In June of 2003, two Assembly members, Keith Richman, a Republican and Joseph Canciamilla, a Democrat, introduced a compromise budget plan to close a $38 billion shortfall, the largest in California’s history. A key component of the plan was the establishment of a reserve to avoid or reduce substantial deficits in the future. Although the plan was shot down, it seems clear that if a significant reserve had been established five years ago when this plan was proposed, we would not be facing a $22 billion deficit today. A reserve, called a “Budget Stabilization Account” (“BSA”) was established with the passage of Proposition 58 in 2004, but it’s primary purpose is to repay the deficit recovery bonds authorized by the passage (also in 2004) of Proposition 57 and there is no requirement for any excess funds in the account to be used to avoid or reduce a budget deficit. The concept of a substantial reserve, or “rainy day fund,” to avoid or reduce future budget deficits re-surfaced in January as part of a constitutional measure (to make a number of changes to the budget process), proposed by the Governor, called the “Budget Stabilization Act.” The May revision to the Governor’s 2008-09 budget proposal modifies those changes and proposes interactions with a lottery modernization and securitization proposal. In the modified proposal, the amount of revenues that the General Fund could receive in any year will be limited by the average growth rate of General Fund revenues over the prior ten years. In any year in which General Fund revenues were expected to grow (based on a forecast by the Department of Finance) by more than the average growth rate of the ten prior years, the excess revenues would be deposited into a new reserve called the “Revenue Stabilization Fund” (“RSF”) with 40% of the amount deposited being allocated to an education sub-account. The aim of the proposal is to build a substantial amount of funds in the RSF (up to 15% of annual General Fund revenues, currently about $15 billion). Unlike the BSA reserve, the Legislature could not generally access the funds in the RSF, including in cases of fiscal emergencies. Instead, funds (not allocated to the education sub-account) could be transferred from the RSF to (only) the General Fund (by a 2/3 vote of the Legislature) in years in which General Fund revenues were forecasted to grow less than the cap established by the ten-year average growth rate, and, the amount of the transfer would be restricted to the amount necessary to reach the cap. Funds in the education sub-account could be withdrawn (by a majority vote of the Legislature) to cover Proposition 98 expenses. Trigger mechanism Additional provisions in the “Budget Stabilization Act’ proposal include a system by which the administration could trigger across-the-board spending reductions if the state’s current-year budget was forecasted to have a negative reserve, and an elimination of the provision in the Constitution that allows the Legislature to suspend Proposition 98 in any year. As indicated above, the May budget revision proposes interactions with a lottery modernization and securitization proposal. The modernization portion of the proposal is anticipated to increase lottery profits from the current $1.2 billion to over $2.4 billion within the next 5 to 10 years. Modernization would include methods of making the lottery more attractive to prospective purchasers such as utilizing new technology to enable greater flexibility in the types of games offered and increasing payouts. With greater profits securitization can be utilized to generate funds for the RSF while still providing the $1.2 billion to schools that is being done currently. School safeguards There are also safeguards in the proposal to assure that the schools will not receive less than that amount. The administration estimates that $15 billion will be raised over the next three years from securitization (sale of a portion of future lottery profits to bond investors in exchange for a series of payments to the State). Since the securitization is a sale rather than a loan, there is no recourse to California. The estimated deposits to the RSF resulting from securitization include $5.1 billion in fiscal 2008-09 and approximately $10 billion more over the following two fiscal years. The 2008-09 deposit would be immediately transferred to the General Fund to help close the gap for that year. I believe that California needs a “rainy day” fund to avoid substantial deficits every time there is a decrease in revenues. Securitization of the lottery has been offered by both the Governor’s proposal and an alternative budget proposal, prepared by the independent Legislative Analysts Office, as a reasonable approach to kick-start the reserve. I agree with them. The decision will be placed in our hands (as voters) in November. Gregory N. Lippe, CPA, is Managing Partner of the Woodland Hills-based CPA Firm of Lippe, Hellie, Hoffer & Allison, LLP, Chairman of the Valley Industry and Commerce Association (VICA) and a Director of First Commerce Bank.
