The Governor vs. the Flash Report

Joe Mathews — Wed, 08 Apr 2009 19:44:00 -0400

Wanna know what's driving Republican politics in California? It's not the Republican governor, or the Republican minority in the legislature. It's the Flash Report, the blog and web site run by Jon Fleischman, an Orange County political operative (and friendly acquaintance of your blogger) who is also an official of the California Republican Party. Flash Report posts often drive news coverage and radio talkers around the state.

If you doubt the Flash Report's power, check out the memo -- at the bottom of this item -- that is being distributed by Gov. Schwarzenegger's team and the campaign committee that supports the measures on the May 19 special election ballot. The memo, titled "Flash Report Myth-Fact," offers a direct refutation of multiple Flash Report posts criticizing the most important measure, Prop 1A, which would establish a new state spending limit and beef up the rainy day fund. The memo also provides a useful back-and-forth (sort of centrist vs. conservative back and forth) on the advantages and disadvantages of Prop 1A.

A related note: Northern Californians who have never met Jon (as one who disagrees with him on many issues, I must say that he's always terrific to talk with) will have an opportunity on April 21 in San Jose. New America and Joint Venture: Silicon Valley Network are hosting an event on the special election measures, and both Fleischman and your blogger are scheduled to be a part of a panel discussing the measures.

"Flash Facts About Proposition 1A

There have been a lot of columns on the Flash Report over the past month regarding Proposition 1A filled with less-than-truthful accusations and assumptions. Everyone is entitled to their own opinion about the propositions, but the debate should be an honest and open one - one in which correct data and information is provided. This document seeks to correct the record and provide accurate information about this measure.

Myth #1
President of The Howard Jarvis Taxpayers Association Jon Coupal: "While they admit that they have no control over their spending impulses the solution they offer would actually allow continued increases in spending without any connection to the taxpayer's ability to provide revenue. Proposition 1A ties spending to income, income which can be increased under the measure through new taxes. The State Constitution already requires a balanced budget, so the only effect would be a reiterate the same requirement, one that is already being ignored with impunity." (John Coupal, Howard Jarvis Taxpayers Association And Michael Reagan, "As A Spending Limit, Prop. 1A Does Not Cut It," Flash Report, 3/30/09)

Fact:
California taxpayers are protected against taxes by the 2/3 vote requirement. Prop 1A does nothing to change this protection. In fact, Prop 1A should reduce the pressure for tax increases over time by forcing the state to save money into the rainy day fund during the boom years to ensure that reserves are available during economic downturns.

Myth #2
Insurance Commissioner Steve Poizner: Prop 1A does nothing to change the fiscally irresponsible approach that is the cause of our chronic budget deficits. Instead, it will cost Californians jobs and hurt small businesses at a time when the state's unemployment rate is already at a staggering 10.5%. (Jon Fleischman, "Poizner Calls on California Republican Party to Oppose Proposition 1A, Flash Report, 3/24/09)

Fact:
Prop 1A puts into place all of the following fiscal reforms:

Prevents overspending revenues in the good years on ongoing programs by mandating that revenues above the 10-year trend line be redirected to first build up the rainy day fund (budget reserve) and then to fund ONLY one-time expenses such as tax rebates, paying down debt or funding an infrastructure project;
Increases the rainy day fund from 5% of the General Fund to 12.5 % of the General Fund;
Mandates an annual 3% transfer to the rainy day fund PLUS transfer of revenues above the 10-year trend line;
Can only be modified by a vote of the people;
Constitutionally limits the ability of the Governor to suspend/reduce the rainy day fund transfer;
Limits the ability of the Governor to withdraw money from the rainy day budget stabilization fund to emergency uses, such as a fire or flood; and
Creates new authority for the Governor to reduce spending during the fiscal year without legislative approval.

