Attack on Schools: California Special Election Prop 76 Analysis

This initiative, known by its proponents as the Live Within Our Means Act, adds an additional spending limit to the existing State Appropriations Limit, gives the Governor new power to unilaterally reduce state spending, and alters provisions of Proposition 98 in ways that change its fundamental purpose of maintaining school and community college funding.

Proposition 76 limits the combined expenditures from both the General Fund (GF) and special funds to the prior year's expenditures adjusted by the average of the growth rates of those combined funds over the preceding three years. Revenues exceeding the limit would be divided proportionally among the GF and each of the special funds. Special fund revenues would be held over to be expended in the following year. GF revenue would be allocated by formula: 25 percent to the state's reserve fund; 50 percent to repay outstanding Proposition 98 maintenance funds over 15 years, repay deficit-financing funds, and repay loans from the transportation fund; 25 percent for road, highway and school construction projects.

This initiative gives the Governor power to declare a fiscal emergency if state revenues fall 1.5 percent below Finance Department estimates, or if the Governor determines that the state will spend at least half of the funds in the state's reserve account. Then, unless an alternative is enacted by the legislature within 45 days, the Governor could make cuts in spending in both the GF and special funds, even those mandated by other provisions of the constitution or programs supported by fees. The only exceptions would be spending needed to comply with federal law, debt service obligations or contracts entered into before the effective date of Proposition 76.

It also provides that if a budget has not been enacted by the beginning of a new fiscal year on July 1, the spending levels authorized in the prior year's budget would remain in effect until a new budget is enacted. In the case of a late budget, the legislature would have only 30 days to address the shortfall. The Governor would have the power to reduce state spending at his/her discretion as described above, and the legislature could not override the reductions.

Proposition 98, passed in 1988 and amended by a later measure, Proposition 111, sets a minimum spending guarantee for K-12 schools and community colleges tied to school attendance and the state's economy. It has provisions for reducing school spending when state revenues decline, either by a two-thirds vote of the legislature to suspend the guarantee or by application of "Test 3," a tighter formula than the main "Test 2" prescription. Proposition 111 provided for Test 3 and also for a "maintenance factor," defined as the amount of "lost" funding resulting from suspension of the guarantee or use of Test 3. This maintenance factor amount must be restored when revenues rise.

Proposition 76 would eliminate both Test 3 and the maintenance factor, removing both the automatic reductions in funding and automatic restoration to previous levels reflecting changes in the economy. The legislature would still be able to suspend Proposition 98, and the Governor could make reductions in a fiscal emergency, but the reductions would permanently lower the minimum guarantee. The existing maintenance factor obligation under current law (estimated at about $3.8 billion) would become a one-time obligation to be paid off over 15 years, and those payments would not be included in calculating the future guaranteed minimum. The same would be true for an existing "settle-up" obligation of about $1 billion that results from final differences between the yearly guarantee level and actual appropriations.

If the Governor and the legislature decided to spend more on education in any year, under Proposition 76 this would be treated as one-time funding and would not raise the ongoing minimum guarantee, as is now the case. These provisions, coupled with restrictions on spending for the budget as a whole (which is the basis of calculating the Proposition 98 guarantee) are intended to lower the minimum guarantee for education funding over time.

Proposition 42, passed in 2002, dedicated sales taxes on motor vehicle fuel to a special fund for transportation projects. It included a provision for the Governor, with the agreement of the legislature, to suspend the transfer of those taxes to the transportation fund if it would have a significant negative effect on GF programs, but required that the funds be paid back in subsequent years. Proposition 76 prohibits suspension and calls for the existing obligation to be paid back over 15 years. It also authorizes bonds to be issued by the state or local agencies that are secured by those repayments.

Any other loans from special funds to the GF would also be prohibited, except for short-term cash flow borrowing, and would also be repaid within 15 years.
BACKGROUND

The state GF comes largely from the personal income tax, sales and use tax and corporation tax and this year spending for public services from the GF will be about $90 billion for such programs as education, health, social services and criminal justice. About another $23 billion from a number of special funds, such as gas or tobacco taxes, are spent on specific purposes, such as transportation or health care. Most state spending is allocated to programs that are delivered by local agencies, which often have to share the costs.

Since the economic downturn in 2001, which caused a sharp drop in state revenue, the state has had large shortfalls in the GF, and the Legislative Analyst's Office (LAO) expects another shortfall in 2006-07, even though revenues have improved. The LAO believes that over time the operation of the spending limit would reduce state expenditures relative to current law.

The California Budget Project (CBP) says that the formula for the spending limit would allow deficit spending during an economic downturn when revenues are already declining, but prevent restored spending even as revenues increase in a recovery, resulting in a "spending cap that runs counter to the impact of a business cycle." They say that if Proposition 76 had been in effect in 1990, "allowable 2005-06 spending would be $12.6 billion below the level in the budget signed into law by Governor Schwarzenegger."

The LAO says that the state could raise taxes or fees and use them immediately when revenues fall below the spending limit, but could not use such revenues immediately to support new or expanded services or even to eliminate an ongoing budget shortfall if the state was already at the spending limit. The state has had a structural deficit for the past few years that it has so far been unable to eliminate.

The Governor already has the power to reduce spending in most areas of the budget through a line item veto before the budget is signed, but cannot use that power on programs such as entitlements or special funds governed by statute or initiatives. Those funds are a significant portion of the budget, and the Governor's expanded power under Proposition 76 to make cuts to those programs raises a number of questions. Reducing the funding does not change the laws, for instance, concerning eligibility for programs or services to be provided. Counties could still be required to administer the programs and pick up the costs.

The CBP points out that the elimination of the maintenance factor for K-12 education would reduce the existing school spending guarantee by $3.84 billion a year, a reduction of nearly $600 per student. Local school districts have already experienced cutbacks, and would probably continue to turn to local voters for new taxes to make up the difference. This is likely to worsen existing inequities in funding between districts with greater and lesser ability to provide additional local resources to their schools.
LEAGUE POSITIONS

The proposals put forward are contrary to the basic thrust of much of the LWVC State and Local Finances (SLF) position, as well as sections of our Education and Constitution positions. The SLF Position in Brief calls for "measures to ensure revenues both sufficient and flexible enough to meet changing needs for state and local government services" and calls for a "system of public finance which emphasizes equity and . . . adequacy." On government process, our position calls for adoption of budgets "by . . . the governing body," with "mid-budget appropriation adjustments through joint action of the executive and legislature . . . so that checks and balances are retained." The Constitution position also calls for provisions that enable the legislature to "deal with state problems efficiently, flexibly and with responsibility clearly fixed." Both SLF and Constitution positions call for "earmarking" of funds and taxes by statute rather than in the constitution. LWVC Education position 12.b. cites state responsibility for "providing sustainable, transparent, adequate, flexible, and timely funding."

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http://ca.lwv.org/action/prop0511/prop76.html