Responses to Yes Campaign

We wrote this letter to address the misinformation coming from the Yes on 2 campaign.   We are deeply concerned that voters are not getting the 'whole story' of Prop 2. It is a complex and confusing addition to the California Constitution.

Often, this means it is misunderstood by its proponents as well as the general public.

We understand that our explanations and answers will mostly make sense to those well versed in California finance. Or, of course, to those people able to spend the time doing the research. We fear the proponents may not even be aware of the ramifications of Prop 2, given the information on their website and comments in our social media.

To help the public and the proponents of Proposition 2, we also share edits to their media kit, which contains inaccuracies. If you care about kids and the future of California, and especially if you are leaning toward voting Yes on Prop 2, please read this information. Ask us ANY questions at 2BadForKids@EducateOurState.org. For us, a 'win' is people educating themselves about the myriad ways Sacramento has intentionally and unintentionally diverted education money.  Often, as with Prop 2, while trying to fix a different problem. Thank you!

To: California Forward Action Fund’s Prop 2 Manager, Philip Ung (the comments in italics are FB comments from Philip Ung, in his capacity as campaign manager for Prop 2, as you will see below), Media and all interested parties:

As some you know, Educate Our State is a group of volunteer parents who have come together to work towards providing young Californians with a high-quality public education.  Analysis of school funding is crucial to understanding why California falls so far short.  How can California taxpayers appear to spend so much, yet the state consistently ranks near the bottom of the nation in per-pupil funding?  Why are only a third of our 4th and 8th grade students proficient on national tests of reading or math?  Why do we have the largest class sizes in the nation?

As we dug in, we encountered historical action after action that significantly changed school funding – generally four to ten years after the original legislation.  In each case, California appeared to be making a decision about fiscal policy unrelated to education (how to compensate cities for the VLF reduction in 2004, how to backfill Prop 13 losses in 1979, how to fund blight reduction, etc.).  In each of these, however, school funding got wrapped into the solution and, within a decade, school funding ended up taking yet another substantial hit. 

Proposition 2 has all the hallmarks of another such situation.  It started out in 2010 to accomplish one goal – strengthen the existing rainy day fund – then morphed this spring to include Proposition 98, and again this summer to pull $5 billion of local school reserves into the mix.

It was at this point, and only at this point, that we said, No.  We cannot afford yet another situation that appears only tangentially related to education, but actually threatens a significant $5 billion (10%) of school funding.  We can’t afford for education to be silent, yet again, when its future is being decided.  Voters need to understand that they are making a choice and what that choice is. 

If politicians want to offer a different choice from what is on the books, that needs to be an explicit commitment, not a paternalistic promise.  Paternalistic promises have not been kept and, worse yet, have been conveniently forgotten.

In this vein, we are delighted to engage with you around the issues and clarify your questions.  “Educate Our State” is our mission – including educating our state on what actually drives its school funding.  It is one thing to choose to minimally fund public education – and another to simply find oneself inexplicably there, whilst politicians trumpet the importance of education.

Now, onto the issues you raise.  We have tried to group them together into major themes, please let us know if you would prefer a different regrouping or separation.

1.  THE BASIC BUDGET STABILIZATION ACCOUNT CHANGES

Phillip Ung comments on EOS Facebook:  The Governor & unanimous bipartisan legislature agreed that the current reserve - that you suggest the state continue to use - is flawed and needs to be tightened to ensure more regular deposits, capturing one-time spikes in revenues, and a quicker way to pay off debt, including the money owed to Prop 98. 

We agree.  We have not taken issue with the basic changes to the Budget Stabilization Account.  If those constitutional changes capture what the Legislature and Governor think they need to make themselves behave responsibly, who are we to argue?

What we take issue with is the 1600 words added to the Constitution to allow the State to hang onto money that Proposition 98 requires to be distributed to schools.  And then the 372 words added to the Education Code requiring school districts to spend $5 billion of their own reserves when the government withholds any fraction of that and puts it into its own fund for schools.

As pious and unanimous as the Legislature’s goals may be, please remember that 94% of school districts in California have disciplined themselves to hold at least two weeks’ reserves.  On average, they hold the 16% (two months’) that governmental standards bodies recommend.  They have done so without a constitutional amendment requiring them to do so.  These local, elected officials have proven that they take their fiduciary responsibility very seriously.