Myth #3
Ben Zycher, Fellow With The Pacific Research Institute: "The language allows the governor to suspend or reduce transfers into the BSF for any fiscal year upon issuance of an executive order, and there is no limit on that power; given the spending pressures that exert themselves upon any California governor, it is likely that such executive orders will become the norm rather than the exception." (Ben Zycher, "FR Interview With Economist Ben Zycher Who Says The Measure Does Not Deliver On A Promise Of A Real Spending Limit," Flash Report, 3/6/09)

President of The Howard Jarvis Taxpayers Association Jon Coupal: "But Proposition 1A fails in its promise to provide a real spending limit for California. How can it, when the Governor can suspend transfers into the budget stabilization fund simply by issuing an executive order? How can this be characterized as imposing 'spending discipline' if the spending limit will automatically be adjusted upward for new taxes?" (Jon Coupal, "Governor, You're Not In Hollywood Anymore," Flash Report, 3/16/09)

Fact:
Prop 1A is a constitutional amendment that does not include a suspension provision. There is absolutely no way for the Legislature or the Governor to unilaterally suspend it. In fact, it would take another vote of the people to change it - the Legislature and the Governor could not act alone to alter it.

It is also drastically different from Proposition 58, which provided a lot of loopholes for the Governor and Legislature to avoid its requirements - namely it made transfers to the rainy day fund optional, not mandatory. Prop 1A does not contain this kind of provision and makes the conditions for transfers into and out of the rainy day fund mandatory so that they are not subject to political pressures.

In regards to the spending limit increasing upward for new taxes, the trend line based on revenues will increase only if the Legislature enacts a permanent tax increase and then only after it is in place for ten years. The Proposition 1A revenue limit doesn't make it any easier or more likely to raise revenues, compared with today. Indeed, if spending is already at the revenue cap, a tax increase would be difficult to justify since the proceeds of the new taxes would be deposited in the reserve.

Myth #4
Lewis K. Uhler, President, National Tax Limitation Committee: "Furthermore, the Prop. 1A spending cap will not, in itself, limit general fund spending. All that this cap does - if spending ever actually bumps up against this 10-year average revenue trend line - is to require that the excess, or so-called ‘unanticipated' revenues be placed in a ‘rainy day fund' - the Budget Stabilization Fund (BSF) and spent according to the rules of the BSF." (Lewis K. Uhler, "Vote No On 1A The "Spending Cap" Measure (Prop. 1A) Is Not Effective Medicine For Taxpayers," Flash Report, 4/3/09)

Fact:
The rules in Prop 1A governing transfers to and withdrawals from the rainy day budget stabilization fund are crystal clear and ensure that boom-year revenues (plus the annual 3% mandatory transfer) are saved into the rainy day fund. These transfers can only be suspended in the event that revenues are below last year's expenditures grown for inflation and population. Likewise, withdrawals from the rainy day budget stabilization fund are only allowed under similar circumstances. Current law allows suspensions and withdrawals from the rainy day budget stabilization fund for any reason.

Myth #5
Ben Zycher, Fellow With The Pacific Research Institute: "Proposition 1A allows the (assumed) revenues from any tax increase to be included in the revenue projection for the current fiscal year, thus increasing allowable spending. But it proscribes any consideration of the adverse economic effects of---and thus the reduction of the tax base caused by---the tax increase in future fiscal years over the ten-year projection horizon. This means that a tax increase yields more allowable spending immediately without any recognition of the future adverse revenue effects, so that future transfers out of the BSF become more likely. Because Proposition 1A treats tax increases in this unrealistic way, it biases the future revenue projection upward, and with it allowable spending under the terms of the proposition." (Jon Fleischman, "FR Interview With Economist Ben Zycher Who Says The Measure Does Not Deliver On A Promise Of A Real Spending Limit," Flash Report, 3/6/09)

Fact:
In regards to the spending limit increasing upward for new taxes, the trend line based on revenues will increase only if the Legislature enacts a permanent tax increase and then only after it is in place for ten years. But the Proposition 1A revenue limit doesn't make it any easier or more likely to raise revenues, compared with today. Indeed, if spending is already at the revenue cap, a tax increase would be difficult to justify since the proceeds of the new taxes would be deposited in the reserve.

The bottom line for whether taxes would be increased has been, is, and will be getting a two-thirds legislative vote. Remember: since Proposition 13 passed in 1978, the Legislature has never raised taxes to increase programs and services - only to address deficits or emergencies. Since 1978, tax increases to finance new programs have only come about by a vote of the people.

Furthermore, only permanent tax increases are included in the trendline, so temporary tax increases would not apply.

