In this edition of “Did you know?” we take a look at Prop. 1C.  Sure, the ballot statement, the legislative analyst’s report, and every public utterance about Prop. 1C to date asserts that it would allow the state to borrow $5 billion dollars against future lottery revenues.  But did you know that, according to Darrell Steinberg, it would actually allow the state to borrow twice that?

Trailing badly in the polls, Proposition 1C would infuse the state budget with cash by borrowing against future California Lottery revenues. The February budget assumed that it would provide $5 billion for the 2009-10 budget. But Steinberg said he now believes the state could borrow $10 billion from the Lottery and use it all in 2009-10.

Consider it something of a “Hail Mary” argument for Proposition 1C.

“In my view we can triage our way through an $8 billion problem,” Steinberg said. “That doesn’t mean that there won’t be some difficult choices. But, you know, we have a $2 billion reserve. There may be other opportunities with federal economic stimulus … If 1C passes, you know, it’s actually a $10 billion one-time securitization. It was just contemplated as being spread across two fiscal years. You could bring the second $5 billion into the budget year.”

What fun things you learn when your proposition trails in the polls!

Let’s go to the summary of Prop. 1C, shall we?

Impact on 2009-10 State Budget: Allows $5 billion of borrowing from future lottery profits to help balance the 2009-10 state budget.

Hm, no mention of future state budgets there.  But yes, the Senate President Pro Tem is correct.  In the analysis by the Legislative Analyst, he mentions that “the state also could borrow more from lottery profits in future years.”  In fact, the $5 billion dollar figure appears nowhere in the text of Prop. 1C.  Here’s the relevant portion of the text:

(2) Notwithstanding any other provision of law or this Constitution to the contrary, the Legislature is hereby authorized to obtain moneys for the purposes of the California State Lottery through the sale of future revenues of the California State Lottery and rights to receive those revenues to an entity authorized by the Legislature to issue debt obligations for the purpose of funding that purchase.

Well, that would be interesting to know before voting, wouldn’t it?  That this proposition basically opens up a new state credit card for the potential purpose of endless borrowing?  Borrowing that would have to be paid back, with interest, for the next several decades?

California’s reliance on borrowing to cover the budget deficit has been part of the landscape for 30 years.  Debt service currently costs the state $5 billion a year.  If you think this is a good idea, I invite you to enable it by voting to allow basically limitless borrowing against the lottery.  Surely that won’t be abused.

…by the way, the depiction by Steinberg of $8 billion dollars as a niggling problem not to be trifled with, but $14 billion as simply insurmountable, is another new one.  Considering that Steinberg and the Senate passed a majority-vote fee increase of around $9 billion last year, more than the $6 billion allegedly at stake in the special election, and his description of how to fill the budget gap did not include this, forgive me for saying that his beliefs don’t hold up to scrutiny.

Building off Brian’s post, George Skelton’s discussion of Prop. 1C gets things about right – the choice is between a terrible public policy and deeper debt.  Supporters of the special election will only show you one side of that argument, the expanding budget deficit that would result from failure, wrapping that into a fearmongering message of urgency.  Opposers of the special election prefer to look at the actual policy, which Skelton describes accurately.

Prop. 1C — the “Lottery Modernization Act” — is one of six budget-related measures proposed by the Legislature and Gov. Arnold Schwarzenegger. It is by far the measure with the biggest immediate money impact.

It would authorize significant tweaking and expansion of the state lottery, creating more winners. And it also would allow the state to borrow $5 billion immediately against future lottery revenue.

Those should be separate questions: 1) Should the state expand its gambling operation? 2) Should Sacramento take out a loan for, say, 30 years just to help pay one year’s worth of daily expenses? […]

You could also call it a payday loan. That’s how far Sacramento has fallen.

This is probably the easiest $5 billion the state can pocket, even if it would have to pay back double, including interest.

