Proposition 1A
State Budget. Changes California Budget Process. Limits State Spending. Increases "Rainy Day" Budget Stabilization Fund.
Legislative Constitutional Amendment
Background
Spending Limits. Currently, the state Constitution has two main provisions related to overall spending. First, there is a limit on the amount of tax revenues that the state can spend each year. In recent years, however, this limit has been well above the state's actual level of spending and thus has not been a factor in budgeting decisions. Second, Proposition 58, passed in March 2004, requires that the Legislature pass a balanced budget each year.
Rainy Day Reserve Funds. In each annual budget, a portion of the estimated revenues for the upcoming year are normally set aside into one of two "rainy day" reserve funds, to pay for unexpected expenses, cover any drops in tax receipts, or save for future years. The more significant reserve fund is the Budget Stabilization Account/Budget Stabilization Fund (BSA/BSF), which was initially created by Proposition 58 in 2004. Proposition 1A would rename it the BSF; so for simplicity, it is referred to as the BSF throughout this discussion.
Each year, 3 percent of estimated General Fund revenues are transferred into the BSF. The Governor, however, can stop this transfer in any year by issuing an executive order, as he has done in the current year, and is expected to do during the next few years, due to the state's budget problems. These annual transfers are not made once the balance of the BSF reaches a specified "target"--the higher of $8 billion or 5 percent of revenues (currently about $5 billion). The state currently can transfer funds out of the BSF to use for any purpose.
Economic Recovery Bonds (ERBs). Proposition 57, passed in 2004, allowed the state to issue $15 billion in ERBs to pay off budgetary debt that had accumulated in the early part of this decade. A portion of the sales and use tax is used to pay off the ERBs. However, one-half of the funds deposited into the BSF--up to a total of $5 billion--are also used to make extra payments on the ERBs. To date, $1.5 billion in BSF funds have been used in this manner.
Recent Tax Increases. The plan to balance the state's 2008-09 and 2009-10 budgets included the following tax increases to remain in effect for about two years, unless voters approve Proposition 1A
- Sales and Use Tax is raised by one cent for every dollar of goods purchased. This raises the state average from about 8 percent to 9 percent through 2010-11.
- Vehicle License Fee is raised from 0.65 percent to 1.15 percent of a vehicle's value through 2010-11.
- Personal Income Tax is raised for each tax rate by a 0.25 percentage point for the 2009 and 2010 tax years.
The Proposal
Proposition 1A was a key element in the negotiation of the budget plan for fiscal years 2008-09 and 2009-10. There are three major facets to Proposition 1A: (1) the establishment of an annual spending limit or "cap," to begin in fiscal 2010-11; (2) the extension beyond fiscal 2009-10 of certain tax increases enacted as part of the budget plan; and (3) the authority of the Governor to reduce certain types of spending without legislative approval. Except as noted, Proposition 1A's provisions are implemented by constitutional amendment.
Spending Limit. Proposition 1A establishes a new annual limit on budgetary expenditures. This limit is achieved by restricting the amount of General Fund revenues that would be available to fund such expenditures. To determine the amount of such restricted revenues, Proposition 1A would first establish which revenues are "unanticipated." Unanticipated revenues would generally be defined to mean those that exceed the amount expected based on the revenues received by the state over the prior ten years, as adjusted. (In certain situations, as noted below, an alternative calculation may be used.) New tax revenues raised by the Legislature or the voters would not be included in the definition of unanticipated revenues.
The spending limit would be implemented, beginning in fiscal 2010-11, by requiring that an amount equal to unanticipated revenues be directed to the following purposes (in priority order):
- Meet funding obligations under the Constitution for K-14 education not already paid (as determined under Proposition 98).
- Transfer to the BSF to fill the reserve up to its newly revised target (see below).
- Pay off any budgetary borrowing and debt, such as certain loans and ERBs.
- Expenditures for a variety of other purposes, including further building up of the BSF, paying for infrastructure (such as constructing roads, schools, or state buildings), etc.
Transfers Into and Out of the BSF. Proposition 1A would increase the amount of the cumulative BSF reserve target to 12.5 percent of state revenues (currently about $12 billion) from the existing target of the higher of $8 billion or 5 percent of revenues. Beginning in fiscal 2011-12, the Governor could only stop an annual BSF transfer in years when the state did not have enough revenues to pay for state spending equal to the prior year's level of spending, as adjusted for changes in population and inflation.
