McGeorge School of Law

Proposition 76

Proposition 76:
State Spending and School Funding Limits.

By

Jason Hauer
JD, McGeorge School of Law, University of the Pacific
to be conferred December, 2006
B.A., Business Administration, University of San Diego, 2000

Copyright © 2005 by University of the McGeorge School of Law


Table of Contents

I. Executive Summary
II. The Law
III. Drafting Issues
IV. Constitutional Issues
V. Public Policy Considerations
VI. Conclusion


I. Executive Summary

Proposition 76 proposes significant changes to the rules governing California’s budget process. As a consequence of downturns in the dot-com sector and the 2001 recession, California’s tax revenues decreased significantly, while state spending continued to rise. As a result, the State is faced with an annual structural budget deficit of $6 billion, with accumulated deficits reaching as high as $26 billion by 2010 if spending practices continue. California Official Voter Information Guide, Analysis of Proposition 76 (Secretary of State, 2005).

In an attempt to balance California’s finances, and protect the State from future fiscal emergencies during economic recessions, Proposition 76 makes significant constitutional changes regarding the way California’s public services are funded. These changes reduce certain funding obligations, coordinate state spending with available resources, and encourage the State to have a balanced budget.

Many state funded public services will be impacted by the changes proposed in Proposition 76. Some view reductions in spending as an incentive for the State to provide services more efficiently, while others view the cuts likely to result from the passage of Proposition 76 as a threat to the State’s ability to provide essential services.

Specifically, Proposition 76 imposes an additional state-wide spending limit, grants more power to the governor to control the budget process, and alters minimum funding obligations for several major expenditures. The aim is to decrease the demand on revenues by cutting state expenditures instead of raising taxes.

II. The Law
A. Existing Law

State Spending Limits

Taxes collected by the state are placed into one of two types of accounts before being distributed. Eighty percent of state tax revenues go into the General Fund, money from which is used to pay for most of the public services provided by the State. Analysis of Proposition 76. Taxes imposed for specific purposes are placed into a special fund, which can only be drawn upon to fund programs the specific tax was intended for. For example, taxes on cigarettes are intended to finance healthcare programs, so these taxes are placed into a special account dedicated to funding healthcare. California has hundreds of special funds that help ensure tax dollars are spent on intended purposes. Id. The vast majority of revenues paid into the state’s General Fund come from state income, sales, and corporate taxes. Id.

California’s expenditures are made by the legislature and accounted for in the state budget. State expenditures finance a wide range of public services, with more than half devoted to K-14 school funding. Id.

Several pertinent constitutional constraints on state expenditures have been enacted in the last 25 years. Beginning in 1979, the California Constitution has limited the amount that the State and localities can spend in a given year. Cal. Const. art. XIIIB, § 1. This spending limit was based on the total state-wide spending in 1979, and is adjusted each year considering population and economic growth. Id. Today, with annual adjustments over the past 25 years, the current state spending limit is $11 billion more than actual expenditures. Analysis of Proposition 76. In effect, state spending is currently not constrained by the spending limit because actual expenditures are well below the state spending limit.

Gubernatorial Powers

In 2004, California voters passed Proposition 58, which mandated that the state budget be balanced, with spending not to exceed available revenues. Cal. Const. art. IV, § 12. Under current law, the governor proposes a budget, which then is considered and altered by the legislature. Once the legislature’s version is passed, it goes back to the governor, who has the authority to cut certain items contained in it, sometimes called a line-item veto. The governor may not veto items mandated by a separate state law. The legislature can then override the governor’s line item veto by a 2/3 majority. Once the budget is signed into law, the governor cannot unilaterally reduce program funding. Analysis of Proposition 76.

Proposition 58 also granted the authority for the governor to declare a fiscal emergency if, at the midyear point, the budget falls out of balance. Cal. Const. art. IV, § 10. If the governor declares this emergency, the legislature is called back into session and has 45 days to propose legislation that fixes the budget imbalance. Id.

Funding Guarantees

By law, California must meet minimum funding requirements for certain public services. In 1988, Proposition 98 was passed, which guarantees funding levels for K-12 education. Cal. Const. art. XVI, § 8. This guarantee is based upon the previous year’s funding and is increased according to student population and per-capita personal income changes. Id. A provision in Proposition 98 allowed for reductions in school funding in times of slow economic growth, but mandates that any reduction be repaid during economic prosperity. Once the shortfall is repaid, the minimum guarantee is based upon that year’s expenditures, including the money repaid. Id.

