McGeorge School of Law

Proposition 2

Proposition 2:
Transportation Fund Protection

By Clinton Parish

Copyright © 2000 by University of the McGeorge School of Law

JD, McGeorge School of Law, University of the Pacific
to be conferred 2000
B.A., University of Puget Sound, 1996

 

Table of Contents

Executive Summary

General Description

Ballot Pamphlet Text

Text of Proposed Law

 

The Initiative Review is produced by the Governmental Affairs Student Association of the McGeorge School of Law

 

Chapter 1

Executive Summary

Proposition 2 seeks to maintain revenues derived from transportation related taxes and fees within the state transportation fund by providing specific criteria under which the Legislature may loan transportation funds to the state General Fund. Under Proposition 2, loans from transportation revenues to the General Fund are limited and defined to ensure timely repayment with interest. Also, Proposition 2 authorizes state transportation funds for loans to finance transportation needs of local agencies under specified conditions, and designates the local transportation funds as trust funds to ensure timely repayment with interest and fiduciary responsibility. By limiting when state transportation funds may be loaned, Proposition 2 restricts the outflow of state transportation funds for local transportation needs or non-transportation activities.

Proposition 2 is designed to place a time limit on these temporary loans via constitutional amendment. The amendment allows the Legislature to take tax revenues designated for the state transportation fund and loan them to the General Fund provided either the borrowed money is returned with interest within the same fiscal year; or, in the alternative, within three fiscal years if the Governor declares a fiscal emergency or the adjusted current fiscal projections are less than the previous fiscal year. By inserting language specifying a repayment term with interest, the amendment addresses what is meant by 'temporary@ yet provides flexibility in a declared fiscal emergency.

Additionally, Proposition 2 clarifies legislative authority to temporarily loan designated tax revenues to local agencies provided they are used for transportation related needs and they are repaid with interest within four years. By designating the local transportation funds as trust funds incapable of being abolished, they are essentially irrevocable trust funds, with heightened fiduciary implications which place management and control of the funds under general fiduciary duties.

Amending the California Constitution under Proposition 2 would likely have minimal fiscal impact. Essentially, the amendment clarifies and limits what the Legislature is already authorized to do -- that is, to loan to the General Fund monies collected and held in other funds. No additional taxes are authorized or restricted. In its simplest form, the specific criteria and limitations of Proposition 2 restrict potential nonrepayment from the loan originating fund and provide for timely repayment with interest.

 

Chapter 2

General Description

A. CURRENT LAW

Currently, the California Constitution authorizes the Legislature to temporarily loan designated revenues to the General Fund conditioned on repayment. (Cal. Const. art XIX, '6.) The Constitution does not require repayment with interest, nor does it limit or define what is temporary.

Under current law, if the General Fund is insufficient to meet non-transportation activities, the Legislature can obtain a temporary loan from state transportation funds to meet its fiscal obligations, much like an overdraft protection plan temporarily loans funds to cover checks written on insufficient funds. Yet the Constitution leaves unanswered what is meant by 'Temporary.@ Also, unlike any bank or trustee, the Constitution does not mandate repayment with interest. These omissions do not provide guidelines to limit loans from the state transportation funds and thereby maintain tax and fee revenues specifically collected and designated for our state=s transportation needs. The only limitations under Section 6 of Article XIX of the California Constitution are that loans be repaid to the originating funds. (Cal. Const. art XIX, '6.)

Current law allows the Legislature to loan to the State General Fund without explicit limitations. The law is silent as to any floor or ceiling amounts, any interest due, any limitations on subsequent or concurrent loans, any specified time for repayment, and any qualifying purpose for the loans. Proposition 2 seeks to address these issues by creating conditions to and limits on loans of state transportation funds to the General Fund.

 

B. CHANGES PROPOSED BY PROPOSITION 2

Proposition 2 would amend the Constitution by repealing the general language authorizing temporary loans and replacing it with more specific language under which loans to the General Fund may be authorized. The amendment limits what is a temporary loan, yet allows flexibility to permit repayment extension for a fiscal emergency. Also, the amendment authorizes loans to local agencies under specific fiduciary, use and repayment criteria. In doing so, the amendment proposed under Proposition 2 attempts to guard against depleting or deferring use of revenues collected and held within the state transportation fund. The fiscal requirements of Proposition 2 further the state purpose in collecting transportation based tax revenues and fees--to fund transportation related maintenance and improvement efforts within the state of California by having timely access transportation designated revenues.

 

1. Specific Limitations on Tax Revenue Loans

Proposition 2 allows loans from designated tax revenues only if repaid under one of two repayment limitations. First, the amount loaned is constitutionally required to be repaid within the same fiscal year, and may be extended to not more than 30 days after the subsequent year=s budget bill is passed. Second, loan repayment may be extended to a period not greater than three fiscal years from the loan origination date, provided the Governor has proclaimed a fiscal state of emergency, or the current General Fund is less than projected or less than the previous fiscal year. These two repayment limitations attempt to provide some structure and meaning as to when and under what time frame designated revenues may be loaned to the General Fund.

 

2. Reserved Authority

Under Proposition 2, the Legislature will reserve the right to pass laws authorizing loans from the state transportation fund to local transportation agencies. However all such loans must be repaid with interest within four years from the time the loan is made. In addition, these loans must used be for research, planning, improvement, maintenance, and operation of public streets and highways. (Cal. Const. art. XIX, ' 1.) The interest rate required is dictated by the rate paid on other government accounts.