Currently, funds in the BSF can be transferred to the General Fund for spending for any purpose. Under Proposition 1A, some revenues in the BSF would have to be spent on particular purposes. If both Proposition 1A and Proposition 1B are approved by the voters, then beginning in fiscal 2011-12 at least 1.5 percent of the state's annual General Fund revenues (currently about $1.5 billion) would be taken from the BSF and paid to K-12 schools and community colleges until the entire $9.3 billion due to them under Proposition 1B was paid; these payments could not be suspended by the Governor. After the $9.3 billion in educational payments were made (or if Proposition 1B does not pass), 1.5 percent of state General Fund revenues each year would be dedicated to paying for infrastructure or state bond debt. In years when transfers are made into the BSF (assuming Proposition 1B passes), the extra ERB payments described above would be somewhat reduced by the provisions of Proposition 1B.
The ability of the state to transfer funds out of the BSF for other purposes would be limited to two situations. First, funds in the BSF could be used to cover any costs associated with an emergency, such as a fire, earthquake, or flood. Secondly, if in any year revenues were not high enough to allow state spending equal to the prior year's level of expenses, adjusted for population and inflation, then BSF funds could be used to meet that level of spending.
Governor's Authority to Reduce Spending. Proposition 1A would give the Governor new authority to reduce certain types of spending during a fiscal year without additional legislative approval. (This authority is included in a part of a law that will only go into effect if Proposition 1A passes.) Specifically, the Governor could reduce:
- Many types of spending for general state operations (such as equipment purchases) or capital outlay by up to 7 percent.
- Cost-of-living adjustments (COLAs)--provided to account for inflation--for any programs specified in the annual budget. This would not apply to any increases for most state employees' salaries.
Tax Increases Extended. Proposition 1A would extend the tax increases included in the February 2009 budget package for one or two additional years. (The extensions of the tax increases are included in a part of a law that will only go into effect if Proposition 1A passes.) The Sales and Use Tax increase of 1 cent would be extended for one year, from fiscal 2010-11 through fiscal 2011-12. The Vehicle License Fee tax increase would be extended for two years, from fiscal 2010-11 through fiscal 2012-13. The Personal Income Tax-related tax increases would be extended for two more years, from fiscal 2009-10 through the fiscal 2011-12 tax year.
Fiscal Effect
According to the Legislative Analyst's Office, the fiscal effects of Proposition 1A are particularly difficult to assess because its effects depend on a variety of factors that will change over time and cannot be accurately predicted. Further, such fiscal effects may vary significantly from year to year. The key factors determining the impact of Proposition 1A in any given year will be: (1) annual budget decisions, including the total level of spending as well as the mix of spending between one-time and ongoing purposes; and (2) the impact of the previous ten years of revenue growth. The state's revenues are very volatile and can have big swings from year to year. Using the trend from ten years of revenues will reduce--but not eliminate--year-to-year fluctuations.
Near-Term Budgets. Proposition 1A would have major effects on the state budget over the next few years, after fiscal 2009-10. It would extend the tax increases adopted as part of the fiscal 2009-10 budget package by one to two years, which is estimated to increase revenues by a total of roughly $16 billion from fiscal years 2010-11 through 2012-13. In addition, the proposition would give the Governor new authority unilaterally to reduce some spending for state operations and capital outlay, and eliminate some COLAs. This authority could potentially be used to reduce spending within a fiscal year if the budget goes out of balance after it is passed.
If Proposition 1B also passes, the state would be required to divert 1.5 percent of annual General Fund revenues (beginning in fiscal 2011-12) to make supplemental payments for education until a total of $9.3 billion had been spent, likely in five or six years. Also, as described above, Proposition 1A could reduce the speed at which the state pays off its outstanding ERBs. Once the ERBs are paid off, the state would experience reduced General Fund costs on an annual basis.
Beginning in fiscal 2010-11, this measure would require transfers of General Fund revenues into the BSF of amounts that exceed the ten-year revenue trend. While very difficult to predict, it is possible that this provision could require billions of dollars in the next few years to be transferred to the BSF.
