good economic times, however. We’re now seeing the consequences.

Warren adds: “To an extent our federate system shares the same problem.  State by state and region-by-region, some gain and some lose by participating in the American Union. That is not what the European Union said it intended, but it’s what it’s getting.”

California cities, counties and school districts would be subject under Prop. 31 to the same predations and free riding as those in the European Union.

Some cities might think they can remain neutral like Switzerland, which is not part of the European Union. But under Prop. 31, a city such as Santa Monica or San Francisco could opt out of regionalized “Strategic Area Plans,” but at a price. They would likely have to forfeit a share of their road revenues.  Or wealthy school districts with supplemental school parcel taxes might have to forfeit an offsetting share of their school property taxes.

This is how revenue sharing of H.U.D. Community Development Block Grant funds works now in California.  Those cities that do not meet their affordable housing quotas have their share of Block Grant funds diverted to less wealthy areas. The mechanism the state uses to confiscate such funds is the Housing Element of a city’s General Plan.

So there would be no escaping the confiscatory policies of Prop. 31 by voluntarily opting out of a Strategic Area Plan. There would be no equivalent to a neutral Switzerland in the European Union under Prop. 31.

Once again, which California cities will be Greece and which Germany under Prop. 31?

By Wayne Lusvardi

Despite regionalization failing miserably in the European Union, California is proposing to adopt it as a tax-sharing policy for distributing state funds to local governments if voters approve Proposition 31 on the November ballot.

Prop. 31 is a combined new law and state constitutional amendment sponsored by the California Forward political action group.  Nicolas Berggruen, a European billionaire, is the biggest sponsor of California Forward with a $1 million donation to the pro-Prop. 31 Campaign.  Berggruen owns the IEC College of vocation schools in California and is a registered Democrat in Florida.  He founded the Council for the Future of Europe, which has proposed “fiscal federalism and coordinated economic policy” to rescue the European Union from its debts.

Regionalism Will SAP Revenues from Suburbs to Cities

Urbanologist Wendell Cox writes that “regionalism” is an emerging policy of the Obama administration, as described in Stanley Kurtz’s new book, “Spreading the Wealth: How Obama is Robbing the Suburbs to Pay for the Cities.” Kurtz is a social anthropologist from Harvard.

Prop. 31 will not result in new regionalized governments. Rather, it will end up in what Cox calls “fiscal regionalism” run by a committee.  The tax-sharing facets of Prop. 31 are:

1. “Granting counties, cities, and schools the authority to develop, through a public process, a Community Strategic Action Plan for advancing community priorities that they cannot achieve by themselves.”
2. “Granting local governments that approve an Action Plan the ability to identify state statutes or regulations that impede progress and a process for crafting a local rule for achieving a state requirement.”
3. “Providing some state funds as an incentive to local governments to develop Action Plans.”
4. “Implement the budget reforms herein using existing resources currently dedicated to the budget processes of the State and its political subdivisions without significant additional funds. Further, establish the Performance and Accountability Trust Fund from existing tax bases and revenues. No provision herein shall require an increase in any taxes or modification of any tax rate or base.”

According to Cox, regionalization strategies are “aimed at transferring tax funding from suburban local governments to larger core area governments.”  The Prop. 31 version of regionalization would not amalgamate city, county, special district and school district governments. Nor would it create new taxes. But it could authorize the state to withhold or divert taxes from local governments unless those governments adopted a “Strategic Action Plan” to distribute the revenues from the suburbs to the large urban cities.

In essence, a Strategic Action Plan, or SAP for short, would sap the wealth out of suburbs. SAPS might also sap the bond ratings from suburban communities.

Governor Would Become “Emergency” Czar

Probably one of the most controversial provisions of Prop. 31 would grant the governor the power to cut or eliminate any existing program during a “fiscal emergency.”  In essence, the governor could usurp local government decisions on where to spend state funds.

Budgets for local public schools, community colleges or cities could be cut at the whim of the governor and the funds diverted elsewhere.  The governor could conceivably use new emergency powers to divert state funds to his choice of regional Strategic Action Plans.

Why Democrats and Unions Oppose Prop. 31

Public unions have historically been concerned about granting the governor broader emergency powers.  On July 11, 1999, the Gov. Gray Davis administration called legislative committee chairpersons to inform them that the governor intended to direct the outcomes of selected funding bills without consulting their authors or the legislature.  The leaders of the legislature at that time — Assembly Speaker Antonio Villaraigosa, D-Los Angeles and Senate President Pro Tem John Burton, D-San Francisco — called Davis’ actions a “totally improper intrusion into the legislative process.” The concern was that Davis was going to kill a bill sought by labor unions to increase workers’ compensation benefits.

