CALTAX COMMENTARY:
Good Start on Budget Process Reform, But More Is Needed

doerrBy CalTax Chief Tax Consultant David R. Doerr

Passage of Proposition 54 on November 8 was a good start for budget process reform. The initiative requires all bills, including the budget and budget trailer bills, to be in print for three days prior to the final vote in either house of the Legislature. This fixes one of the more egregious outrages in the budget process: the practice of amending substantive provisions into the budget and budget trailer bills, and then voting on the bills the same day, before anyone has a chance to read the amendments.

Additionally, other improvements are in place. Each house’s budget subcommittees and the budget conference committee hold hearings, open to the public, on the provisions of the budget and budget trailer bills. This practice needs to continue and be institutionalized.

However, more reform of the budget process is needed. Here are a few ideas:

Major policy changes and provisions that aren’t related to the budget should not be included in budget trailer bills. For many, many years, budget trailer bills were used to make minor changes to facilitate budget appropriations. More recently – particularly since the passage of Proposition 25 in 2010, allowing the budget and budget trailer bills to be passed by a majority, rather than two-thirds vote of the Legislature – huge policy changes are being made in budget trailer bills, without going through the normal legislative process.

Proposition 25 defined budget trailer bills as “bills identified as related to the budget in the budget bill.” Despite a commonsense understanding that only provisions relating to implementation of the budget should be in budget trailer bills, many bills have provisions that really are new proposals. For example, an earned income tax credit was passed as a budget trailer bill. Another example is the limitation on school district reserves – a proposal that has nothing to do with the state budget, but was passed as a budget trailer bill.

Budget trailer bills should include only provisions necessary to implement the budget, identified in the budget at the time the budget is passed. Major policy changes should be passed on their own merits, not as budget trailer bills. Each budget trailer bill should be required to contain the provision of the budget it is implementing, and why the budget appropriation could not be made legally without the trailer bill.

A nonpartisan analysis of the budget and trailer bills is needed prior to lawmakers’ votes. Having the budget bill in print for at least 72 hours will be helpful, but the provisions in a budget bill generally are just numbers, and are impossible for most observers to understand. Prior to 2008, the nonpartisan Legislative Analyst’s Office made a complete analysis of the budget introduced by the governor in January, and the changes made in the governor’s May revision (for example, the budget analysis for 1979-80 was 1,578 pages long). Now, the office issues a series of reports on general topics in the original budget and the May changes. Not every provision in the budget is analyzed. More importantly, neither of these budgets – the January proposal or the May revision – is the one that the Legislature actually adopts.

The Assembly and Senate floor analyses of the budget and trailer bills usually are sketchy. Often, there is no analysis of budget trailer bills that emerge shortly before the voting begins. It would be helpful if the legislative analyst could provide a fuller explanation of the budget that members are being asked to approve, and provide an analysis of provisions and policy issues in budget trailer bills.

Late-blooming budget trailer bills should not be allowed. Occasionally, weeks after the passage of the budget and the appropriate trailer bills, another bill will be amended with a $1,000 appropriation and labeled a “budget trailer bill.” Also, believe it or not, despite an unpublished appellate court decision to the contrary, the legislative budget writers have interpreted Proposition 25 to mean that after the budget bill has been passed without any reference to the late-blooming bill, the budget bill can be amended to include the number of the new bill that someone wants to designate as a budget trailer bill.

Budget trailer bills should be limited to those that implement the budget at the time the budget is passed. No budget trailer bill should be enacted after the budget is passed, or by the start of the new fiscal year if the budget is passed on time.

The Third District of Appeal, in a January 23, 2013, decision (later unpublished) ruled against late-blooming budget trailer bills. According to the decision, the majority-vote provision in Article IV, Section 12(e) of the California Constitution is limited to the time the budget is passed. The court said that a “transparent loophole” in the budget process would be created if the Legislature could “identify nothing more than a budget number in the budget bill” and then after passage of the budget, add substance and appropriation to a spot bill and pass it by a majority vote. This loophole would “defeat the electorate’s intent” that, to qualify for majority-vote passage as a “bill providing for an appropriation related to the budget,” the bill “must pinpoint the idea or concept at theme the budget is passed.” (Howard Jarvis Taxpayers Association v. Debra Bowen, Secretary of State and the Legislature.)

The single-subject requirement for bills should be enforced more vigorously. The California Constitution already limits bills to a single subject (Article IV, Section 9). The courts ruled in Harbor v. Deukmejian that the single-subject requirement in the state constitution applies to budget trailer bills, but at times this requirement has been bent almost to the breaking point. Budget trailer bills are jammed with many provisions that have only the remotest connection to an ambiguous title, such as “general government.” Taxpayers benefit when each budget trailer bill sticks to a single subject, so each provision can stand on its own merits.