Currently California “owes” $3.8 billion to make up for reductions in school funding over the last several years. Analysis of Proposition 76. As the $3.8 billion is repaid, that money will count towards the total education funding for that year, which serves as the base for increases in funding for the subsequent year.

Proposition 42, enacted in 2002, required that gasoline tax revenues be placed in a special fund, only to be used for transportation and infrastructure improvements. Cal. Const. art. XIX, § 1. Included in Proposition 42 is a provision allowing for these funds to be diverted to general fund obligations during fiscal years with major budget shortfalls. Id. This provision was used in 2003-2004, and again in 2004-2005 when the state borrowed $2 billion from these revenues to be repaid in 2007-08 and 2008-09. Analysis of Proposition 76.

California has borrowed an additional $1 billion from various other special funds to cover general fund shortfalls. Id. Some of these loans have specified repayment dates, while others are to be repaid when they are needed to carry out the operations of the particular special fund. Id.

The State is also obligated to pay for new programs that local governments are required to provide by state law. Localities file claims with the State to recover these mandated costs. To cover recent budget shortfalls, the State has deferred payment on these mandate claims. Id. Currently the State has 15 years to make these payments to mandated non-educational programs, with no specific timeframe for repaying education mandate claims. Id.

Under current law when a fiscal year begins without a budget all but court determined essential services do not to continue. Therefore, if the legislature fails to present a budget, or the governor refuses to sign it into law before the start of a fiscal year, funding for many services vanishes.

B. The Effects of Proposition 76

State Spending Limits

Proposition 76 imposes a new formula for calculating California’s annual state spending limit. This measure will require state spending to be in proportion with state revenues. The annual state spending limit will be limited to the prior year’s spending adjusted by the average growth rate of state revenues over the previous three years. California Official Voter Information Guide, Text of Proposed Laws, Proposition 76 (Secretary of State, 2005). Therefore, when expenditures are less than revenues collected, the following year would be based on the reduced level of actual expenditures. In years that the state takes in more than the current spending limit, the surplus will be divided equally between the general and special funds, with 25 percent of general fund surplus money set aside in a reserve fund, 50 percent used for the repayment of Proposition 98 obligations, and Prop 42 bond repayments, and 25 percent for road, highway, and school construction projects. Proposition 76, § 4.

The forecasted long-term effect of this provision on state spending is significant. With spending tied to revenues averaged over the previous three years, spending would no longer be subject to sharp variations from year to year. During economic growth, spending would increase at a lower rate, while maintaining more consistent levels during economic recession. The state’s ability to maintain spending during recessions would depend largely on the amount accumulated in the reserve funds during economic growth. If the reserve funds are insufficient to withstand an economic downturn, state spending will be reduced over time because the spending limits of subsequent years will be based upon lower state expenditures.

New Gubernatorial Powers

This measure gives the governor the power to declare a fiscal emergency based on the governor’s own estimates of revenue returns. If general fund revenues have dropped 1.5 percent below the administration’s estimates, or the balance of the state’s reserve fund will fall more than 50 percent, the governor will be authorized to declare a fiscal emergency. Proposition 76, § 5.

Once this emergency is declared, and the legislature is unable to fix revenue short-falls within 45 days, the governor would then have unilateral authority to reduce state funding with notable exceptions. Id. The governor would not be able to reduce funding for entitlements, which are programs individuals are entitled to based on specific eligibility requirements. Analysis of Proposition 76. These entitlements include, disability pay, and programs for low-income individuals such as healthcare and housing services. Also, the governor would not be able to reduce funding for state contractual obligations, or payment on outstanding state debt. Id.

Over time, the effect of this provision would result in a reduction in state spending. History suggests that California will likely experience economic recessions in the future. During these recessions, the governor will have more authority to cut funding. With funding cut, the total expenditures from which subsequent spending limits are based will be lowered. However, because of the provision restraining over spending during good revenue years, money set aside in reserve funds will mitigate the severity of these cuts.