Myth #6
Grover Norquist, President, Americans for Tax Reform: "Prop 1A does not even come close to providing an effective spending cap. Even worse, the so called "rainy day fund" that 1A creates is nothing more than a slush fund for the spending interests that have put a great state on the road to bankruptcy." (Grover Norquist, "Plenty To Dislike In 1A - Americans For Tax Reform Says Vote No On May Ballot Propositions," Flash Report, 4/6/09)

Fact:
This is political rhetoric, not a factual analysis of what Prop 1A would actually do. Prop 1A creates a mandatory annual 3% transfer to the rainy day fund and forces the state to save boom year budget revenues. The measure calls for part of these savings to retire an existing education obligation, to retire existing budgetary debt and to build up the rainy day fund for use to help the state through bad budget years. In the event that the rainy day fund fills to its 12.5% target, Prop 1A still only allows the use of additional budget savings on specific items such as further building the rainy day fund, paying for infrastructure projects, providing one-time tax relief, or paying off unfunded health care liabilities for state employees.

Note that had Prop 1A been in place over the past decade, the rainy day fund would have been full three times. In addition $33 billion would have been available to fund one-time expenses. Instead we had no rainy day fund and that $33 billion was spent in large part to fund ongoing programs that now cannot be sustained without a tax increase.

Myth #7
Ray Haynes: "Proposition 1A contains no limits on spending for education, infrastructure and bonds, which means that legislature can take this money any time it wants, with little or no restriction, to increase state spending. Second, once the limit on the Budget Stabilization Fund (the BSF) hits 12.5%, the state can spend its excess revenue on anything. Understand that the 12.5% BSF requirement is fixed, it is 12.5% of the budget for that year, amounts deposited in the past do not accumulate. The money deposited from last year counts towards this year's limit. That means in really good years, where revenue is pouring in, as it did in 1999-2001 and 2005-2007, the BSF will fill quickly, and the transfers will be done. Assuming that the Legislature doesn't spend it on the approved items (which it will), once it is full, the BSF is no restraint on spending." (Ray Haynes, "May Ballot Props - A Really Bad Deal," Flash Report, 3/25/09)

Fact:
Prop 1A contains a very clear limit on spending: revenues above the 10-year trend line are used for one-time expenses, to pay down existing budgetary debt and to build up the rainy day fund.

Prop 1A is clear about what happens to excess revenues (above the 10-year trend line) when the rainy day fund is full (12.5% of the current year General Fund). These additional revenues could be used to further build the rainy day fund, pay for infrastructure projects, provide one-time tax relief, or pay off unfunded health care liabilities for state employees.

Prop 1A also specifically allows excess revenues (beyond the 10-year trend line) to be used to further build the rainy day fund beyond the 12.5% target.

Myth #8
President Of The Howard Jarvis Taxpayers Association Jon Coupal: "As a result of Steinberg's selection of Hancock as the author of the argument against, the word "taxes" will not appear anywhere in the official arguments for or against Proposition 1A." (John Coupal, Howard Jarvis Taxpayers Association, "Proposition 1A: Keeping Taxpayers In The Dark," Flash Report, 3/2/09)

Fact:
This argument is a red herring. Voters will see both a description of Prop 1A and its fiscal impact when they go to the polls. The title and summary of the measure that appears in the official voter information guide specifically states: "higher tax revenues of roughly $16 billion from 2010-11 through 2012-2013 to help balance the state budget."

Myth #9
Ray Haynes: "This cap is based on historical spending patterns (over the last ten years, the fastest growth in spending in the history of the state), and has a number of exceptions and allowable spending categories. Analyzing its true effect is difficult because it is based on spending patterns, unknown factors, and legislative action by a legislature that has proven itself to lack all self control. No one can point to a number and say ‘Spending will not exceed that amount.'" (Ray Haynes, "May Ballot Props - A Really Bad Deal," Flash Report, 3/25/09)

Fact:
Because Prop 1A creates an historical 10-year trend line for spending, the measure very clearly defines a limit based on a regression analysis that includes good years and bad years during the past decade. DOF estimates the 10-year trend to be about $100 billion for FY08-09 and to drop a couple of billion dollars in FY09-10. Had the measure been in place the last ten years, this trend line would have forced savings into the rainy day fund during several years - money that would have been available to help us through the current crisis.

