California State Government | November 3, 1998 General |
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A Proposal to Reform the Budget Process and Improve California's Bond RatingBy Curt PringleCandidate for State Treasurer |
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"California must be more fiscally responsible. Just like families must save for the future and have a plan for unexpected expenses and emergencies, so must California. This proposal will greatly improve the budget process and the economic soundness of our state."Today California's bond rating ranges from A to AA-(1). This rating is the result of credit rating agencies consistently discounting California's bond rating to reflect, among other things, the state's lack of a system to address unexpected fiscal emergencies. In turn, this lower bond rating has increased California's borrowing costs. Pringle proposes two significant changes to the budget process to improve California's bond rating. These changes are:
Reserve Proposal: Background: California currently has a state budget which allocates $60 billion annually (3). Yet, during the 1990's the state has set very little aside in a reserve fund. In fact, since 1990, the state has had an average reserve of less than 0.4% a year(4). In the 1998-99 budget bill, in a year in which the state is facing an unexpected windfall of $4.4 billion, the budget bill passed off the Assembly floor with a reserve of only $130 million, or 2/10ths of 1 percent (5).
1990-91----------------$1,298 million----------3.1% 1991-92----------------$1,213 million----------2.8% 1992-93----------------$ 31 million----------0.1% 1993-94-------------(-)$ 540 million-------(-)1.4% 1994-95-------------(-)$1,019 million-------(-)2.5% 1995-96----------------$ 28 million----------0.6% 1996-97----------------$ 305 million----------0.2% During the early 1990s the state experienced one of the deepest economic downturns in its history. Without a reserve, California was forced to make dramatic budget cuts and impose tax increases to balance its books. Just like a family that must save to guard against unexpected emergencies, sound fiscal practices require the state to also plan for the unexpected. The Proposal: Pringle proposes that the state would set up an automatic trigger that would sweep excess revenues into a "Special Reserve Fund" at the end of the fiscal year. The "Special Reserve Fund" would be capped at 3% of General Fund Revenues (6). Any amount above the 3% would be returned to taxpayers pursuant to Proposition 4. Funds in the Special Reserve Fund could not be appropriated in the regular budget process and the Budget Act could not project or assume the use of the "Special Reserve Fund" to balance the budget. The Governor and the Legislature could only appropriate these funds if:
Proposal compared to today's system: Today, resources unexpended at the end of the fiscal year, including any unanticipated revenues, are swept into the Fund for "Economic Uncertainties." Unfortunately, instead of acting like a reserve fund, the Fund for Economic Uncertainties acts as an extension of the overall budget. In January, anticipating additional or unexpended revenues, both the Governor and the Legislature propose to spend this revenue as part of the budget for the next fiscal year. The appropriation for these funds is made in the overall budget bill and for all intensive purposes co-mingles the reserve with the general fund revenues. The effect is to treat the Fund for Economic Uncertainties as a checking account; Pringle's proposal would create a savings account to protect the state. Implications if this mechanism were in effect today: The May Revise anticipated that the 1997-98 fiscal year ended with $1.7 billion more revenues then originally projected. If the Pringle Reserve Proposal were in effect this year, this $1.7 billion would be automatically allocated as a reserve (7). Budget Trigger Proposal Background: During the early 1990s, California experienced an unprecedented economic downturn. This recession resulted in budget deficits that reached a cumulative $8.8 billion over a six-year period. Year------------Deficit/Surplus 1990-91---------(-)1,175 million 1991-92---------(-)2,962 million 1992-93---------(-)2,475 million 1993-94---------(-)1,481 million 1994-95-----------(-)712 million 1995-96--------------235 million 1996-97--------------461 million Today's budget process begins in January when the Governor introduces his budget proposal. Through the spring and into early summer, the Legislature meets to consider the Governor's proposal and to craft their own budget response. The Constitution requires the budget be passed by June 15th of the year. Once the budget is passed, unexpected expenditures and economic downturns impact the state's budget plan with no correction mechanism. Unlike a family that reduces expenditures in light of a financial shortfall, the state does not adjust its spending plan to reflect unexpected expenditures or revenue shortfalls but merely accumulates a budget deficit. The Proposal: The state would set up a specific mechanism to facilitate the early resolution of budget shortfalls to prevent program disruption, provide fiscal stability and minimize or eliminate impacts on the state's credit rating. The mechanism would work as follows:
The state budget is the engine that drives the state financial system. The current lack of fiscal accountability has resulted in reduced bond ratings, increasing the cost of borrowing. Creating and maintaining a prudent budget reserve and providing for budget corrections in an economic downturn, will save California millions in borrowing costs. Furthermore, a prudent reserve will ensure that in tough fiscal times, the state will not have to resort to tax increases or severe budget cuts.
1. California's ratings for General Obligation bonds by the major rating agencies are; Moody's A1, Standard & Poor's A+, Fitch AA-. California State Treasurer's web page, August 4, 1998. |
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Created from information supplied by the candidate: September 21, 1998 08:34
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