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California’s Budget Shell Game
Prop 76 limits tax and spenders...

[by Anthony P. Archie] 8/4/05

Buried within Proposition 76, the “Live Within Our Means” budget reform initiative, is a provision that would prohibit the borrowing of special fund dollars to cover General Fund shortfalls. With this common-sense proposal, state lawmakers would no longer be able to balance budgets by raiding funds earmarked for infrastructure investment, a common practice here. Take, for example, the raids on transportation funds over the past three years.

Anthony P. Archie

Anthony P. Archie is a public policy fellow in Business and Economic Studies. Prior to joining Pacific Research Institute, Anthony earned his masters degree in public policy from Pepperdine University, specializing in economics and regional/local policy. As part of his graduate work, he co-authored Crisis in California: Reforming Workers’ Compensation, a proposal that drew praise from an esteemed panel of scholars and policy advisors. Mr. Archie has held internships on Capitol Hill and in the State Assembly. He received his B.A. in economics and political science from Pepperdine University. [Archie index]

In 2002, voters approved Proposition 42, a measure requiring the allocation of gasoline sales-tax revenue to the Transportation Investment Fund (TIF) for highway-improvement projects. It also contained a provision that if General Fund revenues greatly declined in a given fiscal year, then the TIF could be partially or fully suspended, with the moneys loaned to the General Fund for current expenditures rather than transportation investments.

Although this provision allowed the legislature flexibility in budget planning, it turned the TIF into a piggy bank lawmakers could crack into for a quick score. And being one of the biggest special funds, they have raided it often.

In 2003, the first year the gas taxes were earmarked for the TIF, the General Fund faced an operating shortfall of more than $11 billion. Seizing the opportunity, Gov. Gray Davis and the legislature took $811 million of the $1.1 billion collected in 2003, leaving only $289 million for the transportation account. While the short-term fix gave the legislature easy cash, it added another debt obligation to future budgets since the loan had to be paid back by 2009.

When a budget deficit again threatened in 2004, the fund was raided again, this time under the approving eye of Gov. Schwarzenegger. The General Fund absorbed all of the TIF’s $1.2 billion, a sum required to be repaid by 2008. As the string of shortfalls continued in the 2005 budget, the governor yet again wanted to dip into the Prop 42 money.

His January budget plan called on the state to suspend the $1.3 billion in the TIF, but as the year progressed and revenue forecasts brightened, he dropped the plan. The budget bill signed last month secured all the TIF funding for the first time and included a repayment schedule for prior years’ loans. While this move should be applauded, it is only a temporary reprieve.

The fiscal picture for 2006 is deficit-ridden, with an estimated gap of $6 billion. And with the $15 billion credit card obtained under Proposition 57 near its limit, California can’t sell more bonds to fill the gap. That leaves the potential for more special-fund raids in the state’s future. But Proposition 76 can stop this fiscal maneuver.

It would forbid legislators from using special funds as a General Fund reserve, ensuring that the TIF will be used for transportation projects only. Prop 76 will strengthen the Budget Stabilization Account (BSA), the state’s “rainy day” fund. It requires 25 percent of any excess revenues above the proposed spending cap to be allocated to the BSA, with BSA funds used during deficit years to smooth spending over business cycles.

Earmarked transportation funds should be used to fix roads, not to pay for current expenditures. It’s time to stop the raids and shut down California’s budget shell game.CRO

copyright 2005 Pacific Research Institute




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