Mike Genest, Governor Schwarzenegger’s Director of Finance has offered this response to Dr. Zycher’s concerns about the Spending Limit Initiative language in the current "Big 5" deal:

Dr. Benjamin Zycher made five observations regarding the budget stabilization fund contained within the current budget agreement. In response to his “observations,” I offer five factual statements.

Zycher observed: The degree to which the estimated revenue projection trend and the Budget Stabilization Fund would operate actually to limit general-fund spending is not clear. 

Incorrect. The governor could not simply suspend the transfer of revenues into the new rainy-day fund. While Article XVI Section 20 (e) of the state constitution currently allows governors to suspend the transfers, the budget reform before the Legislature today specifically amends that section. 

The amendments rule out transfers beginning in state fiscal year 2010-11, except under two conditions: (1) when the rainy-day fund is full (i.e., it has a balance equal to 12. 5 percent of the state’s General Fund), or (2) in years in which there is a need to withdraw money from the rainy-day fund. And in that case, a withdrawal can only happen to bring revenues up to a "current services level budget" —   the previous year’s spending level increased only for inflation and population growth.

Zycher observed: The methodology for projecting revenues is highly problematic. 

A simple ten-year trend is the best and fairest approach.  Using this kind of trend would dramatically reduce the variability compared to what we’ve actually experienced. 

In the long term, the trend method is self-correcting; meaning, if an anomalous year of very high revenue or very low revenue affects the trend projection disproportionately one year, it will be offset by more normal years in the future.

In fact, if you take the past ten years, the two largest spikes in state revenue growth were 23 percent and 15 percent, while there were two years of 15 percent drops.  Under the formula used to stabilize revenues in the budget reform proposal, the high growth years would have been just 10 and 15 percent increases and there would only have been one year in which revenues would have dropped, and then by only 4 percent.  Obviously, the formula does a great job of bringing stability to state revenues.

Zycher observed: The language allows future tax increases not to affect the projected revenue trend, but does allow the assumed revenues from a tax increase to be included in revenues for the then-current fiscal year. 

The budget reform proposal focuses on actual revenues coming into the state, rather than an estimation or other artificial formula. That is the soundest way of actually stabilizing the revenue stream. If what Dr. Zycher is taking issue with is that the budget reform proposal does not prevent any future tax increases, he’s correct, it does nothing to alter the already-high bar that exists to preclude any tax increases in California: the two-thirds vote requirement of the Legislature that protects against frivolous or unnecessary tax increases. 

Zycher observed: In particular, the proposed ten-year projection as a fiscal constraint will make future tax reduction very difficult. 

Future tax cuts would be very possible – the ideological make-up of the Legislature permitting, and any cuts would result in an automatic reduction in the trend line used to set spending limits.

Zycher observed: Fiscal institutions should be designed to focus official attention on economic growth directly. 

The wild swings in state revenues that have led to our chronic and recurring budget crises were set in motion by swings in the economy!  What California’s state budget system needs is exactly the opposite: to be less reliant on economic conditions and tied to something more stable.

This entry was posted on Saturday, February 14th, 2009 at 12:00 am and is filed under Blog Posts.