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STATE BUDGET, RELATED TAXES, AND RESERVE.
VOTING REQUIREMENTS. PENALTIES
Initiative Constitutional Amendment and Statute

THE QUESTION

Should the State Constitution and certain statutes be amended to allow the state legislature to pass the state budget and budget-related tax and appropriation bills with a 55 percent vote, and to make other changes to the budget process?

BACKGROUND

The state budget bill provides the annual funding for most state government programs. Before the budget bill is sent to the Governor for approval, it must be passed by a two-thirds vote (67 percent) of each house of the Legislature. The State Constitution requires legislative passage of the budget bill by June 15 of each year. (It does not, however, provide a deadline for the Legislature and Governor to come to final agreement on the budget bill.)

The State Constitution also requires a two-thirds vote of each house of the Legislature for the passage of bills that increase taxes. These types of bills take effect immediately. Other types of bills--including bills reducing taxes or spending--can be passed with a majority (over 50 percent) vote and take effect on January 1 of the following year.

The budget typically includes money set aside for unexpected events, such as revenue shortfalls or emergencies. These funds are placed into a reserve or "rainy day" fund. Currently, the Legislature and Governor can choose each year how much money to put into this fund.

PROVISIONS

This measure amends both the state's Constitution and statutes to change the state budget process. Figure 1 summarizes the main provisions of the proposition.

Votes on State Budget-Related Taxes and Spending. This measure reduces from two-thirds (67 percent) to 55 percent the number of votes required to pass the budget bill and other bills--including tax increase measures--related to the budget bill. These budget-related bills would take effect immediately upon passage.

Reserve Requirements. This measure establishes minimum requirements for putting money into and taking money out of the state reserve fund. Under the measure, funds would be added to the reserve in any year in which state revenues exceeded what was needed for "current service levels." (This term refers to the amount needed to fund existing state programs, adjusted each year for population changes and inflation. Annual revenues above this amount could be considered "excess revenues.") Specifically, the measure requires the Legislature to put in the reserve at least 25 percent of any excess revenues, until the reserve reaches 5 percent of prior-year spending (currently a reserve amount of almost $4 billion). The measure does not restrict the use of the remaining excess revenues. Reserve funds could only be spent in cases of an emergency or in years in which spending on current service levels exceeded available revenues.

FIGURE 1

PROVISIONS OF PROPOSITION 56

Votes on State Budget-Related Taxes and Spending Permits Legislature to enact with 55 percent vote rather than the two-thirds vote currently required.

Reserve Requirements Requires 25 percent of "excess" state revenue (up to 5 percent of General Fund spending) to be set aside. Reserve funds could be spent only in certain circumstances.

Consequences of Late Budget Requires that Legislature and Governor lose salary and expenses each day the budget is late. Requires the Legislature stay in session until budget is passed.

Other Provisions Requires budget summary in state ballot pamphlet and directions to an Internet Web site providing budget-related vote information. Prohibits a legislator from punishing or threatening to punish another legislator for a budget-related vote.

Consequences of Late Budget. This measure prohibits the Legislature and the Governor from collecting their salaries and expenses when the budget is late. Lost salaries and expenses could not be paid back later. In addition, the measure requires the Legislature to stay in session until the budget is approved.

Other Provisions. The measure also includes the following provisions:

• Ballot Pamphlet Budget Summary. The measure requires the State Controller to prepare a budget summary to be included in the ballot pamphlet provided to voters at every statewide election. This summary would include directions to an Internet Web site that includes voting records of legislators on budget-related bills.
• Punishment of Legislators. The measure prohibits a legislator from punishing or threatening to punish another legislator for a vote related to the budget.

FISCAL EFFECT

The measure would have the following fiscal impacts on state government.

Votes on State Budget-Related Taxes and Spending. This proposition, by reducing the number of votes needed to pass budget-related bills, would make it easier for the Legislature to agree on these measures. The extent of any impacts of this change would depend on a number of factors--such as the state's financial circumstances, the composition of the Legislature, and its future actions. For example, since fewer legislators would need to agree to a state budget, the budget's content and level of spending could change in some years from what it otherwise would have been.

Similarly, the reduced number of required votes would make it easier in some years to approve tax increases related to the budget. In such cases, the measure would result in higher tax revenues (and state spending) than otherwise would have occurred. This potential revenue impact could be significant. For instance, given the state's roughly $70 billion budget, even a small percentage increase in taxes could result in a significant amount of additional revenues.