But, instead of trusting the trustworthy, Proposition 2 gets its teeth into local school funding and sucks it back to the State. 

Again, we have and have had no issue with the basic reserve.  It was just when the state took first one, then a second, incursion into school funding that we smelled, and cried, “rat!”

 

2.  THE CARRY-OVER FUNDING (“RESERVES”) ISSUE

Phillip Ung comments on EOS Facebook:  You continue to imply that the local school cap is IN Proposition 2 when you know for a fact it is not. It is in related legislation that was adopted outside of Prop 2 so to imply otherwise shows you are either misinformed or just being dishonest.  …  Local school districts will still have control over how much they can have in reserves and if they need to keep reserves over the cap, they can with approval from the County Superintendent of Schools. You also make it sound like the cap is activated in January, also dishonest. The LAO, Department of Finance, and the independent California Budget Project all estimate the cap, if never changed by the Legislature, would be first used in 2020-2021. So there is plenty of time to deal with your objections through the proper process. The Governor has already pledged to revisit this local cap issue in January … Governor Brown has pledged to revisit and address the concerns over the district cap in January. Opponents should focus their attention there and not against a common sense measure to prepare California for fiscal stability…. It is incorrect for you to say the cap went into place without a committee hearing because the legislation received two budget committee hearings, both with public comment. Legislators did speak out against the cap and even carried legislation to repeal it, but it was too late in the legislative cycle for it to be brought into the process; never claimed it was a violation of Prop 98. You have inserted that dishonest commentary…. Response to your #1: Lie. The local district cap did go through two Budget committee hearings where public testimony was allowed. There's video proof on CalChannel. The LAO doesn't review all legislation and rarely gets involved in day to day legislating. 

If the forced reduction of Local School Carryover Funds and Reserves is not “in” Proposition 2, why did the LAO mention it in its analysis of Proposition 2? 

Because, if Proposition 2 is approved by voters, the cap becomes the law of the State of California. 

We understand that you want us to confine ourselves to overturning this Proposition 2-enabled legislation after Proposition 2 is put into the Consititution.  But we spent months trying to undo it last summer – so we know the challenges.

EOS supporters made hundreds of calls to the governor’s office.  Numerous educational agencies (including CSBA, ACSA, and CASBO) lobbied very heavily in Sacramento.  The governor had ample time to take the legislation out, but he told both legislators and school supporters that he wouldn’t do it. To ‘wait until after the election’ trustingly is not an option for parents on the front line, or school boards who have already been handed last-minute mandates in the past year like the pension increases, despite pronouncements of ‘local control.’

Furthermore, we don’t see legislation as inherently benign and changeable.  For example, we remember the AB 8 Split of 1979, which stripped 30% more local property taxes out of schools after they’d already been hit by Prop 13.  A year after Proposition 13 cut local school funding in half, Governor Brown and the Legislature went in and removed 30% of what was left, handing it to cities and counties.  This AB 8 Split cemented the centralization of school control in Sacramento.

At the time, no one said, “control over schools is to be handed to Sacramento.”  Instead, it was a short-term solution to the political problem of spending taxes collected in low-service areas to prop up big-city services – and loud assurances were made that the “allocation issue” would be addressed legislatively.  The legislature and governor promised most sincerely.  And, indeed, allocation was discussed.  And discussed.  And discussed. 

The most recent legislative discussion around “solving the allocation problem” was in 2000 or so … 21 years later.  It died when, in 2004, another piece of legislation, enabled post-facto by a proposition, handed another $4 billion of local property tax away from schools.  Nowadays, it only shows up when a political candidate wants to dodge a Prop 13 question.  “Well, we really need to revisit the allocation issue,” they’ll say.  Meanwhile, that $4 billion has grown to $6.8 billion and counting.

That’s the kind of stuff you find if you study the past.  Now, looking forward …

If you, the Governor, and Finance believe that the PSSSA will not be invoked until 2020, why did the reserves cap have to be slammed in during one week in mid June?  As one senator says about this “major policy deviation,” it could have been discussed for months, but it was “never brought up.” 