All members of each house should be involved in the budget process. For most of California history, the Assembly and Senate each passed a complete budget bill, then sent the bills to a conference committee to resolve differences. All members could make suggestions and propose amendments during the floor debate. Now, “budget bills” without content are passed and sent to the conference committee. Recommendations from the budget committee of each house form the agenda, and even new provisions that aren’t in either committee’s recommendations can be added, and sometimes are proposed by the governor.

The balanced budget requirement needs to be strengthened; fiscal estimating needs improvement. In 2004, at the urging of then-Governor Arnold Schwarzenegger, voters approved (with 71 percent support) a constitutional amendment requiring the Legislature to pass a balanced budget. Prior to that time, the constitution required only that the governor submit a balanced budget. Proposition 58 provided that the Legislature may not send to the Governor “a budget bill that would appropriate from the General Fund, for that fiscal year, a total amount that, when combined with all appropriations from the General Fund for that fiscal year made as of the date of the budget bill’s passage, and the amount of any General Fund moneys transferred to the Budget Stabilization Account for that fiscal year pursuant to Section 20 of Article XVI, exceeds General Fund revenues for that fiscal year estimated as of the date of the budget bill’s passage.” (Article 4, Section 12(g)).

While almost everyone thinks that a balanced budget has been passed, it is a semi-secret that the amount of general fund spending will substantially exceed the amount in the budget. While it is not possible to say that the budget figure has been “lowballed,” it is less than the actual spending, almost every year. In June of this year, a 2015-16 $40 million general fund supplemental appropriation bill was passed with little fanfare, and generally was not reported in the press. For the 2014-15 budget, a supplemental appropriation bill of $521.5 million from the general fund was passed in the spring of 2015. The prior year, $553.4 million in additional general fund spending was approved nearly a year after the budget was approved for that fiscal year. Whether a supplemental appropriations bill creates general fund spending in a year higher than current revenue depends on the size of the surplus at the time the budget was passed, and the accuracy of the revenue estimates.

One does not know why appropriations almost always are underestimated in the budget. Since it happens almost every year, it is logical to assume that budgeteers would make an effort to avoid such occurrences with a correction factor or more accurate estimates. However, some have suggested that it is politically preferable to show a smaller increase in general fund spending at the time the budget is passed.

A careful reading of the constitution reveals that only appropriation bills passed at the time the budget is passed are included in the balanced budget requirement. Subsequent bills are not. This requirement should be strengthened to provide that all appropriation bills for a fiscal year shall not exceed estimated revenue.

An accurate estimate of expenditures will not necessarily produce a balanced budget, if the revenue estimates are substantially off the mark. It is impossible to hit revenue targets exactly, unless you believe in witchcraft. Estimators cannot know what is going to happen to the economy in the future – it is an educated guess. In some years, the estimates are off by billions of dollars. The Department of Finance and legislative analyst sometimes have differed on budget revenue estimates. For July through October of this year, Controller Betty Yee reports that revenue is $330 million below estimates. We will have to suck it up and tolerate some error in the revenue estimates, but we should learn from such errors so they may be possibly avoided in the future. The Department of Finance should put out a report each year on the size of the revenue estimating error for the year, and the reasons.

However, in one aspect of revenue estimating – revenue estimates for a number of tax measures – the Legislature is being given misinformation, and then must make policy decisions based in part on such misinformation. The Department of Finance and tax agencies generally use “static” revenue estimates. These estimates assume that the underlying tax policy provisions will have no effect on the economy, and will not cause behavioral changes that will either increase or decrease revenue, depending on the provisions of the bill.

The Legislature has recognized that taxes change behavior – otherwise, it would not have granted tax credits and exemptions as incentives to people to change behavior, such as the movie tax credit, environmental policy tax credits, aerospace tax credits, etc. The alternative to “static” estimating is “dynamic” estimating. Former Senator Tom Campbell spearheaded a bill, passed in the 1990s, to require dynamic estimates in certain situations. Unfortunately, the provisions of the bill expired long ago. It is not in the public interest to ask the Legislature to make a decision based on inaccurate estimates of revenue. Dynamic revenue scoring should be used wherever possible.

Performance budgeting should be required. Performance-based budgeting will help ensure funds are being used wisely. This is clearly a bipartisan issue – legislators of both parties like the idea, and governors of both parties don’t. A performance budgeting bill by Democratic Senator Lois Wolk (SB 14 of 2011) was vetoed by Governor Jerry Brown, for example.

One final note. Words used in describing the budget should be clear and understandable. Jargon and gobbledygook should be avoided. Also, it is highly misleading to describe a program’s budget increase as a “cut” because the recipient of the additional dollars didn’t get as much as expected. A long time ago, a report by the Assembly Committee on Revenue and Taxation described these so-called “cuts” as “Slobovian losses,” which the report defined as “the loss of something you don’t yet have, but thought you might get.” Budget-writers should promote clarity, and use “cut” only to describe a budget or budget item that is less than the prior year.

December 14, 2016

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