California must reform how it budgets and spends taxpayer dollars. For a generation, the state's budget has swung in and out of balance as a result of discrepancies between fluctuating tax revenues and auto-pilot spending. This system is not stable, responsible or in anyone's best interest. Since taking office Governor Schwarzenegger has successfully spearheaded efforts to take budget-balancing ploys off the table and increase state savings. In December the Governor announced that he will declare a fiscal emergency to address the current year budget shortfall. Now Governor Schwarzenegger proposes the Budget Stabilization Act, a Constitutional amendment to fundamentally reform the state budget process. This reform requires a vote of the people.

California needs a budget system worthy of the people who rely on it.

California's economy continues to grow, in spite of the current housing downturn, and the state continues to enjoy overall job growth. Yet while Governor Schwarzenegger prudently increased our rainy day reserve to historic highs in 2006 and 2007, California still faces a projected $14 billion budget gap that necessitates across-the-board-cuts.

This situation is not unique. California's budget problem is chronic, and driven by two factors:

• The state historically spends all the money it takes in during years of high revenue growth, leading to unsustainable spending levels in the long run.
• California has not slowed spending growth fast enough. Automatic formulas will increase spending in FY 2007-08 by 7.3 percent, unless we take action now. Each month California spends $600 million more than the state takes in.

The majority of spending in the budget is set on auto-pilot. Currently about 90 percent of the budget is tied up with contracts and statutory requirements.

This "feast-or-famine" cycle and automatic spending threatens the state's long-term fiscal stability and leaves the most vulnerable residents victim to erratic, unpredictable assistance. Californians deserve better. Since the system itself is the problem, the system must be changed.

If the Budget Stabilization Act had been in effect since 1998, the state would not have developed a structural budget deficit. In years where a deficit emerged, the Budget Stabilization Act would have triggered moderate cuts automatically to avoid draconian cuts later.

The Budget Stabilization Act creates stability by saving, not spending, in prosperous times.

The Budget Stabilization Act will establish a Revenue Stabilization Fund (RSF), which is simply a savings account for excess revenues taken in by the state each year.

• "Excess revenues" are defined as state tax revenues above a reasonable, long-term average rate of growth. The state Department of Finance will calculate and release this revenue projection two times each year: in January and May.

This amendment will require that the state deposit excess revenues into the RSF. While the Governor has consistently chosen to bolster California's rainy day fund, the RSF will make these savings automatic - thus ensuring that California does not again fall into the trap of spending all its revenues in prosperous times.

The Budget Stabilization Act bridges the revenue gap in lean times.

In years when tax revenues are below average and California cannot meet its spending obligations, the state will transfer the difference from the RSF into the General Fund.

• Transfers will only take place when revenue grows at a rate below the long-term average.
• The state cannot transfer funds just to avoid deficits.

The Budget Stabilization Act keeps spending under control. The Budget Stabilization Act will allow California to reduce spending when necessary. Right now, California doesn't have this flexibility. Once the Governor signs the budget, spending is locked in unless the Governor declares a fiscal state of emergency and calls a special session.

Under this amendment, automatic reductions in state spending will be triggered by the Governor if the Department of Finance predicts a year-end budget deficit.

• The Department of Finance will calculate and release this projection three times each year: in November, January and June.

If a deficit is predicted, state agencies must reduce their spending by either two percent or five percent, depending on the deficit's projected size.

• If the deficit is projected at one percent or less, agencies will reduce spending by two percent.
• If the deficit is projected at greater than one percent, agencies will reduce spending by five percent.

The Budget Stabilization Act eliminates surprises through predictable, negotiated reductions.

This amendment requires that the legislature enact a statute specifying how the state will reduce spending by two and five percent to meet Budget Stabilization Act requirements as soon as a deficit is projected.

If the legislature does not specify the reductions - or if their reductions are insufficient - the amendment allows the Governor to waive state law and regulations in order to achieve the savings needed to bring California's budget into balance. Debt service, contracts and other constitutionally-protected payments are exempt.

• The Budget Stabilization Act does not change the Proposition 98 guarantee level. Proposition 98 funding could be impacted in some deficit years, but this will be determined by the laws passed by California's legislature.
• The Budget Stabilization Act protects Proposition 98 from the kinds of unpredictable suspensions and cuts it has faced in the past, like those in 2004 and several times in the early 1990s.

Spending changes enacted by the Budget Stabilization Act remain in effect until a new budget or other statutory change is enacted by the legislature.

This amendment requires a vote of the people.