(Readers interested in the so-called committee hearings over the funds cap should listen to the members of the committee pointing out that these ‘hearings’ were wholly inadequate, deviating from past practice and policy, and should listen to the Finance staff unwilling or unable to answer why this needed to be injected at the 11th hour:  http://calchannel.granicus.com/MediaPlayer.php?view_id=7&clip_id=2239 beginning at 1:40)

You also state that the LAO doesn’t get involved in “day to day legislating.”  Would you please name one other piece of new legislation involving over $5,000,000,000 on which the LAO has not weighed in, given the opportunity?

You assure us that there is “plenty of time to deal with your objections through the proper process” however we saw neither time or a proper process in June.  $5 billion of school stability is at stake.

 

3.  PROPOSITION 2 and the PROPOSITION 98 GUARANTEE

Phillip Ung comments on EOS Facebook:  It is incorrect and the LAO would disagree with your claim that the minimum guarantee is not being met. Direct quote from LAO analysis of Prop 2: "Though Proposition 2 changes when the state would spend money on schools and community colleges, it does not directly change the total amount of state spending for schools and community colleges over the long run." … Read the entire LAO analysis. Heck, read the Proposition 2. It does not give less than the minimum guarantee. From Proposition 2: “(k) Nothing in this section shall be construed to reduce the amount of the moneys required to be applied by the State for the support of school districts and community college districts pursuant to Sections 8 and 8.5. (Prop 98)” Prop 2 even guarantees nothing in Prop 2 takes money away from schools. …  Res to #3: Lie. Doesn't violate Prop 98 or else the LAO would have mentioned it in their analysis. This is a dishonest attempt at scaring voters by waving the specter of a 98 violation. You should really be ashamed of this tactic. …  All of Prop 98's obligations will be paid before any money is put in the 98 reserve.

3.1  First:  Test 3 Issues

Please re-read your direct quote from the LAO analysis: 

“Though Proposition 2 changes when the state would spend money on schools and community colleges, it does not directly change the total amount of state spending for schools and community colleges over the long run."

Why do you suppose they added the word, “directly?” 

And read the Proposition 2 text:  “(f) Notwithstanding any other provision of this section, no amount shall be transferred to the Public School System Stabilization Account pursuant to subdivision (b) until the maintenance factor determined pursuant to subdivisions (d) and (e) of Section 8 for fiscal years prior to the 2014–15 fiscal year has been fully allocated.”

Why do you suppose only the maintenance factor for years prior to 2014-15 is respected?

Because maintenance factor is the “catch-up commitment” that the state makes to schools when it fails to keep school funding up with cost-of-living and headcount growth.  By throwing maintenance factor created AFTER last June 30th (2014) to the back of the queue, it actually decreases the money flowing to schools because maintenance factor is not accrued. 

There would have been no need to specify the last date by which it would be respected, had there been no effect.

We realize that this discussion requires an understanding of Proposition 98 Test 3.  While we can understand why the limitations of the Voter Guide analysis meant that the LAO chose not to address this issue, it absolutely exists. 

Of course, readers may have missed Proposition 98 Test 3 altogether.  It was added to the constitution in 1990 as the “Traffic Congestion Relief and Spending Limitation Act.”  When the Legislature added (and voters ratified) Proposition 98 Test 3, it was with the understanding that it wouldn’t have much effect on school funding:

Here’s the LAO Voter Guide Analysis in 1990 explaining why the new Test 3 would not occur very often:  “This is because the minimum funding guarantee under both current law and under this measure is projected to be determined by the percentage-of-revenues formula (as opposed to the maintenance-of-effort formula), and revenues are expected to be below the state's appropriations limit. The net fiscal effect of this measure with respect to public schools and community colleges in subsequent years is unknown.”

In fact, in the years from 1990 to 2008, we had seven Test 3 years, including the one that wasn’t supposed to be one, 1990-91, when it was passed.  We had no Test 1 years.  The impact was significant, since Test 3 years are when education gets less than inflation/headcount-adjusted funding. 

Incidentally, the current Department of Finance/LAO forecast shows four straight upcoming Test 3 years, starting in 2016-17.  The accrued maintenance factor will be thrown to the back of the queue should another Test 1 year occur, leaving California school funding losing ground to inflation. 

