Note: The Background, Proposal, and Fiscal Effect sections are taken from the LWVCEF In Depth publication, based in part on the Legislative Analyst’s Office analysis included in the Secretary of State’s official Voter Information Guide.

BACKGROUND

Price and Availability of Oil

California, like the rest of the United States, is heavily dependent on petroleum, particularly for transportation. The price of petroleum products has soared as the nation continues to import most of this fuel from foreign sources and as demand for petroleum is growing fast in India and China.

The United States currently holds less than 3 percent of the world’s oil supply, but consumes 20 percent of the world’s oil production. Additional oil reserves can be found off the continental shelves of the United States and in the Arctic National Wildlife Refuge (ANWR) in Alaska. However, this oil would comprise only a small percentage of the world’s supply and would not be available for use for up to ten years after the start of drilling.

Some oil experts consider present forecasts too pessimistic and believe there is more oil available when Canada’s oil shale and tar sands are included in the projection and that advanced technology enables more oil to be obtained from older fields.

There is general consensus that the United States must wean itself from oil purchased from unstable parts of the world and that it needs to do so through better management and processing of petroleum and use of a mix of other fuel sources. However, there is a wide disparity of views over where the major emphasis to reduce dependence on oil should be—conservation; development of renewable energy sources; use of fuels that can be produced in the U.S. such as natural gas and nuclear power; or use of oil produced in a stable and adjacent part of the world such as oil from Canadian shale.

Climate Change

Oil shortages and high oil prices came at the same time as an international consensus was growing about the contribution of burning fossil fuels containing carbon to worldwide climate change. Greenhouse gas emissions stay in the atmosphere for many decades and form a barrier that prevents heat from escaping, thus increasing overall temperatures on earth. Science Daily reported on December 13, 2007 that 11 of the warmest years on record had occurred over the past 13 years.

This heating is not uniform across the earth, but is already causing melting of the polar ice caps. Computer models show that the rise in temperature, particularly in the oceans, also contributes to extreme weather events, including droughts, floods, and possibly hurricanes. Drought conditions, in turn, result in reduced water supplies and increased forest fires. Effects are not limited to the area where these gases are emitted but may occur anywhere.

California has taken a leading role in adopting legislation to curb greenhouse gas emissions. In 2006 California enacted the California Global Warming Solutions Act, which requires California to reduce greenhouse gas emissions statewide to 1990 levels by 2020. Since 2002, the Public Utilities Commission (PUC) has required California investor-owned utilities (IOUs) to increase the percentage of renewable fuels in their energy mix by 1 percent a year until they reach the target of 20 percent by 2010. If passed, Proposition 10 would require that by 2012 IOU-produced electricity contain 33 percent of renewable fuels in their energy mix. Governor Schwarzenegger has also issued an Executive Order establishing a groundbreaking low carbon fuel standard that will reduce the carbon intensity of California’s passenger vehicle fuels by at least 10 percent by 2020. State law already requires public utilities to reduce electricity use by 16,000 gigawatts from 2004 to 2013. In July 2008, the PUC increased the reduction target by another 16,000 gigawatt hours by 2020. These cuts are expected to eliminate the need for nine 500-megawatt natural gas-fired power plants. (A gigawatt is one billion watts; a megawatt is one million watts).

THE PROPOSAL

Summary.  Proposition 10 would authorize the sale of $5 billion in general obligation bonds to be repaid from the State’s General Fund, to provide for the following programs in the following percentages:

1. Cash payments of between $2,000 and $50,000 to purchasers of certain vehicles with high fuel economy and clean alternative fuel use, with the bulk of the rebates for trucks and other medium-and-heavy duty vehicles. “Clean alternative fuel” is defined as natural gas and any fuel that achieves a reduction of at least 10 percent carbon intensity.  (58 percent)
2. Incentives for research, development and production of renewable energy technology.  (20 percent)
3. Research and development of alternative fuel vehicle technology.  (11 percent)
4. Demonstration and education projects.  (4 percent)
5. Grants to public universities and colleges for development of alternative fuel and clean energy commercialization.  (3 percent)

Provisions.  Proposition 10 declares that a comprehensive alternative energy strategy must be implemented in California. This strategy should concentrate on three areas: renewable electricity generation, clean alternative fuels for transportation, and energy efficiency and conservation. The measure states that a variety of clean domestic fuels, including natural gas, cellulosic ethanol, biodiesel, and hydrogen, are available to power automobiles.

The stated purpose and intent of the Act is to “invest $5 billion in projects and programs designed to enhance California’s energy independence and to reduce our dependence on foreign oil, reduce greenhouse gas emissions, implement the California Global Warming Solutions Act of 2006, and improve air quality.”

Proposition 10 amends the Public Resources Code by adding a new division to be known as the California Renewable Energy and Clean Fuel Act. It would establish specific accounts from the funds generated by the sale of bonds and specify the state agency that would administer the funds. Administrative costs are limited to no more than 1 percent of each account.