Put aside the fact that lottery revenues have dropped consistently over the past several years (per capita participation is among the lowest in the nation), and that, even if this scheme of more advertising and bigger payouts worked, you would be balancing the budget on the backs of a lottery-buying constituency composed mainly of the poor.  But borrowing policies like this, as a result of putting off tough decisions and mortgaging the future for 30 years, are why our deficit bursts at the seams relative to other states.  In the long term we will pay far more for this borrowing that could ever be brought in.  The solution from the legislature and the Administration, literally, is to not call it borrowing.  David Crane (Arnold’s economic advisor) initially makes a decent point, then hides behind the word “securitization” to mask the reality.

Crane maintains that both tax increases and government spending cuts slow economic recovery. Government programs are “a way of keeping more people employed,” he says. “In a recession, you want government to be counter-cyclical — the teeter-totter” to a falling private sector.

“The overriding principle is that, at a minimum, you want government to be retaining the same level of expenditures, if not expanding.”

Crane points to President Obama’s economic stimulus package, which is heavy on new spending.

Of course, the feds can run up huge deficits and print money. States can’t. And many California conservatives would rather see state government go belly-up than pay higher taxes.

Part of the distasteful remedy may be the lottery borrowing. Only don’t call it “borrowing” in front of Crane. It’s “securitization,” he insists. Future lottery revenue would “securitize” the state’s repayment of $5 billion in bonds.

This is a semantics game with political consequences. When the “borrow” word is used to describe the lottery proposal, I’m told, voter support for it drops by 25 percentage points.

Of course, it is borrowing – when you issue bonds and promise to pay them back later, you’re borrowing.  But the “securitization” model also masks the fact that California officials will have to go out into the market and find investors to buy debt based on future lottery revenues.  Despite the success of recent state forays into the bond markets, that’s not such an easy sell:

The ballot measure simply gives the state the legal authority to go out into the financial markets and find investors willing to purchase debt backed by a revenue source that has declined since 2005-06.

Before counting on quick cash from the sale of lottery bonds, it is worth reviewing borrowing-related assumptions made in recent budget agreements, such as the $1 billion in proceeds from the sale of EdFund booked as part of the 2007-08 budget agreement, a sale that was never consummated, or the $1 to $2 billion in proceeds assumed in various budgets from proposed, but never sold, pension obligation bonds. Or the $1 billion in proposed, but never issued, bonds for transportation programs that were to be repaid out of tribal gaming receipts. The careful reader may note a pattern here – a pattern that began long before the global meltdown in financial markets that has made obtaining loans more difficult for even the most creditworthy borrowers.

This isn’t a serious funding measure, it’s an accounting trick – a way to take $5 billion off the books quickly and easily with a minimum of pain.  It’s symptomatic of the failed solutions taken by this legislature and this Governor for years, which constantly try to push off solutions and never deal with the consequences (of course, the needy in this state always do).  That anyone would sink money into protecting this status quo speaks to a failure of imagination, and a willingness to delay fundamental reforms that must happen before it’s too late.

A Field Poll released today shows support for 6 items on the May 19 statewide ballot (they neglected to poll the new and improved Prop. 13, which deals with prohibiting seismically retrofitted buildings from being classified as “new construction” for property value purposes, and will also be on the ballot).  These are baseline numbers, as the awareness of the election is low and the turnout model is unclear.  But I think we can conclude that this initial support is in no way firm, and at least two items are in peril.  Here are the raw numbers:

Proposition 1A (Spending cap/tax extension)

Registered voters

Yes: 54 percent, No: 24

Likely voters in May special election

Yes: 57, No: 21

Proposition 1B (Education funding)

Registered voters

Yes: 59, No: 27

Likely voters

Yes: 53, No: 30

Proposition 1C (Lottery)

Registered voters

Yes: 48, No: 37

Likely voters

Yes: 47, No: 39

Proposition 1D (Early childhood services funding (Prop. 10))