3.2  Second: Budget Emergency Issues

Furthermore, ‘directly’ means that Proposition 98 money will be moved into the PSSSA, creating funding that schools may very well not receive until some vague point in the future … unless it is needed under Article XVI, Section 22 (a) 4, below.  In which case, it will become the first dollar, not the top-up dollar, of school funding.  Letting the State off the hook, again, from making any sacrifices for schools. 

Incidentally, you may want to read the California Budget Project analysis of Proposition 30 here and, specifically, how the state has been able to appear to ‘spend’ Proposition 30 monies on education, while actually replacing Proposition 98 monies they would have had to spend anyway, thus freeing up General Fund money for all the other things they really like to spend on.  Those are the spending areas in which we rank in the top 10 nationally (unlike education), including corrections, fire, police, infrastructure, debt service, etc.

 3.3  Third:  Proposition 98 ‘Guarantee’ Issues

And whenever you quote something in which the State promises not to take anything away from schools, please remind yourself that 2007-08 is the last year for which Proposition 98 guarantee certification was completed.  That is to say, seven fiscal years have elapsed in which the government has been unable or unwilling to fully certify that it has met its obligation to California schools under the Constitution.

  

4.  USING PROPOSITION 2 SCHOOL PSSSA MONEY FOR PURPOSES OTHER THAN FUNDING SCHOOLS &/OR TOPPING UP SCHOOL FUNDING

Phillip Ung comments on EOS Facebook:  Totally untrue to claim that Prop 2 allows them to sweep PSSSA money into the General Fund for other programs, which just shows you either haven’t read the proposition, don’t understand it, or attempting to misinform the public. Please refer to cited section of Proposition 2 above…  And your de facto bank claim also shows your misunderstanding of public finance. There isn’t a fund in the state that is immune to short-term cash borrowing. This is a common practice in public finance so don’t act like it’s some conspiracy to take money. It’s not. What you neglect to include in that dishonest claim is the rest of the subsection: “(l) The Controller may utilize funds in the Public School System Stabilization Account, that he or she determines to currently be unnecessary for the purposes of this section, to help manage General Fund daily cashflow needs. Any use of funds by the Controller pursuant to this subdivision shall not interfere with the purposes of the Public School System Stabilization Account.” SHALL NOT interfere with the purposes of PSSSA which means the money will always be there for schools.

You are correct, in an emergency, PSSSA funding cannot be swept into the General Fund and directly used for other programs.  In our original Opposition submission to the Voter Guide – written in less than 24 hours without, incidentally, the benefit of any LAO analysis, and limited to 500 words – we omitted words we should have included.  Specifically, we read the following section:

Article XVI, Section 22:

(a) Upon the Governor’s proclamation declaring a budget emergency and identifying the conditions constituting the emergency, the Legislature may pass a bill that does any of the following:  <snip>

 (4) Appropriates funds transferred to the Public School System Stabilization Account pursuant to Section 21 and allocates those funds for the support of school districts and community college districts.

And realized what it meant.  Namely, that the Governor can declare a budget emergency that appropriates the PSSSA funds to school districts and community colleges.  In this case, the funds are not required to top them up, but for the so-called ‘first dollar’ of funding. 

The good news is that that particular money can’t go anywhere else … but, like the Proposition 30 funds that have been used to meet the base Proposition 98 guarantee, those funds then supplant, not supplement, General Fund moneys that would otherwise have had to go to education. 

Finally, a review of revenue behavior over the past 15 years you at California Forward use in your analysis shows no years in which a little gentle slosh from the year or a few years before would have helped buffer school spending cuts.  But it shows three years with major funding drops (2001, 2008, 2011) that triggered budget emergencies.  These would have entitled the state to drain the PSSSA, if it had anything in it.  In these cases, there is no evidence that cuts would have been made elsewhere to allow schools to be more buffered than prisons, public safety, or other services. 

Your second point appears to be that we do not realize that any State funds are subject to short-term cash borrowing.  Indeed we are, in fact, aware of this.  We were certainly aware that $400 million of the State’s $2000 million BSA had been lent by the State to the State right before the 2008 crash.  So, when people point out that there was “only” $1.6 billion in the BSA, it was because $400 million had been borrowed out of it in the relatively flush period leading up to the 2008 crash. 

