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THE CALIFORNIA BALANCED BUDGET ACT

Legislative Constitutional Amendment

THE QUESTION

Should the state Constitution be amended to require that the state adopt a balanced budget and provide for mid-year adjustments if the budget falls out of balance? Should the Constitution also include state budget reserve requirements and limits on future borrowing to finance budget deficits?

THE SITUATION

California has experienced major budget difficulties in recent years. Although program spending has been reduced and revenues increased to address the shortfalls, large deficits and significant amounts of borrowing have continued. The State faces another major budget shortfall in 2004-05.

The state Constitution requires the Governor to propose a balanced budget each year, but does not require that the budget finally passed by the Legislature and signed by the Governor be balanced. The Constitution also requires a prudent state reserve fund, but does not specify its size or a mechanism to fund it. In general, voter approval is required by the Constitution for debt backed by the state's general taxing authority. In addition, bonds submitted for voter approval must be for a specified "single object or work."

THE PROPOSAL

Proposition 58 amends the California Constitution to require that the state enact a balanced budget. If the Governor later determines that the budget is going out of balance, he or she may declare a fiscal emergency and propose legislation to address the problem. If the Legislature fails to pass bills addressing the budget problem within 45 days, it would not be allowed to act on any other bills or adjourn until it did so.

This measure requires a reserve, the Budget Stabilization Account (BSA), in the state's General Fund. A portion (rising from one to three percent) of the state's estimated annual General Fund revenues would be transferred into the BSA each year until the BSA reaches the greater of $8 billion or 5 percent of the state's General Fund revenues. The annual transfers could be suspended or reduced for a fiscal year by an executive order of the Governor.

Each year, half the funds transferred into the BSA would be used to repay the deficit-recovery bonds authorized by Proposition 57 until $5 billion had been dedicated for that purpose. The remaining funds in the BSA could be transferred to the General Fund by a majority vote of the Legislature and approval of the Governor, and spent for various purposes--including covering budget shortfalls--generally with a two-thirds vote of the Legislature (as in current law).

This measure provides that the Proposition 57 bonds comply with the constitutional requirement concerning a "single object or work." Subsequent to the issuance of the bonds authorized in Proposition 57, this proposition would prohibit most future borrowing to cover budget deficits.

Proposition 58 will only take effect if Proposition 57 on this ballot is also approved by the voters.

FISCAL EFFECT

Fiscal effects could vary, depending on future budget circumstances and actions taken by Governors and Legislatures. Proposition 58 would limit the state's future ability to allow accumulated budget deficits to carry over from year to year. The larger reserve could smooth out changes in state spending as the economy goes up and down.

WHAT A YES OR NO VOTE MEANS

A YES vote means the state Constitution would be amended to require a balanced budget and to add other new requirements on state budgetary practices.

A NO vote means the state Constitution would not be amended to require a balanced budget and make other changes in the budget process.

SUPPORTERS SAY

• Proposition 58 will require the Governor and the Legislature to enact a balanced budget. Now, the Governor is only required to propose, not enact, a balanced budget. This loophole has led to huge budget deficits.
• Proposition 58 prohibits borrowing to pay off future deficits and requires building a reserve of at least $8 billion to protect California from future economic downturns.
• State government spending in California is out of control, significantly exceeding state revenues over the past three years and threatening the state's ability to pay its bills and access financial markets.
• Together with the Proposition 57, this measure will give California's leaders the tools to resolve our budget crisis and restore confidence in the financial management of the state.
• Proposition 58 puts a mid-year process in place to address fiscal crises and bring the budget back into balance, forcing the Governor and the Legislature to work together before it is too late.

OPPONENTS SAY

• We were promised a strong state spending limit to accompany the deficit retirement bond in Proposition 57, but Proposition 58 does not give us any spending limit. The Legislature is free to continue spending like crazy, sticking us with higher taxes and more debt.
• Proposition 58 does not protect us from the accounting tricks and short-term borrowing currently employed to balance the budget.
• This proposition allows Legislatures and Governors to ignore the prudent reserve requirement in current law. Its reserve funds are largely unprotected.
• Proposition 58 sweeps aside the provision in our state Constitution that has limited long-term borrowing to projects like schools, parks, or water projects that will serve coming generations, and allows the Governor and Legislature to borrow $15 billion to paper over California's biggest budget deficit ever.
• The Governor already has the power to call the Legislature into session to address a developing budget shortfall. Proposition 58 requires the Legislature to take action before it can move on to other business, but this rule is loophole-ridden.

For more information:

Supporters: Join Arnold, 916-442-7757, www.joinarnold.com

Opponents: San Diego Tax Fighters, 858-530-3027, e-mail rrider@san.rr.com

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