Registered voters

Yes: 62, No: 20

Likely voters

Yes: 54, No: 24

Proposition 1E (Mental health funding(Prop. 63))

Registered voters

Yes: 61, No: 23

Likely voters

Yes: 57, No: 23

Proposition 1F (No raises for officials in deficit years)

Registered voters

Yes: 74, No: 17

Likely voters

Yes: 77, No: 13

The softest support is for Prop. 1C, the measure to sell the lottery, cashing in now to fill a budget hole in exchange for a long-term revenue loss.  That’s under 50% and could easily be tipped over if a No campaign explained that this will hurt long-term future revenues.  A loss on this measure would put a $5 billion dollar hole in the signed budget that would have to be dealt with by June 15.

Most interesting is the case of Prop. 1A, the spending cap.  The ballot language is going to be crucial here.

when told that the “rainy-day” measure, Proposition 1A, triggers as much as $16 billion in higher taxes through 2013, four out of 10 initial supporters said they were less inclined to vote for the measure, particularly Republicans and fiscal conservatives.

“I’d vote ‘no’ on that,” said William Tate, 49, a South Lake Tahoe voter who said he’d support Proposition 1A before learning of the taxes. “They should just save some money and put it in a ‘rainy-day fund’ without taxing people. We’ve got too much bureaucracy in this state.”

This of course is an expression of magic pixie-fairy Santa Claus conservatism at its worst, but there’s no doubt that a sliver of the electorate will view things this way.  And unlike other potential ballot measures around taxes, this is very tangible (your taxes will go up X) and there’s no counter-argument of what voters are getting in return.  In fact, they’re getting an unpalatable spending cap that would ratchet down state services and tie the baseline to a budget put together during the worst economic crisis since the Depression.  There’s something for pretty much everyone to hate in Prop.1A, and the construction of it was a pure play to keep interest groups on the sidelines, and just to make sure no mere voter knows about it, they hid the truth from the ballot language.

When the Legislature places a measure on the ballot, however, it often bypasses the attorney general by specifying the ballot title and even indirectly designating those who write ballot pamphlet arguments. In other words, the Legislature, in league with the governor, tries to fix the election by fixing how measures are portrayed.

Cases in point are the six measures that the Legislature and Gov. Arnold Schwarzenegger are asking voters to approve in a hurry-up May 19 special election to implement much of their state budget deal.

The most important of the measures, Proposition 1A, would create a state spending limit and direct excess revenue into a “rainy day” account to be used when the economy and state revenue dip. But a very important provision of the package is that billions of dollars in new taxes would be short-circuited if Proposition 1A is rejected.

That “poison pill” is designed to discourage unions and other left-of-center groups – which despise state spending limits – from campaigning actively against the measure. But it indirectly gives conservative anti-tax groups, which despise the new levies, a potential weapon.

Voters won’t be told any of that in the official title written by the Legislature, which reads this way: “RAINY DAY BUDGET STABILIZATION FUND. Reforms the budget process. Limits future deficits and overspending by increasing the size of the state ‘rainy day’ fund and requiring above-average revenues to be deposited into it, for use during economic downturns.”

That’s misleading on a whole host of fronts, not just on taxes but on the role of the spending cap.  Our friend Anthony Wright at Health Access is teaming with the Howard Jarvis Association to file a lawsuit to overturn the ballot title and summary.  The question is whether the larger groups will jump into the fray.  That the legislature allowed this subterfuge can only empower the argument that they are trying to stealth tax everyone and will hurt future efforts at reform.  It may well cause someone like a Meg Whitman with designs on the Governor’s mansion to spend some of her fortune to beat it, and given that support drops from 57% to 34% at the mere mention of the tax issue (and particularly how its hidden from view), it wouldn’t take that much.  With progressives like Loni Hancock committed to killing the spending cap, this could be a strange bedfellows election.