The state is not responsible about funds under its control.  Thus, we continue to say that if more ‘rainy day funds’ are needed for schools, the State needs to put those funds where they’re respected – in school districts.  If the state wants to direct some of the Proposition 98 disbursement as a one-time funding of school districts to bolster districts’ local rainy day funds to a certain level, OK.  That way, at least, schools, not the state, would have the control of the deposits.

 

5.  LOCAL CONTROL INCURSIONS

Phillip Ung comments on EOS Facebook:  Response to #2: Under the LCFF which was recently adopted by the Governor and Legislature, local school districts have an unprecedented amount of control over their finances. The local cap will be reviewed in the coming legislative year, and since the cap isn't in Prop 2, Educate our State should stop opposing a common sense measure to save money for the next recession which will occur. 

“Unprecedented?”  LCFF has granted local school districts “unprecedented” control over their finances?  What existed prior to 1978, then?  Are you aware that districts were funded primarily by local property tax assessments, with equity top-ups to low-property-tax districts from the state?

Governor Brown did not invent local school district control over their finances.  In fact, during his first two terms as governor he oversaw an unprecedented removal of local control from our local school districts.  

Furthermore, when we’ve talked with trustees from a large number of school districts, the feeling has been:

  • “Local Control Funding Formula” was simply a better catch-phrase than the “Weighted Student Formula” – i.e., pure marketing
  • Given the ease with which the Governor slams new expenses into the “LCFF” (like the CalSTRS catch-up payments), it’s more an opportunity to pile on unfunded mandates than real flexibility
  • “more responsibility, less authority” continues to be the watchword out of Sacramento

You might enjoy reading Governor Brown’s observations about the unprecedented loss of local control that he oversaw as governor, following Proposition 13 here:  http://latimesblogs.latimes.com/california-politics/2011/01/gov-jerry-brown-talks-prop-13.html

 

6.  WHY PROPOSITION 2 MUST BE APPROVED BY VOTERS 

Phillip Ung comments on EOS Facebook:  Prop 2 needs to be approved by voters because it amends Prop 58 which the voters put in the constitution.

And because it amends Proposition 98, which voters also put in the Constitution.  (And Proposition 111 [1990].)   

The difference is that Governor Brown and the Legislature can put exactly the same amount of money into the BSA and pay down exactly the same amount of debts and release exactly the same proportion of funding in case of a recession under the current laws as they can under Proposition 2.  The only thing he cannot do, under existing law, is take anything OUT of Proposition 98.

 

7.  PROPOSITION 2 IS CRUCIAL IN THE SHORT-TERM?

Phillip Ung comments on EOS Facebook:  Prop 2 ensures we are saving for the next recession, which may occur as soon as 2016. Without a strong reserve, not only will kid's education, but other vital services that affect children, including healthcare and nutrition assistance, will face the cutting block again. …   Oh Jennifer, you know better than that. The current reserve was never used until this year. So the amount saved in most years under Prop 58 was $0. Prop 2 saves more in some years simply because the reserve deposits are automatic. Yes it saves less in some years because Prop 2 does something the current reserve does not: captures revenue volatility. Which is the #1 issue for why California services are not stable, also the top issue for credit rating agencies who don't believe Prop 58 is a strong enough tool to earn their trust. Its why budget cuts are so deep after years of growth.  

In fact, according to the Governor’s Budget Summary 2007-08, there was $2 billion in the reserve, $400 million of which had been borrowed for short-term uses, netting $1.6 billion.

This year, Governor Brown put $1.6 billion in the reserve, and used $1.6 billion to pay down debts.  In fact, he followed the Proposition 58 rules to the letter.

There is nothing to prevent him doing the same in 2015-16, which would add another $1.6 billion to the reserve and pay down another $1.6 billion in debt – compared with the smaller amounts, $900 million and $900 million, that would be required under Proposition 2.  If more money in the stabilization fund is your goal!  And, if he were to do this again in 2016-17, we would have a total of $4.8 billion in the fund … more than the $4.6 billion currently forecast for the end of the following year, 2017-18, under Proposition 2’s rules. 

And, if there were a recession in 2016, there would be MORE money to save services if he followed the letter of the current law.  (Which money, of course, he would have to save OUT of services in 2015.  There seems to be a myth that Rainy Day Funds create money.  They do not.) 