Reserve Requirements. Under this measure, the Legislature would be required to put revenues into the reserve in certain years. (The funds placed into the reserve would have been available for additional spending or revenue reductions.) As a result, there would be a higher reserve level in some years than otherwise would have occurred. In addition, a higher reserve level could lead to less fluctuation in state spending. For example, a higher reserve could result in lower spending in high revenue growth years and help sustain current service levels in low revenue years. The impact of the reserve requirements would depend on the level of state revenues and legislative decisions regarding current service levels.

Consequences of Late Budget. The loss of salary and expenses requirement for the Governor and Legislature would reduce costs in any year in which there is a late budget. In such cases, the measure would save the state about $50,000 per day in salaries and expenses until approval of the budget.

Ballot Pamphlet Budget Summary. The requirement for the State Controller to produce budget-related information would result in minor costs to the state.

Other Factors. By changing the budget process, this measure could have other fiscal impacts. For example, to the extent the measure makes it easier to address budget problems, it could have some positive effect on the state's credit rating. If so, this would result in some state savings from lower interest costs

WHAT A YES OR NO VOTE MEANS

A YES vote means the legislature could pass the state budget and budget-related bills with a 55 percent vote, and other changes in the state budget process would also be made.

A NO vote means the state budget process would not be changed.

SUPPORTERS SAY

• Proposition 56 is a package of reforms that will end the pattern of late budgets and irresponsible deficits. The legislature has not passed a budget by the constitutional deadline since 1986.
• This measure holds legislators accountable by requiring them to pass the budget on time or face real consequences. They would have to stay in session and work only on the budget, and would forfeit both their salary and expenses until the job was done.
• This constitutional amendment will end partisan gridlock by reducing the vote required to pass the state budget and related bills, including tax measures, from two-thirds to 55 percent. Only two other states routinely require a two-thirds vote to pass a budget. Rather than guaranteeing consensus, this high threshold has given a handful of California legislators the ability to block compromise and demand concessions in return for their support for a budget.
• Proposition 56 gives voters the facts they need to hold their legislators accountable. The Voter Information Guide (ballot pamphlet) would contain a summary of state spending and a Web site listing all legislators' votes on the budget and related taxes.
• Prop. 56 helps avoid future deficits by building up a "rainy day" reserve fund when revenues are greater than needed to fund existing services. The fund could be used only to maintain service levels in bad times or for emergencies like major fires or earthquakes.
• Deficits and late budgets hurt the state's credit rating. They force cuts to important programs as well as big tax increases.

OPPONENTS SAY

• The real aim of this proposition is to make it easier for the legislature to increase our income tax, sales tax, homeowners' parcel tax, car tax, and other state taxes, year after year. Prop. 56 pretends to discipline Sacramento politicians, but it actually rewards them with an open-ended "blank check."
• Buried in Proposition 56 is the elimination of the two-thirds legislative vote requirement for increasing taxes. The two-thirds requirement forces bipartisan consensus and strong justification before politicians can raise taxes.
• California's past fiscal problems are not the result of difficulty in achieving a two-thirds vote for the budget and appropriation bills, but rather its failure to consistently produce prioritized, balanced budgets and inattention to this state's economy and competitive position.
• Jobs and the income tax revenues they produce are the state's number one resource for funding the budget. A higher tax burden on California businesses and individuals will drive more companies out of business and out of state, hurt the state's economic recovery, force more families onto the unemployment line, and ultimately require more education, health care, law enforcement and other budget cuts.
• Californians pay $130 billion in state and local taxes every year. Properly managed and budgeted, $130 billion tax dollars is more than enough to fund California's needs. But our tax dollars are not being properly managed and budgeted.
• Spending is out of control. From 1994 to 2000, state-level government spending increased 100 percent. Raising taxes is not the solution. Resolving the state's chronic budget problems requires correcting the structural imbalance between revenues and spending. The best way to do this is to cut wasteful spending and increase state revenues by stimulating economic growth, NOT by raising taxes.

SUPPORT AND OPPOSITION

Official ballot arguments in support are signed by Helen Russ, President, California AARP; Dan Terry, President, California Professional Firefighters; Carla Nino, President, California State PTA; Lenny Goldberg, Executive Director, California Tax Reform Association; and Jacqueline Jacobberger, President, League of Women Voters of California.

Official ballot arguments in opposition are signed by Larry McCarthy, President, California Taxpayers' Association; Allan Zaremberg, President, California Chamber of Commerce; David Herman, Executive Director, The Seniors Coalition; Betty Jo Toccoli, Chair, California Small Business Roundtable, and Martyn B. Hopper, California State Director, National Federation of Independent Business (NFIB).

FOR MORE INFORMATION

Supporters

Yes on Prop 56, 916-443-7817, www.budgetaccountabilitynow.org

Opponents

Californians Against Higher Taxes--No on 56, 310-996-2678, www.NoBlankChecks.com

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