The breakdown of the use of bond funds described in the above Summary is shown in the following table (from the LAO Analysis):

FISCAL EFFECT

The Legislative Analyst’s Office and the California Director of Finance estimate the fiscal impact of Proposition 10 bonds on state government to be about $9.8 billion over 30 years to pay both the principal ($5 billion) and interest ($4.8 billion).  Payments would be about $325 million per year over the 30-year time frame. The cost is approximate because the actual cost would depend on the interest rates at the time the bonds are sold.

The measure allows an amount not to exceed 1 percent of the amount in each fund created by the measure to be used to defray administrative costs. However, the Legislative Analyst estimates there would also be potential state costs of up to about $10 million annually through about 2018-19 for state agency administrative costs not funded by the measure.

There could be an unknown increase in state sales tax revenues, potentially totaling in the tens of millions of dollars, over the period from 2009 to beyond 2018 if consumers use the subsidies to buy more expensive vehicles than they would otherwise. Similarly, local sales taxes and vehicle license fees could increase by an unknown amount, potentially totaling in the tens of millions of dollars, from 2009 to about 2018-19.

There would also be a reduction in highway or gasoline tax funds, the amount depending on the amount of gasoline reduced by using alternate fuel vehicles funded by the bonds.

LEAGUE POSITIONS AND DISCUSSION

The LWVC State and Local Finances (SLF) position on Long-Term Debt Financing supports the use of bond financing for construction of capital projects and purchase of facilities for public use, and states that the League’s support of bond measures should take into account the state’s current bond rating and the impact of the measure on the ability to finance other projects; how the bond measure fits within debt management and infrastructure plans; and current urgent needs.

The LWVC SLF position on Flexibility of Revenue also opposes earmarking of funds by calling for adoption of designated earmarked funds and taxes only in those situations where social benefit significantly outweighs the loss of flexibility, as well as automatic sunset dates and mandatory review and reauthorization of earmarked funds.

Under the LWVC Energy position, the League supports development of a state energy policy that will ensure reliability of energy resources and protection of the environment and public health and safety, at reasonable customer rates, giving primary consideration to conservation and energy efficiency. The League believes that in acquiring new electric resources, major additional factors to consider include the reduction of greenhouse gas emissions, development and deployment of renewable resources, and contribution to the diversity of the resource mix.

Discussion

Although the League’s Energy position would, in general, support efforts to reduce reliance on petroleum-based fuels and to increase the development and use of alternative and renewable energy sources, the League opposes this proposition on the basis of our government finance positions.

Bonds are usually used to finance capital expenditures or the purchase of property for public purposes, and we can support bonds for those purposes. However, the majority of the proceeds of this bond measure do not fall in those categories but would go to providing rebates to purchasers of alternative fuel and high efficiency vehicles. The state would be repaying the cost of the bonds long after the useful life of these vehicles. Bond funds would also be used for research and development of renewable energy and alternative fuels, and toward training and educational grants, which are not an appropriate use for bond funds and should be financed on a pay-as-you-go basis.

This measure limits flexibility in the use of funds by calling for specific percentages of the bond proceeds to be spent for the rebates, research and development of new technology, and education. There are programs at the federal level that provide more support for some of these purposes already, and at present there also appear to be substantial amounts of venture capital looking for opportunities to invest in this field.

This is a general obligation bond measure that would have to be paid off from the state’s General Fund (GF). Overall GF debt payments in 2007-08 were about $4.4 billion; this figure will continue to rise over the next decade as previously authorized but unsold bonds are marketed.

Proposition 10 does not come with a dedicated revenue source and thus would be funded at the expense of ongoing state programs that are already suffering cutbacks. It would cost the state about $10 billion to repay the principal and interest on the bond, with costs of about $335 million a year from the GF. In contrast, increased revenues to the state and local governments from the sales tax and vehicle license fees on new vehicles as a result of the rebate program could be in the tens of millions of dollars. The measure does not appear to provide adequate funds for administrative oversight, which would probably result in administrative costs of about $10 million a year.

We do not believe this measure is an appropriate use of bond funding, and we feel that it is particularly unwise given our ongoing structural budget situation.

The rebuttal to the supporters’ argument was signed by Donna Gerber, Director of Government Relations, California Nurses Association; Richard Holober, Executive Director, Consumer Federation of California; and Judy Dugan, Research Director, Consumer Watchdog.

The rebuttal to the opponents’ argument was signed by Dr. Alan Henderson, Past President, American Cancer Society, California Division; Jim Conran, President, Consumers First, Inc.; and John D. Dunlap III, Former Chair, California Air Resources Board.

RESOURCES

Anne Henderson, LWVC State and Local Finances Program Director

Chris Carson, LWVC Government Director
govt@lwvc.org

Trudy Schafer, LWVC Senior Director for Program
1107 9th Street, Suite 300, Sacramento 95814
916 442.7215, tschafer@lwvc.org

www.votenoonprop10.com, www.consumerfedofca.org, Consumer Federation of California
650 375.7840

SUMMARY POINTS

• Read and distribute a flyer.
  
  

get involved

Consider sending a letter to the editor of your local newspaper. Please adapt this letter to your own community and check your local paper’s word limit for published letters.