 

8.  ARE YOU OVERPROMISING – AGAIN?

Phillip Ung comments on EOS Facebook:  Prop 2's reserve saves California from a world of hurt in the next recession if we adopt it in November and start building it now. ..Whether it is public safety, social safety net, or education, no portion of the state's budget is immune from the damage of a recession. That is why is Proposition 2 is so important because it will insulate education and other vital services from the deep cuts we saw in previous years. Education will continue to be the first priority of the state. Prop 2 doesn't change that.

A “world of hurt?”  Really?  How much does the government forecast will have accrued in the Prop 2 reserve by June 30th, 2018?  $4.6 billion – right?

Having shaved about $1 billion off of spending for the prior three years – right?

At a total General Fund level of about $110 billion a year – right?

Of which only half, $2.3 billion, could be used in Year 1 of a recession, right?

A world of hurt?  Umm.  No.  Overpromising, yes.

Would $2.3 billion save us from a $13 billion drop like we saw in 2001?  (From $77 to $64 billion.  Or the following year, at $65 billion [2002], $70 billion [2003], and finally up again to $80 billion in 2004.)  That’s $32 billion over three years, against which $4.6 billion from Proposition 2 would have been a 15% nibble.

Save us from a $16 billion drop like we saw in 2008?  (From $96 to $80 billion.  Followed by $85 billion, $90 billion, $83 billion, and finally $96 billion again, thanks to Prop 30.)  That’s like, $46 billion, against which $4.6 billion from Proposition 2 would have been a 10% buffer.  Not deep-cut prevention, so why pretend it is?

 

9.  OUR “DISHONESTY?!”

Again and again, you accuse us of dishonesty.  We are certainly passionate.  We are certainly unpaid, therefore frantically fitting this civic engagement into our other obligations.  We are decidedly unskilled at electioneering and, frankly, often exhausted by having to repeat ourselves over and over.  But we are not dishonest. 

Indeed, we have done all the analysis ourselves.  You order us to “read the LAO analysis!”  Believe me, we have.  And, having done the analysis ourselves, we probably have a much deeper understanding both of the numbers and of the LAO’s conclusions.

Interestingly, the LAO analysis was not published until AFTER we’d written both our opposition AND rebuttal to the Proposition.  Having had to analyze all this from the ground up with no crutch, we asked questions, checked our assumptions, and explored our opinions.

As a result, we understand it.  And we may use shorthand to express our opinions about it, but they are valid and researched.  Meanwhile, let’s turn our attention to California Forward’s “Media Kit.”

 

10.  CALIFORNIA FORWARD ACTION CAMPAIGN MEDIA KIT

**Note: excerpts are from the California Forward Action Prop 2 Media Kit, which you will find at the bottom of the page (hopefully they will revise after they see edits, but so you know where we pulled this information.

Proposition 2 is a numbingly complex 4000-word addition to the California Constitution.  But it’s still a bit surprising that the California Forward Action Campaign Media Kit gets its basic facts and numbers wrong:

10.A:  Misstating the Capital Gains Uplift

On page 2 of your media kit, we find:

Screenshot_2014-10-21_09.18.04.png 

Aside from fixing the typo in the chart, you may want to revisit the actual terms of Proposition 2, rather than trying to intuit them from the LAO analysis.  Here is the specific calculation:

Screenshot_2014-10-21_09.20.42.png 

You need to subtract the amount due to schools under Proposition 98 from the amount of capital gains exceeding 8%.  As this usually runs about 40%, you are significantly overestimating the amount that will be reserved.

Neglecting this basic calculation allows you to significantly over-estimate the amount of capital gains capture.

 

10.B. Looking Backward with Blinders On is Not Predictive

On page 3 of the Media Kid you write:

  Screenshot_2014-10-21_09.24.56.png

We also looked at the state’s financial revenue history, before deciding to file in opposition.  We wanted to see whether Proposition 2 was simply too special to pass up, given its threats to schools. 

The challenge, which you ignore, was immediately apparent to us.  How do you back out the secondary decisions made during the recessions from fiscal flows.  For example, the State forced cities and counties to cough up $2.6 billion in SERAF funds in 2004-2006 – would it have been able to do so without a fiscal crisis?  Unlikely.  So, doesn’t one have to add that back in?  If so, you end up even further short than we already outlined.