The Budget Stabilization Act does not change any vote threshold. Tax increases, urgency measures and most General Fund appropriations will still have to be enacted by two-thirds majorities in both houses of the legislature.

The Budget Stabilization Act builds on Governor Schwarzenegger's longtime commitment to reining in California's unwieldy state budget. Governor Schwarzenegger campaigned and was elected on the promise of greater fiscal stability and responsibility, and he has actively pursued policies to achieve this for California.

The Governor proposed the California Recovery Plan. The Governor's 2003 proposal included a Constitutional amendment to limit budget spending; it also proposed issuing economic recovery bonds and reforming workers' compensation. The spending limit was not included in the final proposition package that went before California voters.

The Governor negotiated and championed Proposition 57. Placed on the ballot in conjunction with Proposition 58, the Economic Recovery Bond Act (Proposition 57) made $15 billion in bonds available to pay off California's General Fund deficit, without raising taxes.

The Governor negotiated and championed Proposition 58. The Governor championed the California Balanced Budget Act (Proposition 58), which was passed by voters in March 2004. The amendment:

• Requires the state to enact a balanced budget each year.
• Allows the Governor to declare a fiscal state of emergency and make mid-year budget adjustments, in the event that the state faces significant revenue shortfalls or spending deficiencies.
• Establishes a rainy day reserve.
• Prohibits most future borrowing to cover budget deficits (general obligation bonds, revenue bonds, and certain other forms of long-term borrowing).

The Governor negotiated and championed Proposition 1A. The Governor worked with the legislature to place the Protection of Local Government Revenues Act (Proposition 1A) on the November 2004 ballot and campaigned on its behalf. Passed by voters, this Constitutional amendment prevents the state from taking funding from local coffers. Prior to the Governor's administration, the state was criticized by local governments for regularly using local tax dollars in difficult budget years to help cover Sacramento shortfalls (estimates put this number at $40 billion between 1992-2004).

The Governor pushed for a state spending limit. In 2005, the Governor championed the "California Live Within Our Means Act" (Proposition 76), which included a spending limit for the state budget- showing his commitment to solving our budgets structural problems and the state's spending habits even in prosperous economic times.

The Governor raised the bar on Proposition 42. Voters approved the 2006 Strategic Growth Plan Proposition 1A (different from the November 2004 Proposition 1A noted previously), which protected and made it more difficult for the state to tap Proposition 42 transportation funds. As a result, the state is prohibited from borrowing transportation funds on an open-ended basis.

On The Record/Just The Facts: Board Of Equalization Member Bill Leonard - "California State Budget Is On Auto-Pilot": "The truth is that the California state budget is on autopilot with more than 85% of the spending determined by statutory formulas that are appropriated without a budget." (Bill Leonard, "The Leonard Letter," Newsletter, 8/27/07)

Field Poll - 90 Percent Of Voters Statewide Believe The State Budget Deficit Is Serious. "Nine in ten voters statewide believe the state budget deficit is serious, with 58% describing it as very serious and 32% as somewhat serious. Just one voter in twenty (5%) thinks it is not serious. The belief that the state budget deficit is serious includes large majorities of Democrats, Republicans and nonpartisans." (Field Poll, "Voters See State Budget Deficit As A Serious Matter," Poll, 12/28/07)

Legislative Analyst Elizabeth Hill - "Without Permanent Budget Solutions, The State Will Continue To Face Annual Budget Problems": "Addressing the state's current budget problems is even more urgent because we forecast a continuing gap between revenues and expenditures. Without permanent budget solutions, the state will continue to face annual budget problems. A plan to permanently address the state's fiscal troubles must involve ongoing solutions." (Dan Walters, "Fiscal woes becoming even deeper," Sacramento Bee, 11/15/07)

Governor Gray Davis - "Only Way To Avoid Roller-Coaster Ride" Is To "Put Aside" A Percentage Of The Budget: "The only way to avoid this roller-coaster ride is to have a constitutional amendment in place that requires that you put aside 3 (percent) to 4 percent of the budget and only draw down on that when the economy is weakening." (Harrison Sheppard, "Running deep in the red," Los Angeles Daily News, 11/15/07)

New California Network - "Right Reforms Could Ease The 'Structural' Budget Gap By Reducing The Pressure Of Increasing Costs": "The right reforms could ease the 'structural' budget gap by reducing the pressure of increasing costs. Smart reforms in budgeting and management could deliver in California, as they have in other states, better results in education, social services, and even prisons, and as a result, hold down demands on the most expensive government programs." (New California Network, "In Search Of Fiscal Responsibility," Report, 7/1/06)