California Proposition 2: State Budget Nov. 2014

The Question

Should the State Constitution be amended to change how the state pays down debt and saves money in reserves?

The Situation

When the economy is strong, state tax revenues rise, and the state transfers funds into its reserves. When the economy weakens, total tax revenues decline, but reserve funds are available to help mitigate adverse steps otherwise needed to balance budgets.

The Budget Stabilization Account (BSA) is the state’s basic reserve. Currently, about $3 billion per year is transferred into the BSA, although the Governor may reduce or eliminate this amount. There is a target maximum, currently $8 billion. BSA funds can be released by vote of the Legislature. Due to the recent adverse economic conditions, these transfers were stopped, and the BSA had no funds at all for several years, until the current year.

State law requires that local school districts keep reserves equal to 1-5% of their annual budget, depending on their size. Many districts keep larger reserves.

The state’s debts total around $300 billion, including about $150 billion for retirement benefits already earned by public employees, and several billion dollars owed to local governments, such as school districts, cities, and counties.

The Proposal

Prop. 2 would reduce the annual revenue transfer to the BSA to approximately $1.6 billion, but add a portion of capital gains-related taxes in years when such revenues exceed a certain level. The total annual transfer could thus possibly increase to $4 billion or more.

For 15 years, half of the foregoing amount would have to be used to pay down public retirement benefit obligations and inter-governmental debts. Later, the Legislature could choose whether to use the BSA transfer funds to further pay down these debts.

Prop. 2 would increase the target BSA maximum to about $11 billion. Once the maximum is reached, the BSA transfer amount would instead be used to build and maintain infrastructure.

Prop. 2 would also limit the circumstances under which the transfer could be reduced, or BSA funds could be withdrawn, and the amounts which could be withdrawn in any year.

In some years when capital gains revenues are strong, and certain other conditions are met, money would go into a new state reserve for schools and community colleges. However, Prop. 2 does not directly change the long-term amount of state spending for schools and community colleges.

If the new school reserve is funded, under certain circumstances a new state law would limit the size of local school district reserves to a maximum of 10% of their annual budget, depending on the size of the district. This new maximum limit could be changed in the future by the Legislature.

Fiscal Effect

Under Prop. 2, the state would likely pay down existing debts somewhat faster, leaving less money for other things in the state budget during at least the next 15 years. Prop. 2’s impact on state budget reserves over the long run would depend on the economy, capital gains tax revenues and the way that state government implements the measure.

The new school reserve would receive funds only occasionally—likely only during very good economic times. Once this reserve has funds of any amount, the local school district reserves would be limited, and some districts likely would have smaller reserves in bad economic times.

A YES Vote Means

A YES vote on this measure means: Existing state debts likely would be paid faster. There would be new rules for state budget reserves. Local school district budget reserves would be capped in some years.

A NO Vote Means

A NO vote on this measure means: Rules for payment of state debts, state budget reserves, and local school district reserves would not change.

Supporters Say

  • Prop. 2 establishes a strong constitutional reserve fund, which will force state government to save money and pay down debts.
  • Prop. 2 will shield taxpayers from unnecessary tax increases and protect schools from devastating cuts.

Yes on the Rainy Day Fund:

Opponents Say

  • Prop. 2 hides a financial time bomb that limits school districts’ reserves, resulting in possible higher costs and deeper cuts.
  • Prop. 2 establishes a double standard—prudent reserves for the state, but limited reserves for school districts.

Educate Our State:….

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