Similarly, what budget items do you see having been cut in order to accumulate funds?  Do those have any implications?  Less spending on police, safety, public welfare, corrections, does not have zero impact.  During the period between 2004 and 2008 California was not spending money gleefully.

Simply inventing billions that ‘would have been saved’ ignores the discipline of double-entry bookkeeping.  Furthermore, it usually crashes when faced with reality.  That is exactly what faced politicians after Proposition 58 was approved in 2004 – it is one thing to imagine savings flowing neatly into a rainy day fund, but quite another to refuse to fund wildfire fighting, or to respond to court-ordered corrections changes, or to ignore other unfunded activities.

School districts learned this years ago.  They have built up their reserves slowly and laboriously – $5 billion of which the Governor wants them to dump, seemingly unaware that rebuilding them will take years.

10.C.  Your Miscalculation of the Capital Gains Uplift

We actually saw eight years of the past 15 when capital gains would be subject to capture – which ones did not qualify, in your view?  (We excluded fiscal years beginning with 2001, 2002, 2003, 2008, 2009, 2010 and 2011.)

Unfortunately, the Prop 98 slice of the General Fund during those years was 42.7% on average, which means that the average capital gain uplift was about $1.2 billion each time, not $2 billion. 

10.D.  Combining Assumptions

When we put the numbers together – we don’t see numbers that support your conclusion on page 3 that, “if the state had this type of reserve mechanism in place over the last 15 years, programs dependent on the state budget would have avoided the fiscal impacts of the dot.com bust and the multi-billion deficits of the Great Recession would have been half that size.”

The dot.com bust showed a cumulative revenue shortfall of about $32 billion.  Even allowing for the smoothing effect of spending slightly less of the prior windfall, the $2.9 billion in the fund would have been water wings, not a life raft.

Similarly, the $4.6 billion available at the beginning of the Great Recession ($3 billion more than the state did have) would have been a rain hat, not an umbrella and certainly not a bus shelter when faced with a $46 billion shortfall.

Calculations:

You never actually put the numbers together, but starting 15 years ago (1999-00), our numbers show $5.7 billion reserved as of the beginning of 2001 – less $2.8 used to pay down debt – leaving $2.9 billion in the coffers.  This would be there to deal with the $13 billion drop in 2001-02.  (From $77 to $64 billion.  Followed by just $65 billion [2002], $70 billion [2003], and finally up again to $80 billion in 2004.)  That’s $32 billion over three years, against which $2.9 billion would be less than a 10% offset. 

Then, when deposits were required again in 2004-05, a total of $9.1 billion by June 2008 – less $4.5 billion to pay off debt – leaving $4.6 billion to address the $16 billion drop we saw in 2008.  (From $96 to $80 billion.  Followed by $85 billion, $90 billion, $83 billion, and finally $96 billion again, thanks to Prop 30.)  That’s $46 billion, against which $4.6 billion would have been a 10% buffer.  (And Prop 58 had produced $1.6 billion, to put this in perspective.)

10.E.  It Would?! 

This is from your media kit:

Screenshot_2014-10-21_09.33.38.png 

Two things.  First of all, why do you say set aside $4.6 billion, of which $2.3 billion is available to pay down debt?  Those aren’t the LAO’s numbers, or Finance’s.  Where do they come from?

The number they use is $4.6 billion reserved AND $4.6 billion of debt paid down -- $1.6 billion this year and roughly $1 billion a year for the next three years towards each purpose – paying down debt and filling the BSA.   

Second, the Governor and Legislature ALREADY have the flexibility to put $1 billion into the BSA and $1 billion towards paying down debt/pensions for each of the next three years.  Proposition 2 doesn’t allow them to save a nickel more than the Constitution does – actually quite a bit less. 

10.F.  And where does all this saving come from?

Moving forward, I hope it is very clear to you what will ‘give’ in the pantheon of state spending to accommodate the savings.  We don’t say that to discourage you, but simply because if nothing actually will give, we will end up exactly where we did in 2008.

For questions or concerns, please email us at 2BadForKids@EducateOurState.org or call (510)500-5147

To see the California Forward Action Fund Prop 2 Media Kit, as it existed at the time of this writing (October 20, 2014), please click here.

 

 

 

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