Anthony Wright of Health Access has a good piece musing about whether or not we’ll still need additional spending cuts or revenue increases before the next fiscal year budget in June 2010.  It basically hinges on two things: the May 19 special election, where close to $6 billion in budget money is on the line, and the federal stimulus, which if it provides enough money to the state could trigger some reductions in cuts and taxes.  First, the trigger:

Although the budget contains a number of spending cuts, it also contains a mechanism to restore some of those cuts using federal funds authorized by the American Recovery and Reinvestment Act of 2009 (ARRA) signed by President Obama on February 17, 2009. The mechanism requires that in order to restore cuts, the state must receive at least $10 billion in federal funds to offset General Fund costs. In other words, $10 billion of federal funds are needed to “trigger off” some of the cuts.

The precise amount of federal stimulus funds for California is still being determined, however, the Director of Finance and the Treasurer must determine by April 1, 2009 whether federal funds meet the $10 billion threshold to trigger off the spending cuts. Specifically with respect to health care cuts discussed above, if there is sufficient federal funding, Medi-Cal benefits would not be eliminated and public hospital payments would not be reduced. If there is insufficient federal funding, those cuts and others–including steep cuts in SSI/SSP, IHSS, and CalWORKS would be implemented July 1, 2009.

Hopefully, these funds will make it to California’s shores to stave off the worst cuts.  Ultimately the federal government should seek a goal of stopping all cuts in public services and layoffs of staff, and should fill the gap in revenue in the short term.  The states are being punished through little fault of their own, and counter-cyclical cuts threaten the success of recovery.

The next element is the May 19th special election.  We’ll be covering that in the weeks to come, but Wright lays out the most important initiatives that relate to the budget.

* Proposition 1D would amend Proposition 10, which was passed in 1998 and increased the tobacco tax to be used exclusive for services for children up to five years old. This budget, subject to voter approval, would redirect Proposition 10 funds of up to $340 million in the first year and $268 annually for the following five years to be appropriated by the Legislature. As a result, local First Five Commissions would have to cut the programs they fund, such as county “Healthy Kids” coverage initiatives.

* Proposition 1E would amend Proposition 63, which in 2004 raised the income tax for the upper-tax bracket to earmark funding specifically for mental health services. This budget, subject to voter approval, would redirect Proposition 63 funds of up to $226.7 million in the first year and $234 annually for the following year from Proposition 63 mental health services to backfill the existing Early and Periodic Screening, Diagnosis, and Treatment (EPSDT) program.

* Proposition 1A would pass a Constitutional amendment to institute a spending cap, to limit the amount of revenue that can be appropriated for the General Fund. It also would extend the temporary taxes to last from two to five years. Under the spending cap, any revenues above a forecasted amount must be put in a “Budget Stabilization Fund,” and can only be accessed under certain circumstances. In other words, the spending cap locks up money making the state less able to fund education, health care, and other core state services.

Wright doesn’t mention Prop. 1C, which would sell the state lottery to fill a $5 billion dollar hole in the short term, but cost the state money in the aggregate in the long-term from the loss in consistent revenue.  I’ve always thought it was a stupid and shortsighted idea and would be unlikely to support it in May.

But clearly, Prop. 1A is the most dangerous measure in the long-term, locking the state into deep cuts into the distant future, which would ratchet down services regardless of demand or growth.  This is the long-sought effort by the far right to drown government in the bathtub.  And yet to this point, no opposition has been found to this measure.

The last time Gov. Arnold Schwarzenegger asked California’s voters to permanently cap state spending, organized labor dumped millions of dollars into a successful campaign to defeat his proposals.

Four years later, Schwarzenegger and other proponents are hoping the unions will sit out the May 19 special election in which the governor is again asking voters to enact a spending cap. That measure was placed on the ballot by the Legislature as part of last week’s deal to resolve the state’s cash crisis.

The official ballot arguments have been submitted, and in what administration officials hope is an encouraging sign, the best-funded labor groups opted not to weigh in against the measure. At least not yet.