New Funding Guarantees

School funding guarantees set by Proposition 98 will be altered by this measure. Minimum funding levels will still be calculated in proportion with student enrollment and per-capita income increases, but Proposition 76 will eliminate the provision that factors in general fund revenue increases. Proposition 76, § 6. This will result in more predictable funding from year to year. During economic downturns, funding will not automatically be reduced, and during economic growth funding obligations will not increase as dramatically.

Reductions in school spending will no longer be accounted for and owed in subsequent years. Id. School funding minimums will no longer be tied to long-term funding goals. In effect, the constitution will no longer authorize automatic minimum spending requirements to be reduced during recession, or automatically restore funding during economic upswings. Analysis of Proposition 76.

Money owed under Proposition 98 provisions following recent school funding cuts will be a one time obligation paid over 15 years, and will not count towards any subsequent year’s base funding from which annual adjustments are made. Proposition 76, § 6.

Funding over and above the minimum guarantee will no longer count towards the subsequent year’s funding base. Analysis of Proposition 76. If the legislature elects to spend more on education than the minimum required by law, the following year’s base will only increase in proportion with student enrollment and per-capita income increases, without regard to the overspending. The impact of this provision is uncertain. On one hand, the minimum guarantee will be lowered relative to current law, thus lowering the total school funding obligations for the state. Id. On the other hand, without concern for the long-term impact of overspending, the legislature will be more likely to actually spend more than the minimum. The legislature will no longer make long-term funding commitments if it decides to spend more than the minimum in a given year.

Taken together these changes will likely result in more predictable, and less volatile funding for our schools. However, because funding above the minimum in a given year will not be used in calculating the following year’s minimum funding requirements, minimum school funding requirements will likely fall over time. Id.

Proposition 76 will end the practice of the State borrowing from special funds to cover budget deficiencies. The $3 billion owed from borrowing from Prop 42 transportation funds and other special funds over the past several years will be repaid over the next 15 years. Proposition 76, §§ 8-9. The impact of this provision will be more predictable revenue for California’s special funds, with no possibility of those funds being raided to cover budget shortfalls.

A provision in this measure will authorize funding to continue at present levels in the event a budget is not enacted by the beginning of a fiscal year. Proposition 76, § 5. This will prevent sudden funding stoppages when a budget is not enacted in a given fiscal year.

III. Drafting Issues

Severability

Section 12 of Proposition 76 contains a severability clause, which reads “If any provisions of this act, or part thereof, are for any reason held to be invalid or unconstitutional, the remaining provisions shall not be affected, but shall remain in full force and effect, and to this end the provisions are severable.” Proposition 76, § 12. While self-enacted severability clauses “normally calls for sustaining the valid part of the enactment,” they are not conclusive . Santa Barbara Sch. Dist. v. Super. Ct. 13 Cal.3d 315, 331 (1975). Therefore, a court must look at the measure as a whole before determining whether the law can stand on its own with the invalid or unconstitutional elements removed. Legis. v. Eu, 54 Cal.3d 492 (1991) [“Eu”].

The California Supreme Court, in the Eu decision, enumerated three criteria for upholding valid provisions in a ballot measure after portions of it have been ruled unconstitutional. Sections taken out must be grammatically, functionally, and volitionally separable from those left in. Id. at 535.

Proposition 76, while aimed at the singular goal of making the California budget process more efficient and predictable, achieves this end through several distinct approaches – altering state spending limits, granting new powers to the governor to control the budget process, and altering minimum funding guarantees for several major expenditures – each with multiple changes to multiple sections of the constitution.

All three approaches do not depend on each other to be functional. If one approach is ruled unconstitutional, any of the remaining proposals could be implemented on its own. If, for example, the governor’s sweeping new powers over the budget process are found to be unconstitutional, this ruling would not impact the ability to impose new state spending limits.

Proposition 76’s multiple sections appear to be grammatically severable as well. Because each proposed change to the constitution is found in different sections of the constitution, if one were to be deemed invalid, the others could grammatically stand on its own seamlessly.

Lastly, each proposed change appears to be volitionally severable. The court in Eu set forth a test for determining whether a portion of a measure is volitionally severable. Id. Following this precedent, Courts must decide whether, “the framers and voters undoubtedly would have adopted the remaining provision had they foreseen the success of the petitioners’ challenge.” Id, at 535. A person who votes for Proposition 76 is affirming their desire to change each section of the constitution independently. That is, the voter would like (1) a new state spending limit, (2) new powers for the governor, and (3) changes in minimum funding guarantees for a variety of major state expenditures. If one of these provisions were missing, it does not appear that the voter, or the framers would no longer desire the remaining provisions.

