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Propositions 57 and 58 Are a Necessary First Step

Tuesday February 24, 2004

The March 2 election date is fast-approaching and many Berkeley voters have already received their absentee ballots. So many of you have called me and asked my opinion about Propositions 57 and 58, that I am distributing the remarks I gave on this subject to the Berkeley Democratic Club earlier this month.  

Prop. 57, the Economic Recovery Bond Act, authorizes the state to sell $15 billion in bonds to pay for operations, not the bricks and mortar that you normally would expect from the selling of bonds. These bonds are to be paid back over a period of 9 to 14 years from one fourth of a penny from the state sales tax. A range is given on the number of years to pay back the debt because as the economy improves, the total amount of sales tax increases. the amount available for payback increases, and the payback period decreases. As the economy slows or limps along, the amount of sales tax goes down, and the payback period takes longer. 

Prop. 58 amends the California Constitution to require the state to approve balanced budgets each year in the future. Currently, the Constitution requires the governor to propose a balanced budget annually, but does not require that the final budget approved by the Legislature and signed by the governor be balanced. Prop. 58 also requires that the state set up a reserve using from 1-3 percent of the state’s general fund revenues until the reserve reaches either $8 billion or five percent of the state’s General Fund whichever is greater. The purpose of this reserve is to smooth out future dips in revenue so that there aren’t sudden changes to programs and services. 

Both Prop. 57 and 58 must be approved by the voters in order for either to take effect.  

Berkeley’s acting city manager, Phil Kamlarz, has called borrowing to pay past debt is “lousy policy.” We can all agree on that, and hopefully a majority of us will agree that the financial situation California faces todayleaves us without choice. Just like too many ordinary people, the state has been living with unbalanced budgets—spending more than their income. I am not here to fix blame or point fingers. There is plenty of blame to be assigned to many parties, but what has happened, has happened. Now, we need to focus on getting out of this mess, so let me give you five compelling reasons why we need to approve Propositions 57 and 58 on March 2.  

1) Without voter approval of 57 and 58, the state will be out of money in June of 2004. 

2) The state, which already takes millions from local governments to balance their budget, will take even more, maybe double the current amount. The state has taken $4 million from Berkeley alone every yearsince the early ‘90s, $6 million now. The state taking more will clearly be a disaster for our own local situation. They need to give our money back to us! 

3) Even if bankrupt, the state will still have to function, so California will have to turn to “stand-by agreements.” These are nasty financial instruments that carry very high interest rates which depending on various factors, could increase California’s debt to $30 billion by 2005!  

4) We can’t rely upon last year’s $11 billion bond debt financing plan approved by the Legislature last year because that action is being taken to court by the Pacific Legal Foundation on the basis it wasn’t approved by the voters. Don’t be mistaken, this $11 billion is included in the $15 billion in Prop. 57. There isn’t an extra $11 billion out there. Several legal experts believe that the Pacific Legal Foundation court challenge will succeed. 

5) If we were to raise income tax rates on those with incomes over $200,000, raise taxes on alcohol and tobacco and raise the sales tax by one cent, we will generate about $7 billion, not even one-half of the $15 billion debt. 

Some have said that the whole debt could be wiped out simply by raising income taxes on California’s wealthiest residents. Income taxes are not retroactive. The earliest an income tax increase could apply would be next year, maybe longer depending on how long it takes to work out. This, at best will be after the state runs out of money and has to rely on deep cuts to services, funds from local and county government and those costly stand-by agreements. Also, increases to income tax are also subject to all of the withholding and credits allowable for various reasons, so it’s hard to determine the full impact without a great deal more of study. 

This is far too important a matter to play around with. I am very concerned that our elected leadership at all levels, with the exception of Oakland Mayor Jerry Brown, has been silent on this issue. So, it is time, for us ordinary citizens to speak up. An interesting analogy that we can all relate to, and use as an explanation to friends and neighbors, is the ordinary citizen who lives beyond his means and gets into wrenching debt. Any responsible credit counselor would advisor this person to consolidate debt, re-finance with lower interest rates, make regular paybacks and commit to responsible behavior in the future. This is exactly what Propositions 57 and 58 do. 

Sure, approving Props 57 and 58 will not solve our budget woes. We still must face living within our means, trimming state expenditures (I suggest eliminating the State giving brand new luxury cars to legislators and paying people over $100,000 to sit on a state board), and raising new revenues (I suggest increase income taxes on our wealthiest residents). Yes, it’s lousy policy to borrow to get out of debt, but it’s the responsible, practical and effective thing to do right now. Vote yes on Propositions 57 and 58 on the March ballot.  


Shirley Dean is a former mayor of Berkeley.