In addition, the state’s major antitax groups have split over the measure, with at least two supporting it even though it would prolong the tax increase that the Legislature passed last week. The California Taxpayers’ Assn. signed the ballot measure backing the spending cap, and Lew Uhler of the National Tax-Limitation Committee said he also favors the measure, called Proposition 1A.

The above-mentioned provision that extends the taxes passed by the Legislature makes for approximately the easiest demagoguery in the history of California initiatives.  Jon Coupal at the Howard Jarvis Taxpayers Association says his group will try to defeat the measure.  The fact that the ballot arguments had to come in so quickly may be driving this perceived silence on the part of slower-moving unions, but they need to make themselves clear.  Do they support a spending cap that will unquestionably take the state backwards in the future, or will they oppose it – and back up that talk with action?  We shall see.

The California Budget Project has done a preliminary report on the “solution” (and I’m glad they put it in quotes) reached yesterday and expected to be signed by the Governor today.  They demystify the fact that this is, once again, a short-term fix that will actually worsen our budget situation in the future.  The $42 billion dollar hole from this year is a direct result of constant short-term fixes over the past several decades, pushing off the problem until the current legislators are out of office.  Even in this budget, it is balanced through $6 billion in borrowing, which might as well be magic since we have the worst bond rating in the country.

The worst part of this is the spending cap, which could cripple future budget and severely ratchet down state services well beyond demand or even the rate of inflation and population increases.  We have seen from other states how this is a hammer on the heads of the least of society and it must be fought in the May 19 special election.  But the CBP is just as perturbed about the massive tax cuts, at a time of a $42 billion dollar deficit, to large multinational corporations:

Give multi-state corporations the option to choose between two different formulas for determining how much of their income would be subject to tax in California. This provision would be in effect in tax years beginning on or after January 1, 2011 and would cost $650 million in the first full year of implementation, eventually increasing to $1.5 billion annually. This provision provides no benefit to small businesses that only operate in California.

The tax breaks for movie companies and new construction home buyers and for hiring new workers (which history has shown doesn’t end up increasing employment but increasing employer chicanery with their payrolls) are all temporary, as are the tax increases.  The only PERMANENT tax in the entire plan is this giveaway to giant corporations like Exxon.  This is why Richard Holober claims that big business is the “only winner” in this budget.

The worst of the business tax cuts is a permanent change in the formula for calculating the income tax for multi-state and multinational corporations. This produces an initial big business tax cut of about $700 million a year. The State Senate analysis estimates the recalculation will eventually yield a corporate tax reduction – and state revenue loss – of $1.5 billion a year. This is not tax fairness. Combined with the tax hikes on everyday Californians, it is redistribution of income away from workers and consumers and into the pockets of our state’s biggest businesses. And it provides no tax savings for the mom and pop businesses that we usually count on to provide the camouflage for these corporate welfare schemes.

Another major sin in this budget are the agreements secured by Republicans to essentially increase greenhouse gas emissions by relaxing environmental regulations for large diesel vehicles.  This is another example of Arnold Schwarzenegger being a complete hypocrite, running around the country painting himself as the “green governor” while ramming through a provision directly contrary to that.

Like the budget itself, AB 8 XX was not the subject of any public hearings. The measure’s scaling back of emission controls was one of many concessions sought by Republicans in order for three of them in the Assembly and three in the Senate to vote for the budget.

Since there were no public hearings on the measure, it was easy for the GOP to side with the construction industry and ignore the majority of its members who want California to reduce greenhouse gas emissions and improve air quality.

A 2006 statewide by the Public Policy Institute of California found that 62 percent of Republicans strongly support state action to ratchet down greenhouse gas emissions. So do 73 percent of Democrats and 70 percent of independent voters.

That same poll found that two-thirds of likely voters for rolling greenhouse gas emissions back to 1990 levels by 2020. That is the legislation that became AB 32.