IV. Constitutional Issues
A. Federal Constitution

Proposition 76 does not appear to raise any federal constitutional issues.

B. State Constitution

Constitutional Amendment, or Revision?

Because Proposition 76 would change the structure of California’s government, including the balance of powers between the legislature and the governor, it could be considered a constitutional revision, instead of a constitutional amendment. A proposed constitutional revision requires that it be placed on the ballot by a two-thirds vote of the legislature or a constitutional convention. Cal. Const. art. XVIII, §§ 1, 3. Proposition 76 was placed on the ballot through the initiative petition process as a constitutional amendment, and therefore could be declared unconstitutional by the courts.

However, courts have recognized the well-entrenched constitutional right for the initiative process, and have broadly construed the right to enact initiatives by stating, "the power of initiative must be liberally construed … to promote the democratic process." San Diego Bldg. Contractors Assn. v. City Council 13 Cal.3d 205, 210 (1974). In order for an initiative to be deemed invalid because it should have been a constitutional revision, “ a substantial alteration of the entire Constitution,” must be present. Amador Valley Joint Union High Sch. Dist. v. State Bd. of Equalization 22 Cal.3d 208, 222 (1978) [“ Amador Valley].

In reconciling the fundamental differences between a constitutional amendment and revision the Amador Valley court sought clarification from the prior century : "The very term 'constitution' implies an instrument of a permanent and abiding nature, and the provisions contained therein for its revision indicate the will of the people that the underlying principles upon which it rests, as well as the substantial entirety of the instrument, shall be of a like permanent and abiding nature. On the other hand, the significance of the term 'amendment' implies such an addition or change within the lines of the original instrument as will effect an improvement, or better carry out the purpose for which it was framed." Livermore v. Waite 102 Cal. 113, 118-119 (1894).

Accordingly, California courts have recognized that granting too much power through the initiative process is grounds for rejection because it changes underlying principles of the constitution, rather that simply improving them. Soon after World War II, a contested proposition created an entirely new article to the California Constitution with 208 subsections, repealed or substantially altered 15 of the 25 other articles, and added four new topics, which taken together would have constituted greater changes than the 1879 revision of constitution. McFadden v. Jordan 32 Cal.2d 330 (1948) [“McFadden”]. Its changes to the balance of power in California were wide sweeping, greatly curtailing legislative powers, judicial functions, and the ability for cities and counties to levy property taxes. In one pertinent line of reasoning the court emphasized the significance of a provision that created a state pension commission with vast powers by stating, “The delegation of far reaching and mixed powers to the commission, largely, if not almost entirely in effect, unchecked, places such commission substantially beyond the system of checks and balances which heretofore has characterized our governmental plan." Id., at 348.

While the constitutional amendments proposed in Proposition 76 do not amount to the vast amendments rejected by the McFadden court, any challenger to Proposition 76 will likely analogize the unchecked power of the state pension commission in McFadden to the new gubernatorial powers contained in Proposition 76. Ultimately, a court weighing this challenge must determine whether the governor’s new power to make unilateral cuts to state funding during fiscal emergencies represents a change to an underlying principle of the constitution, which must be contained in a constitutional revision, rather than an amendment.

Single Subject Rule

Ballot measures in California must address a single issue, and cannot contain any superfluous provisions, sometimes called pork barrel provisions. The constitution is explicit regarding this, “an initiative measure embracing more than one subject may not be submitted to the electors or have any effect.” Cal. Const. art. II, § 8 (d). To determine if a measure addresses a single issue, the court has taken a broad approach using the “reasonably germane” test, which states, “the single-subject provision does not require that each of the provisions of a measure effectively interlock in a functional relationship. It is enough that the various provision are reasonably related to a common theme or purpose.” Senate v. Jones, 21 Cal.4th 1142, 1157 (1999) (referring to Legislature v. Eu, 54 Cal.3d. 492, 512) [“Jones”].

