(Published Nov. 23, 1999)

Legislative Analyst Elizabeth Hill projected last week that California is awash in new money. In her five-year fiscal outlook, Hill estimates that California state government will have a surplus of $2.6 billion this year, rising to $3 billion next year and for several more years to come. That's more triple the $881 million forecast of just five months ago. For a governor who proclaimed education to be his "first, second and third priority," it sounds too good to be true.

In fact, it is. Before anybody rushes off to spend the new money, least of all Gov. Gray Davis, some major cautions are in order. When all is accounted for, there likely won't be very much new money to spend for education or anything else. This makes a proposed $6 billion November 2000 ballot initiative to bring California up to the "national average" in per-pupil spending suddenly look the 800-pound gorilla of next year's budget politics.

A chart on page four of Hill's report shows where half of the surplus will go. It reveals that the amount of money the state will have to pay to backfill local government coffers for dramatic reductions in vehicle license fees (VLF) will triple from $1.5 billion a year today to $4.5 billion a year by 2004-05. The Legislature negotiated VLF cuts with Gov. Pete Wilson before he left office at the end of 1998, but the full cuts will only kick in over the next few years.

In other words, because the economy is so good, California motorists will pay smaller registration fees on their vehicles each year. Until two years ago, Californians paid 2 percent of each vehicle's value. Last year, under the deal with Wilson, it was reduced to 1.75 percent. This year, it was reduced again, to 1.65 percent. Over time, as long as these surpluses continue, the car tax will be cut to 0.67 percent, a two-thirds reduction. On a $30,000 car, the tax will be $200, down from $600.

Since the VLF revenue goes to local governments, cutting the tax could have savaged county governments. But as part of the deal that cut the VLF, the state promised to make up the revenue loss. This "backfill" to the locals is what rises to $4.5 billion a year, what eats so dramatically into the projected surplus.

"Pete Wilson will get us from the grave and keep cutting taxes well into a second Davis administration," said Lenny Goldberg, executive director of the California Tax Reform Association, a liberal lobbying group in Sacramento.

The good news, says Irwin Nowick, a senior consultant to state Sen. Steve Peace, is that these cuts will happen "responsibly" and over time, as opposed to what happened in Washington state last month. There voters, outraged by increases in their car tax, voted by initiative to cut the vehicle registration fee to a flat $30 a year, thus depriving a state that has no state income tax of $million a year. Officials are scrambling there to make up the revenue loss. Nowick's legal research helped torpedo a similar initiative here that Republican Assemblyman Tom McClintock was attempting to put on next year's ballot.

But the VLF challenge is not the only thing eating into the projected surplus. Davis has already said he would rebate money to motorists who paid a smog impact fee when they registered their out-of-state cars. That's another $600 million. Several lawsuits threaten to claim even more.

So the surplus isn't as dramatic as it looks at first glance. Hill estimated that education spending per pupil would grow about 1.6 percent a year in inflation-adjusted dollars, well below the overall growth of the state economy. One budget analyst said that maybe $250 million a year in new money would be available for the governor's initiatives, including education, and for district "pork" for legislators. "That chart on page four," this analyst said, "represents our lost opportunity. Had we not done that tax cut, as Pete Wilson insisted, we'd have all this money to spend on education."

The California Teachers Association is preparing an initiative for November 2000 to bring state per-pupil spending on education to the national average, or roughly $1,000 more per student, over five years. That would require an additional $6 billion a year in state spending. The initiative does not specify a funding source, leaving that politically sensitive choice to the governor and the Legislature.

"CTA knows the money is there and the governor has been lip-syncing for a year on this," said one supporter not affiliated with CTA. "So they are saying, 'You can put the money there, or we'll do it for you. We know we have the support of the voters, and since you do the same polling we do, so do you.' "

CTA government affairs director John Hein said California spending on education has increased about 3 percent a year for the past 10 years. "But the national average for the same period has increased 3.98 percent a year, which explains why, with all the increased dollars we've spent recently, we aren't gaining in the national average."

Hein said his proposal wouldn't pinch other state programs or increase property taxes. "Our polling shows there is overwhelming support for moving to the national average," he said. "We are dead serious, and we will spend whatever it takes."

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