Proponents of Proposition 2 on November’s ballot said the measure would compel lawmakers to set aside money to pay off debts and build a rainy-day reserve to “make sure that we don’t repeat this cycle of boom and bust budgeting.”
There was never any talk about “Test 3” supplemental appropriations, whether to use marginal or average tax rates to estimate capital gains revenue, or other budget speak.
The simple themes of Proposition 2 proponents’ TV ads and mail pieces will give way in the coming months to the legislative nitty-gritty of implementing a measure that has multiple moving parts and interactions with existing budget laws. The decisions could swing, by billions of dollars, what actually goes into the Proposition 2 reserve or is available for debt repayments.
Gov. Jerry Brown will lay out his Proposition 2 course of action when he releases his proposed budget next week. Parts of the reserve law are open to interpretation, experts say. That creates the likelihood for differences of opinion between the Brown administration and lawmakers on how to carry it out and which approach best reflects the desires of California voters who backed the measure with 69 percent of the vote, the largest margin of any fall measure or statewide candidate.
Advocates for low-income people and the unions representing teachers, in-home health providers and other public employees, many of which stayed neutral on Proposition 2, are expected to have a voice interpreting the rainy day measure as the state budget is negotiated.
State Sen. Mark Leno, D-San Francisco, who leads the Senate budget committee, said coming budget talks should reflect a “strategic balance” between spending and setting aside money in Proposition 2-created accounts.
But State Sen. Jim Nielsen, R-Gerber, the top Republican on the Senate budget panel, said he worries that Democrats will interpret the law in ways that maximize the amount of money available for new spending
“One, it should be held in reserves. Two, it should be used for debt retirement,” he said of the shifts required by Proposition 2.
The November initiative is the most significant change in the state’s reserve policy in more than a decade. In March 2004, voters approved Proposition 58, creating the budget stabilization account that was supposed to set aside revenue during good years. Lawmakers, though, suspended the rule almost every year, and the reserve did nothing to ease the shock of deep budget cuts during the recession.
Proposition 2 makes it more difficult for lawmakers to suspend the reserve rules.
The law calls for shifting 1.5 percent of general fund revenue, as well as capital gains revenue that exceeds 8 percent of general fund taxes. Half of the money would go to the rainy-day reserve. The other half would go to pay off debt, including retirement and health obligations.
Lawmakers can tap the money only during a budget emergency, such as a natural disaster or when there is not enough state revenue to cover existing spending. Only half of the reserve money could be spent in a given year.
Proposition 2, though, is only the latest in a thicket of budget-related formulas. And experts are just starting to delve into the interplay between the measure and existing laws.
“It’s really complex. And it will influence some key budget decisions this year and in future years, that is for certain,” said Assemblywoman Melissa Melendez, R-Lake Elsinore, the new Assembly budget committee vice-chair.
In its recent fiscal outlook, the nonpartisan Legislative Analyst’s Office devoted a whole chapter on the choices facing the Legislature as it carries out Proposition 2 in its first year.
Topping the list: How should lawmakers treat the $1.6 billion put into the reserve in the current budget, before Proposition 2’s approval? There is “a strong argument that the Legislature has broad authority to use that $1.6 billion when and how it sees fit,” the analyst’s office said.
But H.D. Palmer, the spokesman for Brown’s Department of Finance, said the administration’s position is clear: The money should stay in the reserve. “We and the Legislature put that money in there for a reason, and that was to start rebuilding the rainy-day fund,” Palmer said.
The constitutional amendment that became Proposition 2 emerged in the Assembly, where then-Speaker John A. Pérez partnered with Brown to get it on the ballot. That increases the likelihood that the Assembly would share the governor’s interpretation, although Assembly Democrats declined to weigh in publicly. In a statement, Assemblywoman Shirley Weber, D-San Diego, the new chairwoman of the Assembly Budget Committee, said only that lawmakers’ “first objective is to ensure ongoing stability.”
Leno said the $1.6 billion likely will come up in budget talks.
“No one wants to repeat what happened in 2008. At the same time, there are real needs,” Leno said, citing cuts in general fund money for University of California and California State University. The UC system has approved up to 5 percent tuition increases over the next five years, which it said are necessary because of shrinking general fund support.
Melendez said the $1.6 billion shifted to the reserve last June should stay put. Added Nielsen of the analyst’s report, “It may be arguable. But I don’t think it can be argued at all that it would be wise for the Legislature to spend that money.”
Proposition 98, the state’s 26-year-old constitutional school-funding guarantee, adds another layer of complexity to the interpretation of the new rainy-day law.
Under one set of what the school measure calls “Test 3” assumptions, Proposition 2 would divert almost $4 billion into the budget reserve and debt-payment pool in the coming year – more than $1 billion more than if lawmakers opted for another set of assumptions, the analyst’s office said.
Proposition 98 also comes into play when deciding how to estimate capital-gains revenue, a major part of the reserve law. If lawmakers go with a marginal tax rate calculation, the reserve and debt repayment requirements would be hundreds of millions of dollars higher.
And despite the state’s upbeat fiscal outlook, a combination of hypothetical budget decisions by the Legislature – including the use of the $1.6 billion in reserve funds that existed before Proposition 2 was approved – could even create grounds for a “budget emergency,” according to the analyst’s office. That would allow the Legislature to pass a budget that reduced or suspended deposits to the reserve.
“All of this will be discussed,” Leno said.
▪ Lawmakers voted unanimously in May 2014 to place the reserve and debt-payment measure on the fall ballot.
▪ Approved Nov. 4 with 69.1 percent of the vote
▪ Highest percent approval: Marin County (76.7 percent)
▪ Lowest percent approval: Trinity County (47 percent)