This measure is predicated on the fact that we will have years in which revenues are above the cap, called "good years" and years in which they are below, or "bad years".

Prop 1A puts into effect essentially two different formulas. The first applies to the good years to cap spending based on a 10-year revenue trend line designed to smooth out expenditures. The state's fiscal problems have not grown as a result of the down years, but rather the good years when the Legislature makes ongoing funding commitments that we cannot afford to sustain. Prop 1A limits the Legislature's ability to spend it all in these years and forces them to save for the down years.

It is in these down years - that is, when current year estimated revenues are lower than prior year expenditures - when the second formula created by Prop 1A comes into place. Under Prop 1A, the state cannot spend more in a down year than it spent in the prior year plus an adjustment for population and inflation. Right now, the trend line would increase at about a 5.2 percent rate, but population and inflation are at a combined 4 percent growth rate.

This means that irrespective of the actual balance in the reserve fund and irrespective of the ten-year revenue trend line, the state could only draw down the rainy day reserve to allow for current year spending that does not exceed the prior year's expenditures plus an adjustment for population and inflation. Under this second formula, it would be limited by the population and inflation growth rates, even if we had the funding in reserve to spend all the way up to the higher revenue trend line.

Had Prop 1A been in place over the past decade, the rainy day fund would have been full three times. In addition $33 billion would have been available to fund one-time expenses. Instead, we had no rainy day fund and that $33 billion was spent in large part to fund ongoing programs that now cannot be sustained without a tax increase. We would have gone into the 2008-09 budget year with less than half the deficit and $9 billion in reserve to cover the gap.

Myth #10
Lewis K. Uhler, President, National Tax Limitation Committee: "The threshold difficulty is that neither the California Department of Finance, nor any other potential source of these numbers, is willing to provide out-year revenue projections with which to work. And the design of the Prop. 1A cap, relying upon a running 10-year average of actual general fund revenues, cannot be used to test the efficacy of the cap without such out-year revenue projections (whereas, a conventional state spending cap, which is predicated on the previous year's actual spending, adjusted for changes in inflation and population, generates a hard number and a known restraint over the business cycle)." (Lewis K. Uhler, "Vote No On 1A The ‘Spending Cap' Measure (Prop. 1A) Is Not Effective Medicine For Taxpayers," Flash Report, 4/3/09)

Fact:
The Department of Finance has provided an estimate of how Proposition 1A would have impacted the last ten years of budget history and how that plays out in the current year (FY08-09). They found that if Proposition 1A had been in effect, spending would have been held to about $92 billion for FY 08-09 and $9 billion would have been available in the rainy day fund. Instead, the state faced a situation earlier this year where expenditures were estimated to be more than $104 billion with nothing in reserve to cover the massive budget deficit due to the decline in revenues."

A Fantastic New Tool Shows Why Gay Marriage Initiative Will Make Ballot

Joe Mathews — Wed, 21 May 2008 18:12:00 -0400

The California Secretary of State's office has added a great new feature to its pages on ballot initiatives: daily spreadsheet updates on signature verification. As instructed by press secretary Kate Folmar (whose journalistic work is badly missed here), I went to the web site, http://www.sos.ca.gov/elections/elections_j.htm#pending_sigs, and clicked on the link Random Sample next to each initiative that is pending signature verification.

The verification data on the initiaitve that would ban gay marriage is instructive. It shows that the initiative turned in more than 1.1 million signatures for random sampling. So far the verification rate is very good -- over 83 percent on more than 20,000 signatures that have been checked. If that rate holds, the measure should qualify easily for the November ballot. (In the signature biz, 70 percent). One other thing that this data shows--the outsized role that San Diego and Orange counties play in signature gathering. Only LA produces more signatures, and per capita, both counties far surpass their neighbor to the north.

Department of Self Promotion

Joe Mathews — Sat, 05 Apr 2008 16:20:00 -0400

Orange Coast magazine doesn't have its April issue on the web, but please pick it up and check out my piece on the fight between Disney and developer SunCal. The fight produced two municipal ballot measures -- a referendum and a ballot initiative -- that were taken off the June 3 ballot by the city council.