Finally, there is $5.8 billion that will be on the ballot for voters to agree upon, including a privatization of the lottery (which assumes a $5 billion sale… who is lining up to buy the California Lottery?) that would be a net loss of revenue for the state in the long-term, and $800 billion in raids from various voter-approved funds for things like mental health treatment.  Considering how unpopular the legislature is these days, there is no guarantee that any of these will pass, which will leave another hole to fill by June.

These are just some of the details that reinforce the object lesson that major fundamental reforms, in particular repealing the 2/3 rule, are desperately needed.  None of the above measures help the state.  They were put in to placate a fanatical minority who is emboldened by a conservative veto.  Sign the pledge to repeal 2/3.

Before last night’s blogger conference call with LA City Council President Eric Garcetti, my opinions of the budget deal from Sacramento weren’t very well-formed.  I think I have become so inured to craptastic solutions from Sacramento that this one looked no worse than others.  Of course, I don’t have a responsibility to constituents and a need to implement the outlines of the plan, so Garcetti’s very forceful words against the package kind of snapped me out of my slumber.  Here’s a paraphrase.

“I think it’s a reflection of a broken system.  It’s like shooting a little morphine into a sick patient.  I think depending on federal dollars to balance the budget is irresponsible, and will blunt the impact of the stimulus.  It means that the county and school districts will see a lot of projects rolled back.  The health care cuts are going to be devastating.  You’re going to see a lot more homeless people this year, a lot more people who need critical care and can’t get it.  So there is no joy in this resolution other than that it is a resolution.”

Very strong stuff.  And he’s not wrong.  My one quibble would be that it’s not the reliance on federal stimulus dollars to balance the budget, which is necessary and will save jobs throughout the system, that gets me, but the continued reliance on borrowing and the raid of voter-approved funds for mental health and early childhood programs, which is illegal and will require the unlikelihood of passing new initiatives.  

There isn’t any margin for error if, say, one of the FIVE measures that will now be on the ballot in order to secure the budget fail, or if the giant corporate tax cut fails to satiate business, or if nobody wants to buy our debt or buy the state lottery, which is losing revenue.  It’s another seat-of-our-pants craptastic budget which makes no long-term solutions and essentially keeps intact a broken structure.  Garcetti is right that the problem is systemic, and so that’s the goal for progressives in the state for this point forward – systemic change.

Anything else?

UPDATE by Dave: Yes I have a few more.

Dave Johnson, Speak Out California

Is California’s lottery becoming just one more subsidy for the rich?  

When We, the People of California agreed to have a state lottery it was to pay for extra education for our children on top of the existing education budget.  It was not supposed to make up for other budget cuts for schools, it was supposed to be extra money to improve the educational system.

This has … migrated.  The lottery under the Governor’s new borrowing plan may be fast becoming one more gimmick to avoid taxing the rich and big corporations.  (Not to mention paying out millions upon millions in debt interest for years and years to those with the means to loan the state these billions.)

The California Budget Project has a new report, Borrowing Against the Future: Are Lottery Bonds the Best Way To Close the Budget Gap? (PDF file)  It is well worth taking a look at.  They say the numbers don’t add up, the lottery can’t deliver the needed revenue, the scheme makes it even harder to fix the budget in the future, will have a high interest rate, and has numerous other problems.  On a conference call Tuesday with jean Ross, one of the report’s authors, I also learned that the cost over time of borrowing this money will be between $41.5 and $50 billion — way too high.  The lottery is largely played by low-income people so efforts to drive up lottery purchases increases their burden and will likely come at a cost of other purchases, thereby sacrificing sales tax revenue to the state.

That there are so many things wrong with this latest borrowing scheme might be a good sign.  It might, just might mean that the Republicans are scraping the very bottom of their barrel of anti-government and tax-avoidance gimmicks.  After this wild scheme collapses maybe, just maybe they’ll come to their senses.

Click through to Speak Out California