This explains why the Democratic Party is currently opposed to Prop. 31 giving the governor emergency powers over the budget. Also, any consolidation or revenue sharing arrangement of local governments might lead to the heads of local unions losing their jobs if absorbed into a larger union.

Why Republican Party Wrongly Endorses Prop. 31

Oddly, the California Republican Party supports Prop. 31. This is because Prop. 31 is being misleadingly advertised as a government budgetary efficiency measure.  But a two-year budget and performance budgeting do not need the approval of voters to be implemented.

Budget analyst John Decker in his book, “California in the Balance: Why Budgets Matter,” draws on an example from the Schwarzenegger administration to explain why a voter initiative is not needed for Prop. 31, except for the tax sharing provisions:

“Amid much fanfare the year after his election, Governor Schwarzenegger announced the results of a year long internal effort to find efficiencies in government known as the California Performance Review.  Though most of the recommendations made could be implemented administratively, few were actually taken in the form proposed.”

Local governments can form “joint powers authorities” in California without Prop. 31 and make their own decisions about revenue sharing.  In an email to this writer about Prop. 31, Wendell Cox stated: “State law permits Joint Powers Authorities and this is all that is needed.”

Tea Party Rightly Opposes Prop. 31 Despite Paranoia

The proponents of Prop. 31 may say that the Tea Party and those opposed to fiscal regionalism are over-reacting to its provisions.  But why are the proponents trying so hard to sell Prop. 31 as a budget reform and government performance measure with little mention of its tax-sharing provisions?

The East Bay Tea Party has more accurately perceived the dangers with Prop. 31 as the creation of a “super” layer of government that cannot be held accountable by local government elections.  Unfortunately, the paranoid Tea Party also fears that Prop. 31 would measure the “performance and accountability” of local governments by United Nations Agenda 21.

No doubt this sort of paranoia reflects the powerlessness and political marginalization of the Tea Party’s members in California. But such paranoia gives the opponents of the Tea Party reasons to discount them as “wing nuts” not to be taken seriously.

California Forward Hides Tax Sharing Part of Prop. 31

California Forward is selling Prop. 31 to the public as “trustworthy, accountable for results, cost-effective, transparent, focused on results, cooperative, closer to the people, supportive of regional job generation, willing to listen, thrifty and prudent.” The touted provisions of Prop. 31 call for a “two-year budget cycle” and for “performance budgeting.” Prop. 31 is officially titled “The Government Performance and Accountability Act.

California Forward makes no mention in its filing or in its official ballot argument in favor of it that Prop. 31 will socialize state revenue sharing.  And the analysis of the California Legislative Analyst is so neutral and narrowly focused that it is does not help the public understand the importance of the tax-sharing aspects. The ballot arguments in favor and against Prop. 31 also ignore that it would socialize local government taxes by regions.

Commentariat Mislead About Prop. 31

It is amazing that California’s journalistic commentariat has, thus far, only been concerned that Prop. 31:

* Is a Trojan horse that would result in “tweaking” environmental regulations;

* Prescribes an “aspirin” instead of “surgery”;

* Is a “virtuous budget reform package that falls short;” but

* Would “restore our state to greatness.”

Wendell Cox is one of the few that has caught the magnitude of the problem of regionalism to our democratic form of government when he wrote, “[D]emocracy is a timeless value. If people lose control of their governments to special interests, then democracy is lost, though the word will still be invoked.”

In an email, Cox further wrote:

“In general, the idea of tax sharing is negative. This breaks the connection between local governments and taxpayers, as tax sharing governments are, by definition, not accountable to the taxpayers of jurisdiction with which they share taxes. Milton Friedman was right in saying something to the effect that people are more careful about with their own money than they are with other people’s money. This would be a very bad step for California, which already is suffering significant ill effects from insufficient fiscal responsibility.” 

Prop. 31 is Ripe for Abuse 

Safires’ Political Dictionary defines “tax sharing” as “collection of revenues by the (state) government, returned directly to the (local) governments without (state) control of expenditures.”  Prop. 31 would go beyond merely returning tax revenues to local governments without controls and conditions attached.  It would be prone to abuse for funding political cronies and political earmarks.

When former President Clinton proposed a form of revenue sharing in an economic stimulus bill, Republicans described it as political pork and successfully blocked it.  But in the California Legislature, the Republican Party no longer has any blocking power.  Prop. 31 would be prone to abuse because there are few checks and balances anymore in California’s new “Fusion Party.”

History indicates bureaucratic agencies have a way of not ending up as policy makers intended. There is no way of knowing whether Prop. 31 would end up as some form of “Tennessee Valley Authority” that would usurp local governments and would be self-perpetuating without any sunset provisions.

Voters on both sides of the political spectrum should be concerned about the implications of Prop. 31.