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Prop 22 could play a pivotal role in future California budgets

by Greg Lucas, published

Proposition 22 on the November ballot is the latest fiscal battle between the state and local governments -- and it could be the knock-out punch for the state in its efforts to close its chronic budget shortfalls. 

In the midst of a busy ballot with higher-profile propositions like legalizing marijuana, Proposition 22 hasn’t received a lot of attention despite its significant impact on both the state and mainly cities and redevelopment agencies.  Supporters of the ballot measure, which include the League of California Cities and redevelopment agencies, say the proposition will stop the state from “raiding” funds that should go to local government and transportation projects. 

      “Sacramento politicians have used loopholes in the law to take billions in taxpayer funds dedicated by the voters to local government and transportation services,” the ballot argument for the measure reads. “Yes on 22 will stop state raids of local government and transportation funds.” 

Opponents, including the California Teachers Association and the California Professional Firefighters, counter that locking in various spending formulas and further restricting the tools available to the state to balance its budget will lead to deeper cuts for schools, public safety and health care.  “(Proposition 22) would cut almost $1 billion out of our school budget immediately and cost them upwards of $400 million a year going forward,” said Ventura County Supervisor Kathy Long at an October 18 press conference. California already faces an estimated $21.3 billion budget shortfall for the fiscal year that begins July 1, 2011, a hole likely increased by some of the unrealistic revenue assumptions contained in the 100-days-late budget signed into law October 8. 

Proposition 22 basically insulates cities from the state’s fiscal condition and protects transportation and redevelopment funds. That’s why the League of Cities is by far the biggest financial backer – close to $2.8 million.  But, its effect is mixed on counties who are the provider of last resort of health care for the poor and social services, revenue for which is not protected under Proposition 22.  As a result, the California State Association of Counties has a “neutral” position on the measure. 

Regardless of the pro and con arguments, Proposition 22 is a classic example of what’s become known as “ballot-box budgeting.”  Those are measures placed before voters that earmark specific revenues or establish minimum spending levels for specific programs, reducing the legislature's and the governor’s capabilities to redirect revenue or reduce spending to cope with either changing policy priorities or fiscal emergencies.  “If the proposed initiative … passes, it will further limit choices available to state decision-makers as they face the next several years of budget deficits,” concluded a May 18 association of counties memo assessing Proposition 22’s impact. 

One of the best-known examples of “ballot-box budgeting” is Proposition 98, approved by voters in 1988, which directs that public schools receive at least 40 cents of every dollar the state receives.  A more recent example is 2004’s Proposition 1A which restricts the state’s ability to use local property tax revenue to balance the state budget.  The state can borrow local revenue if the governor proclaims a “severe state fiscal hardship” and two-thirds of both the Assembly and the Senate approve the borrowing.  Local money must be repaid – with interest – within three years.  In the 2009 budget, the state borrowed the maximum amount allowed by Proposition 1A, 8 percent of local property tax revenue: $1.9 billion.  That money was used to lessen the cuts to the state’s cash-starved general fund and the various programs it supports.  The $1.9 billion must be repaid before the end of the fiscal year beginning July 1, 2012  -- a key reason the Legislative Analyst predicts the state will face a $23 billion budget shortfall that year.  But, if Proposition 22 passes, the state would be prevented from such borrowing. 

The state also required redevelopment agencies to make payments of $2.1 billion to public schools, reducing the amount of support from the general fund needed to meet the minimum funding levels established by 1988’s Proposition 98. Redevelopment agencies challenged the move in court. A Superior Court judge upheld the state’s action but the case remains on appeal.  Proposition 22 contains language aimed at buttressing the redevelopment agencies’ case.  Under Proposition 22, lawmakers could no longer reallocate redevelopment agency funds to schools, counties or any other agencies, stripping the state of another budget-balancing tool. 

Nor could the state reallocate, borrow or restrict the use of “the proceeds of any tax imposed or levied by a local government solely for the local government’s purposes.”  Through a complicated “swap” enacted in March, the state exempted gasoline from the sales tax but almost doubled the excise tax levied on it.  The aim was to give policy makers more flexibility in how fuel tax money is used. There are fewer restrictions on the use of excise tax revenue than gasoline sales taxes.  A portion of the excise tax money is used to pay debt service on several transportation bonds – 100 percent of the debt service on the $2 billion in bonds authorized by Proposition 192 approved by voters in 1996 and three-quarters of the debt service on the $19.9 billion in bonds authorized to be sold through 2006’s Proposition 1B.  Debt service costs for the two bonds is $603 million this year. The price is expected to climb to $1 billion within three years. Normally, debt service is paid for by the state general fund.  "The fuel tax swap significantly reduces pressure on the general fund by shifting the cost of these payments to a transportation-specific revenue source,” according to a September analysis of Proposition 22 by the California Budget Project.  Proposition 22 prohibits using gasoline excise tax revenue to pay debt service on bonds sold before November 2, 2010 – the day the measure would become operative, if voters approve it.  Some $1.5 billion in Proposition 192 bonds are outstanding as are $7 billion in Proposition 1B bonds. Under Proposition 22, the debt service costs for those amounts would be shifted to the general fund.  For bonds sold after November 2, 2010, Proposion 22 would require approval by voters to use excise tax revenue for debt payments. If voters refuse, again the costs would be borne by the general fund. 

Of more immediate fiscal concern for the state, Proposition 22 would end the ability to loan gasoline excise taxes to the general fund as a short-term cash flow tool. Most of the state’s spending occurs in the first half of its fiscal year; most of the revenue is received during the second half.  The current budget contains just such a loan of $762 million.  At best, less than half of that amount could be transferred to the general fund before Proposition 22 takes effect, increasing the budget’s shortfall by another $381 million.  Supporters counter that using general fund money to pay for transportation debt service would mean more fuel tax revenue could be spent on state and local transportation projects.  And restricting the state’s right to redirect money would mean more money for redevelopment and local transportation projects. 

In its assessment of Proposition 22, the Legislative Analyst estimates a cost to the state of at least $1 billion annually if it passes and a boon of at least the same amount to the local entities benefiting from the measure.

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