The bottom line – budgetarily speaking – on 3 propositions (that are now the law of the land)

150 150 Fred Silva

Now that the slate mailers are in the recycling bin, how did this election affect the State’s precarious fiscal condition? Is the 2010-11 state budget still in balance? Is the problem bigger or smaller than it was on Monday, Nov. 1?

May create a deficit for the 2010-11 budget.

Proposition 22 does three things. First, it prevents the State from reallocating or using locally levied taxes, such as the sales tax.

Second, Prop 22 prevents the state from changing the distribution of property taxes for state purposes. Lawmakers are now prohibited from transferring the property tax from cities (and redevelopment agencies), counties, or special districts to finance K-14 obligations under the Proposition 98 guarantee. (By the way, Prop 98 never actually meant that schools would receive more money if they were allocated more property; it was simply recorded as a savings to the state budget). But, the underlying problem still exists; Under Proposition 13, the state controls the distribution of property taxes within each county. When you pay your property tax bill in December, good luck trying to figure out how much of it goes to your city, county, and school district. With a super majority vote, the Legislature may still move property taxes between cities, counties, and special districts – look for that to take on new meaning.

Third, Prop 22 changes the way the state gas tax is administered and distributed. The basic allocation of the gas tax – including the split between the state (for state highways) and local governments (for local roads) – is now, as a practical matter, set in the state constitution, with a new process for revisions. Prop 22 also prohibits the State from using gas tax money to pay debt service on transportation bonds without voter approval. That provision was a “user pay” policy that had transportation “users” paying the debt service on the bonds that built the facility.

This is a Minus to the recently adopted budget. The 2010-11 budget allocated about $1 billion of fuel tax money to pay the debt service for transportation bonds. Not anymore. The new administration will need to use the general fund to help finance current transportation bonds. Aside from any of the other budget solutions that may not hold up, this is probably enough of an increase in spending to drive the June 30 ending balance for 2010-11 perilously close to a deficit.

Neutral to fiscal balance for 2010-11

Proposition 25 – The vote on the budget and “budget-related bills” now requires a simple majority vote. The impact on budget passage is easy to figure out. The majority party is now free to send its budget plan to the governor, who is equally able to send it back (veto it), if the contents are not to his liking. Any bill “related” to the budget is treated the same. The Legislature will need to focus on ways to minimize the mischief this provision could encourage.

Open Question…

Proposition 26 – This measure simply focuses on the vote requirement for legislation that relates to taxes and fees. Since the passage of Prop 13, tax measures “enacted for the purpose of increasing revenues” required a two-thirds vote. All other legislation dealing with fees for service or assessments for benefit was treated differently. Prop 26 provides new ground rules for the vote requirement on taxes and fees. Tax legislation that might revise a tax by broadening the tax base (taxing more things) while lowering the tax rate (thus not raising revenue) now requires a two-thirds vote. More challenging is a broader reading of the language that requires any statute (not just tax measures) that “results in any taxpayer paying a higher tax” to be voted on at the two-thirds majority. This will surely lead to much speculation over the broad nature of the language and the vote requirement for legislation that does not change the tax code but does increase a taxpayers’ tax liability. Since Prop 26 affects tax legislation enacted after Jan. 1, 2010, there may be fee measures that raise revenue for the 2010-11 budget that will need to be reenacted with a two-thirds vote. A list of such measures is no doubt being prepared.

Welcome to the world of state finance, Governor-Elect Brown.

Fred Silva is the senior fiscal policy advisor for California Forward.


Fred Silva

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