The announcement last week of the Governor’s 2014-15 state budget was a sign that the state is back to living within its means. The central theme of the proposed spending plan is consistent with California Forward’s long held view that the state needs a multi-year fiscal plan that provides for program stability, sets aside spikes in revenue and provides the environment for community governments to improve results.
Governor Jerry Brown’s proposed budget is a major step toward replacing governance based on boom-and-bust cycles in favor of a restrained approach where things don’t just fall apart when the next inevitable downturn comes along.
Since 2008 California Forward has advocated for strengthening the rainy day fund in part by managing spikes in revenue, and the Governor has now gone beyond his own prudent fiscal decisions to back a constitutional amendment institutionalizing that discipline. The budget makes the first annual contribution into our rainy day fund since 2007, half of it to pay down a significant portion ($11 billion) of the state’s budget related debt (now estimated at $25 billion). His ultimate goal is to eliminate the budget-related debt by 2017-18. The other half set aside is a reserve to alleviate fiscal strain when California is hit with another downturn.
“The budget takes a significant amount of the spikes in revenue attributable to capital gains and slugs it into the reserve,” said California Forward’s Fred Silva. “Half of it will be used to pay down debt. The overall emphasis is to get those debts paid down sooner.”
Spikes in revenue are a fact of life for a state whose tax wagon is hitched to high-income earners whose tax contributions fluctuate with the economy. California is in the midst of one of these upward spikes now, and much has been written about how that money should be spent. The Governor’s budget pumps the breaks and looks miles ahead instead of just a few blocks. “Income taxes levied on capital gains aren’t very predictable and they vary year-to-year,” said Silva. “In the past when revenue spiked, rather than putting it away, we were spending it. That’s how we got into boom and bust budgeting.”
The Governor, in a bid to buck the boom-bust, included in his proposal a constitutional amendment to be voted on in November that would capture these spikes in revenue and save them. A similar amendment was passed in 2010 in the form of ACA 4, which is set to be on the ballot this year. However, Gov. Brown has asked the Legislature to instead use an alternative to ACA 4 that would move excess capital gains revenue into a reserve in addition to allowing the state to use the money to pay down debt.
It’s not just what’s in the budget that represents a sea-change for California budgeting; it’s the urgency and finality that comes with it. “The Governor isn’t waiting for a constitutional amendment to pay down debt and start saving for the next recession,” said California Forward president and CEO Jim Mayer. “Political reforms are being felt in the capitol. In six years, California’s reputation has gone from being ungovernable to being a model of how to break the partisan gridlock.”
The Governor’s proposed budget deftly walks the center of the aisle, leaving blogs and radio talk shows hard pressed to push ideological outrage. The budget invests in the future by committing millions to education (including accelerating the implementation of the Local Control Funding Formula) and infrastructure, and at the same time it saves for the future with substantial contributions to the rainy day fund.
The budget is fiscally prudent, it focuses on results, and it pays down debt. But most importantly, it’s a brave step forward toward the governance Californians deserve.