On its face, Proposition 76 has many different provisions changing several different sections of the constitution. However, the different approaches are all related to the common theme of requiring state expenditures to be in line with available resources. Each provision attempts to achieve this goal through different approaches, but overall it can be argued that each approach is intended to aid Proposition 76’s overall purpose. This does not seem to violate the broad approach to the single subject rule the court took in Jones. Id.

V. Public Policy Considerations
A. Proponents

Proponents argue that proposition 76 will benefit California because it will cut wasteful state spending, encourages the governor and legislature to work together on the budget, ensures steady revenue for roads and infrastructure, and stops the State from raiding taxes earmarked for specific programs. California Official Voter Information Guide, Argument in Favor, Rebuttal to Argument Against Proposition 76 (Secretary of State, 2005).

Proponents argue that our current budget process is inefficient and results in deficits during slow economic periods. They recognize that legislators continue to increase funding for social services without regard for the long term financial consequences on the State. Proposition 76 – Live Within Our Means Act – Join Arnold (accessed Oct. 5, 2005). Since 1999-2000 the state has increased spending by twice as much as it has increased revenue. Id. This year California is faced with a $6 billion deficit, with experts predicting accumulated deficits to reach $22-$26 billion by 2010. Argument in Favor, Rebuttal to Argument Against Proposition 76.

Proponents say Proposition 76 is needed to cut wasteful spending by the state legislature. They view our budget mismanagement as a reflection of over-spending rather than under-taxing. Current law allows the legislature to have indefinite budget standstills, resulting in some fiscal years beginning without a budget. Id. Without a budget all but court-determined essential state expenditures do not continue. Analysis of Proposition 76. By giving the governor more power to control the budget, it will be more likely that California will have a balanced budget on time every year, ensuring the continued funding of our social services.

Proponents argue that minimum guarantees for school funding are calculated unreasonably. With minimums more closely related to revenues, and the State no longer obligated to make up for under-funding as a result of decreased revenue, when the economy improves the State’s increased revenue will no longer be tied up with accounting debts. Id.

Proposition 76 will ensure that taxes dedicated to special projects such as road and highway construction will be protected from general fund obligations. These taxes were introduced to fund specific purposes, and as such, should not be raided by the state to cover other budget deficiencies. Proposition 76 – Live Within Our Means Act – Join Arnold (accessed Oct. 5, 2005).

B. Opponents

Opponents argue that proposition 76 will cut funding for schools, healthcare, public safety, and other essential social services, gives too much power to the governor to control the budget process, and ultimately will encourage increases in taxes.

By changing the minimum funding requirements for education, opponents forecast a permanent reduction in per-student funding. California Official Voter Information Guide, Argument Against, Rebuttal to Argument for Proposition 76 (2005). This will lead to crowded classrooms, teacher layoffs, and generally less money to spend on educating California’s K-14 students. California schools have been shorted $3 billion over the last three years, and with Proposition 76, it will take 15 years for this money to be repaid. Id.

A provision in Proposition 76 will allow the governor to unilaterally cut funding for programs during fiscal emergencies, and legislative standstills. Id. These cuts could be implemented without the approval of the legislature, and could impact vital services such as healthcare and public safety. Opponents point to the dichotomy of Proposition 76 protecting funding for roads and infrastructure, while subjecting funding for vital services to the discretion of one person – the governor. Id. In practice, opponents forecast the governor unilaterally cutting funding for vital services such as schools and healthcare under the powers granted in Prop 76, while funds for ancillary programs such as environmental mitigation and infrastructure improvements are untouchable. Id.

Opponents also argue that the governor’s new powers will undermine California’s system of checks and balances, and place too much purse-string power in the hands of one person. Id. In essence, the power for the governor to make unilateral funding cuts is derived from declaring a fiscal emergency. Whether California is in a fiscal emergency is determined at the discretion of that same governor, based on estimates made by his or her own administration. Id. This results in fewer opportunities for legislative influence during fiscal emergencies.

According to tax watchdogs, Proposition 76 will actually encourage increases in taxes. Id. With significant cuts in state funding, our social programs will be forced to offer less services. Increasing demands on these services will force the state to increase taxes to fund services that Californians depend on.

VI. Conclusion

Proposition 76 raises fundamental governance questions for California voters. The current fiscal position of the State requires fixing. Voters will have to decide whether limiting state funding through more stringent state spending limits, reduced funding guarantees for education, and granting new powers to the governor is the appropriate approach.