Pete Rates the Propositions
Sensible opinions on the California ballot propositions      since 1980      by Pete Stahl

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Pete Rates the Propositions
June 2006

Pete recommends:
81   YES   Library Construction Bonds ($600 million)
82   NO   Tax on Incomes Over $400,000 for Preschools


Proposition 81: Library Construction Bonds ($600 million) – YES

(Please see My Semi-Biennial Lecture on Bonds for my opinion on bonds in general.)

1974's Prop 13 slashed local governments' budgets, rendering most unable to fund library construction and renovation. The state now pays most of this. In 2000 voters approved Prop 14, providing $350 million for library buildings. All of that has been spent. A 2003 study has identified nearly $4.4 billion in needed library upgrades, including urgent seismic retrofitting and structural repairs, as well as new library buildings for our growing population. Prop 81 will provide $600 million, or less than one seventh of what's needed.

Public libraries have recently taken on a substantial new role. In addition to providing traditional information such as books, tapes and newspapers, libraries must now provide public access to the Internet. Prop 81 allows bond proceeds to be used for Internet wiring and computer acquisition. With 81 our libraries can continue to be effective resources for the community long into the Information Age.



Proposition 82: Tax on Incomes Over $400,000 for Preschools – NO

Proposition 82 would impose a tax increase of 1.7% on individual incomes over $400,000 ($800,000 for couples) in order to fund preschool for every four-year-old in California.

Make no mistake: I think preschool is a great thing. It makes kids read earlier and learn faster. It reduces the need for remedial education, saving both minds and money. Preschool boosts rates of high school graduation and college attendance, giving us a better educated workforce. And it even decreases criminal activity.

And make no mistake: I think a modest bump in the state tax for the wealthy would be just fine. Federal taxes for such people have been repeatedly slashed under the current regime in Washington. Prop 82 barely begins to equalize that. Increasing the tax on the top portion of the highest incomes will be quite bearable—for example, it will add just $3,400 on a household income of $1 million.

However, I object strongly to Prop 82 earmarking all of the new tax revenue for preschools. Under Prop 82, every penny of the $2.1 billion (and growing) realized from the tax increase must be spent on preschool facilities, teacher salaries, training, and scholarships.

As my regular readers know, I'm allergic to budget set-asides like this. Prop 98 (1988) requires the state to spend $55 billion a year on education. Prop 42 (2002) stipulates $1.2 billion must go for transportation; Prop 49 (2002) steers half a billion into after-school programs; and Prop 63 (2004) sets aside $800 million for mental health services. With all this budgeting through the ballot box, there's less and less room for the legislature to accommodate unexpected economic conditions, natural disasters, homeland security, and other surprises. A report by the California Budget Project concludes that "using a very minimal definition of mandatory spending, approximately two-thirds of state spending is mandatory and one third (35 percent) is discretionary ... In reality, the Legislature is much more constrained." With measures like Prop 82, it will only get worse.

These propositions can impose absurd priorities on state spending. Who really believes that after-school programs are more important than law enforcement, health care, or clean water? Nobody. Yet Prop 49 forces the legislature to fund after-school programs before it considers more vital things, every single year. These permanent spending mandates just don't make sense.

Compounding this folly is the enormous ratchet built into Prop 82. By not indexing the $400,000 floor on the new bracket, Prop 82 will result in huge increases in its earmarked funds down the road. The Legislative Analyst projects $2.1 billion in 2007-8, but $2.6 billion—a 24% increase—just three years later. Over time inflation will add more and more of us to the $400,000 Club, and soon catapult preschool funding into the stratosphere. Economic recovery and, dare I suggest, another bubble, would only increase it further. Will the legislature be allowed to use any of that windfall for emergencies or other, equally deserving programs? Not one dime.

Universal preschool is a very admirable cause. In addition to the obvious academic benefits for the tykes, the early education provided by Prop 82 would make K-12 schools better places for everyone by raising the levels of all students. And Prop 82 could even reduce state costs for prisons and jails. I would love to see this happen. But Prop 82's inflexibility makes it a bad law that will straitjacket the legislature for decades. As much as we need universal preschool, we can't live with that side-effect.

I've just quoted most of my argument against Prop 63 from 2004. But this initiative really smells more like Prop 49 from 2002. Like Prop 49, Prop 82 has a famous Hollywood sponsor (pre-governor Arnold Schwarzenegger then, Rob Reiner now), funds a supplementary educational program (after-school, preschool), and creates an untouchable income stream for it (mandated allocation, dedicated income tax). While I agree that the programs are noble and the celebrities famous, I cannot support the funding model of either measure.



My Semi-Biennial Lecture on Bonds

When California wants to finance a large project, it asks the voters for permission to take out a loan. Prop 81 is just such a request. If voters approve, the legislature may take out loans for the projects by selling general obligation bonds, which are paid back with interest over thirty years or so. The bond payments come out of the state's main budget, the General Fund. So when we vote on the bonds, we are really voting on whether the projects in question ought to be added to the state's budget.

"Wait a minute!" I hear you cry. "What about those interest payments? Won't we end up paying more for interest than for the bonds themselves?" This used to be the case, but with today's low interest rates each dollar of bond money will cost only 30 cents in interest, accounting for inflation. (See details online or on page 24 of your ballot pamphlet.)

"Okay," you admit, "but loans are still more expensive than pay-as-you-go." This is true. But loans are the only way to buy a house, or a car, or anything else that you need immediately but can't pay for yet. It's worth paying the premium of interest to get the funding now.

You may be thinking, "We're in a budget crisis! We can't afford these bonds this year!" My response is: Huh? A budget crisis is exactly when you should borrow. We'll pay off the bonds later, when the picture in Sacramento will presumably be rosier.

"Well and good," you continue, "but there are $600 million in bonds on this ballot. Isn't that too much to borrow?" For you, yes, but the State of California can handle it. Bond payments today amount to 5.7% of the General Fund. While this figure is expected to rise to 6.5% in a few years due to bonds for deficit reduction ($15 billion from Prop 57) and school construction ($25 billion from Props 47 and 55), it will probably subside to below 5% as these are paid off. Prop 81, at less than one billion dollars, won't affect the debt ratio significantly.

Prop 81 will fund long-lived, tangible acquisitions, such as library buildings and equipment. It's sensible to make extended payments for things that will be used far into the future. Remember, too, that California's population continues to grow by hundreds of thousands of people every year. Borrowing makes particular sense if you know your income will go up in the future. As the state grows and the economy recovers, the General Fund will certainly grow too.

There is one last reason to vote for a bond measure. In addition to being formal requests for permission to take out loans, bond measures are also looked upon as referenda on the merits of the proposed projects. If a bond measure fails, legislators are likely to believe that the public feels the project is not worthy of receiving state funding. By voting no, you may have meant, "Yes on the project but no on the bonds," but your message to Sacramento will read, "No on the project." So if you vote down a bond measure just because you don't like bonds, you may well have killed forever the project the bonds were to have funded.



 
 
 
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