Some aspects of Proposition 1A--such as the higher tax revenues--would make it easier to balance the state budget in the coming years. Other aspects--such as the limited ability to suspend the annual transfers to the BSF--could make it more difficult. For example, in fiscal 2011-12, the size of the tax increases connected to this measure would likely make that year's budget easier to balance. In other years, however, the effect of the measure on the ability of the state to balance the budget is unknown.
Longer-Term Outlook. Prop. 1A has a number of significant effects which would last for less than a decade--including higher taxes, supplemental payments to education, and altered payoff of the ERBs. However, even after these effects have run their course, Proposition 1A could continue to have a substantial effect on the state's budgeting practices as follows:
Restrictions on Revenues and Spending. In any given year, Proposition 1A does not strictly limit the amount of revenues that could be collected by the state or the amount of spending that could occur. The measure does not restrict the ability of the Legislature and the Governor to approve tax increases to collect on top of existing revenues. Regarding spending, while the measure could make it harder to approve spending increases in some years by restricting the access to revenues, it would not cap the total level of spending that could be authorized in any year if alternative revenues were approved.
More Money in the BSF. In some years, the measure could lower the amount of money in the BSF rainy day reserve by allowing 1.5 percent of General Fund revenues to be spent on infrastructure. In many other cases, however, the measure would increase the amount of money in the state's BSF rainy day reserve by restricting the ability of the Governor to stop the annual transfer into the reserve; restricting the purposes for which funds can be taken out; requiring revenues above a decade-long trend to be deposited into the fund; and raising the target cap on funds in the BSF to 12.5 percent of revenues.
Overall, the Legislative Analyst's Office expects that the balance in the BSF would be greater under Proposition 1A than under current law in many future years. This could lead to reduced spending in high revenue years, and allow increased spending in low revenue years as compared to current law. The state would probably spend money on different types of programs than otherwise would be the case. The measure, for example, could increase spending on a variety of one-time activities--such as repaying budgetary borrowing and debt, infrastructure projects, and temporary tax relief, and thereby reduce spending for ongoing expenditures.
What A Yes Or No Vote Means
A YES vote means the state Constitution and state law will be amended to set limits on spending and increase funding of "rainy day" funds; and, in addition, extend the term of certain tax increases, resulting in about $16 billion in additional tax revenues over the next several years.
A NO vote means that the state Constitution and state law regarding the budget process will not be changed and the term of certain tax increases will not be extended.
Supporters Say
- By limiting spending and increasing the rainy day fund, Proposition 1A stabilizes the budget process, thus preventing the wild peaks and valleys that cause budget dysfunction.
- Proposition 1A enhances the rainy day fund so more money will be available when the economy falters, reducing the need for tax increases and cuts in services.
- This measure stops out-of-control spending by restricting the amount the state can spend each year while protecting funding for schools, public safety and other vital services.
Opponents Say
- Proposition 1A removes the flexibility essential to dealing with the state's fiscal needs by dictating how half of the money in the Budget Stabilization Fund must be used, limiting the Governor's ability to suspend transfers to the BSF in difficult years, imposing new formulas for calculating "unanticipated revenues," and specifying how this money can be used.
- This measure will freeze state spending at a level which is already too low to guarantee adequate public services, ignores factors such as rising health care costs, and will prohibit the state from using increased revenue when the economy recovers.
- Proposition 1A undermines the system of checks and balances by allowing the Governor to unilaterally make mid-year cuts without consulting the Legislature.
Support And Opposition
Ballot arguments in support are signed by Teresa Casazza, President, California Taxpayers' Association; Ed Bonner, President, California State Sheriffs' Association; and Dr. Glen W. Thomas, California Secretary of Education.
Ballot arguments in opposition are signed by Hank Lacayo, State President, Congress of California Seniors; Lillian Taiz, President, California Faculty Association; and Richard Holober, Executive Director, Consumer Federation of California.
PRO
Budget Reform Now
California Chamber of Commerce
California Teachers Association
California Taxpayers Association
The National Tax Limitation Committee
CON
Vote No on 1A
California Federation of Teachers
California Nurses Association
Howard Jarvis Taxpayers' Association
American Federation of State, County and Municipatl Employees
For More Information
California Secretary of State
Legislative Analyst's Office
Campaign Finance Information
Ballotpedia
California Budget Project
EdSource
Diagram of Proposition 1A
From Rick Simpson, Deputy Chief of Staff, Office of the Speaker of the California State
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