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Props 1A, 1B and 1C

by Sheila Kuehl
May 4, 2009

This is the first of two essays presenting the content of, and analysis on, the six propositions on the May 19 ballot.  A number of people have asked me to write a quick summary of the propositions and to make recommendations as to votes.  I think the arguments on both sides of 1A, 1B, 1C and 1F are, in their own ways, supportable and try, below, to set out information so you can judge for yourselves.  At the same time, I've indicated my opinion on all of them, because, after all, you have to end up somewhere.....

What I Think
It seems pretty obvious that, whether the propositions pass or fail, they create a significant, but different, problem for the state.  The total monies brought into the current budget by all the propositions together is about 6 billion dollars.  However, over $5 billion of that revenue comes from the sale of the lottery.  This makes Props 1D and 1E virtually unnecessary.  Prop 1A brings significant monies in three and four years out from the current budget, but creates a badly-thought-out spending cap.  The problems created by the passage of the propositions simply to gain a small amount of one-time money and a bigger theoretical rainy day fund in the future are, in my opinion, too much of a price to pay.  Therefore, I intend to vote no on all of them, except maybe the lottery proposal for reasons set out below under Prop 1C.  Unfortunately, there is no right answer, so long as we must garner a few Republican votes to pass a budget and raise a tax.  I apologize for the fact that the descriptions of the propositions are a bit simplified, but I hope you might find them helpful.

Proposition 1A
Proposition 1A amends the State Constitution in a number of ways, most of which have not been discussed in the press:
Prop 1A would require that all revenues and resources coming into the state would have to be identified as to whether they are one-time or ongoing. Theoretically, this provides a tool under which the legislature may choose to limit the expenditure of one-time money to one-time spending, which is a good idea.

If Prop 1B is approved, Prop 1A creates a new account in the Constitution called the Supplemental Education Payment Account, a supplemental rainy-day fund for the schools which will be used to pay down the monies owed to the schools caused by the current and past underfunding of Prop 98 requirements--about 9.3 billion dollars.  A portion of the monies in excess of the cap created by 1A goes into this Fund.

Prop 1A significantly raises the amount to be held in the Budget Stabilization Fund (the so-called Rainy Day Fund) from 5% of revenues to 12.5% of revenues except for the monies paid to education under Prop 1B. 

Perhaps most importantly, Prop 1A caps the amounts of revenues and resources that may be spent in any fiscal year and directs that any monies collected over that amount must be deposited into either the Budget Stabilization Fund or the Supplemental Education Payment Account. 

The spending cap is calculated using a regression model, which, most simply, draws a kind of straight line (or closest to it) through all the tax revenues of the previous ten years, then continues this line into the current year.  Where that trend line crosses the eleventh (current) year, that is the cap on expenditures from General Fund tax revenues for that year.  Any extra goes into the "rainy day fund" and the new education fund to pay off what is owed to the schools because of underpayment of Prop 98 minimums.

What's Not in Prop 1A
Among the 33 budget bills voted on in both houses and signed by the Governor in February is one that extends the increases of the sales tax, personal income tax and vehicle fees for two years beyond the two now adopted.  The extra two years' tax, which are to be collected three and four years out from the current budget, would bring in about 16 billion extra dollars, with some of it going to the schools via Prop 1B.  You won't read that in the text, but it's tied to Prop 1A.

What Else Dropped Out of the Budget When They Agreed on Prop 1A
The oil industry lobbied very forcefully to eradicate a proposed 9.9% oil severance tax.  California is the only oil-extracting state without such a tax.

The liquor, beer and wine industry pushed mightily to shelve any increase in alcohol taxes.

The California Teachers' Association pushed for Prop 1B in order to grab some of the new revenue from the two-year tax extension for the schools.  In exchange, they agreed to push for Prop 1A, as the two are tied.

My Opinion on Prop 1A
I don't like the idea of a spending cap, even calculated on the regression model.  I would prefer the ability of the Legislature to spend one-time money on one-time expenditures and calculate ongoing expenditures separately, without an automatic cap, and a growing rainy day fund.  With such a cap, there will never be enough monies for the schools, even with a small portion of the monies over the spending cap going into an education fund.  In my experience, all programs get short-changed when a robo-cap like this is enacted.

Prop 1B
Prop 1B requires to state to pay school districts and community college districts $9.3 billion in lieu of the maintenance factors that would have been applied because of Prop 98 for 08-09 and 09-10.  It also requires deposit of a portion of the amount over the spending cap into the Supplemental Education Payment Account in future years.  Prop 1B does not go into effect if Prop 1A fails to pass.  These two measures were tied together to keep the teachers' union from opposing the spending cap. 

My Opinion on Prop 1B
I don't think the education funding is a sufficient reason to enact the permanent spending cap proposed by Prop 1A in the state Constitution.  Other teachers' organizations oppose Prop 1A and have indicated, since they believe the state already owes the 9.3 billion, they will simply sue the state for it.  Which would, of course, create even more of a hole in the budget. There needs to be a sure hand with authority to pass an adequate budget without gimmicks, which is why I support an end to the 2/3 requirement.

Prop 1C
Prop 1C authorizes the legislature to sell the future revenues of the Lottery, as well as the legal right to receive that revenue, to an entity authorized for these purposes by the Legislature.  Prop 1C also authorizes the sale of bonds for that purpose.  It increases the minimum guarantee for payouts, encourages more aggressive marketing and amends the Constitution so that the General Fund must pay education an amount equal to the amount they received from the Lottery in 08-09, adjusted for inflation and attendance.

My Opinion
This is the one proposition I'm tempted to support.  Of the six billion current dollars estimated to come from all the propositions combined (not counting increased tax revenue three and four years out), more than five billion is estimated to come from the sale of the lottery receipts.  Although I do not support increased encouragement for gambling, this income could be the least damaging.

It's also interesting that the casino-operating tribes made sure that the measure avoids any new games that could threaten their operations.

Next-(and fairly quickly)-Props 1D, 1E and 1F