 

3. Specific Authorization for Loans from State and Local Transportation Funds

Proposition 2 will add Article XIX A to the California Constitution, specifically authorizing loans to the General Fund from funds held in state or local transportation accounts subject to the same limitations as loans authorized from designated tax revenues. By adding this article to the California Constitution, temporary loans to the General Fund are allowed from two general sources: (1) designated tax revenues pursuant to Article XIX, and (2) funds held in state and local transportation accounts. The specific limitations are largely the same, requiring repayment within specified time limits, and a provision for flexibility in a fiscal emergency.

Under the new Article XIX A, a local transportation fund is defined as a fund created under specific statutory authority set forth in Government Code, Section 29530. (See Cal. Gov't Code ' 29530 [counties are permitted to contract with the State Board of Equalization to establish local transportation funds through which state funds may be diverted for local usage].) Most significant is that under Proposition 2, all local transportation funds are constitutionally designated trust funds, which raises fiduciary implications when managing the funds. Moreover, these local transportation funds cannot be abolished. This language seems to constitutionally designate local transportation funds as irrevocable trusts, and thereby implies strict limitations on the management and control of these trust funds. Lastly, money allocated in a local transportation fund may be used for transportation purposes only.

POLICY IMPLICATIONS

The state of California has several mechanisms to generate revenues for state transportation needs. Yet with a seemingly yearly budget impasse and unexpected general fiscal needs, often these transportation funds are diverted for long periods of time, and if repaid, it is without interest. Proposition 2 attempts to limit repayment periods, and attach an interest requirement to maintain state transportation funds. In doing so, the California Constitution would mandate timely repayment with interest, and thereby maintain and preserve the revenues collected and designated for our state's transportation needs.

Proposition 2 allows flexibility for fiscal emergencies which provides a safety net for the state's non-transportation needs. For example, should current fiscal needs be greater than projected, loans to the General Fund are authorized under strict conditions. Therefore, general state needs can be funded via temporary loans. Given the revenues generated by transportation related taxes and fees, it is conceivable to have huge pools of transportation funds while at the same time, conditions may be present that deplete the General Fund. In fact, this amendment is proposed because this very scenario is not only likely, but is probable and such temporary loans have been authorized. This amendment gives guidance and limits the scope of when these loans are authorized, and under what conditions the repayment must follow.

Those in favor of Proposition 2 see the limitations set on transportation funded loans to the General Fund as desirable, in order to maintain the revenue base for improved roadways and public transit systems. If California is to meet the needs of its growing population, these funds are needed to improve roadways, deficient bridges, and systems for mass transit. By maintaining revenues collected and deposited in state and local transportation funds, California=s transportation system is assured timely access to funds designated for these purposes. Currently, loans funded by transportation designated revenues do not require timely repayment and in fact allow the money to be spent for non-transportation needs without limitation. Under Proposition 2, strict repayment criteria are set forth, and funds to local agencies must be for transportation-related needs. Moreover, timely repayment is with interest which maintains the status quo, since it is foreseeable that money within the state transportation fund is invested for interest payments on the principle. Designating local funds as trust funds places fiscal fiduciary duties to ensure responsible use and repayment of these funds. In all, Proposition 2 gives structure and guidance to authorized loans to the General Fund.

On the other hand, the state of California has transportation based revenues from three sources, the gas tax, the sales tax on fuels, and taxes and fees on motor vehicles. This tax and fee base generates revenues that make up the state transportation fund. If this money cannot be temporarily borrowed, the Legislature cannot address what may be more pressing general needs of its citizens. By constitutionally requiring repayment within the same fiscal year, the Legislature is severely restricted in how these funds can be used. In effect, the funds are merely a temporary fix, in that the underlying problem addressed by the loan is subordinated by the ability to repay.

 

D. PROBLEMS UNADDRESSED BY PROPOSITION 2

The specifics proposed under Proposition 2 do not address loan amounts and what portion of the state transportation funds can constitute temporary loans to the General Fund. Without loan amount limits or caps on the percentage of the transportation funds that can be temporarily allocated to the General Fund, it is conceivable that the state transportation funds could be largely depleted. Much like limits on an overdraft protection plan or credit card, such limitations provide structure and ceilings as to borrowed amounts. Also, the amendment is silent regarding whether there are limitations on allowing concurrent loans or subsequent loans if there is a history of delinquent repayment. Because the proposition does not specifically address repayment enforcement provisions, if a loan is made and for whatever reason repayment is not consistent with the constitutional mandate, or is repaid by yet another loan from the state transportation funds, this amendment leaves unaddressed very real situations that may arise.

When extending repayment from the current fiscal year to a three year period if a fiscal emergency, the amendment does not limit or define what constitutes an economic emergency. This silence may allow emergency designation only if the Governor declares as such. The statute attempts to structure repayment provisions, but leaves gaping loopholes under which maintenance of the state transportation funds may largely be the same as it is under the current law.

 

Appendix A

Ballot Pamphlet Text


TRANSPORTATION: FUNDING.

LEGISLATIVE CONSTITUTIONAL AMENDMENT.

 

  • Requires loans of transportation related revenues to the General Fund to be repaid the same fiscal year, or within three fiscal years if the Governor declares an emergency significantly impacting the General Fund or General Fund revenues are less than the previous fiscal year's adjusted revenues
  • Allows loans of certain transportation related revenues to local entities conditioned upon repayment, with interest, within four years.
  • Designates local transportation related revenues to local entities conditioned upon repayment, with interest within four years.
  • Restricts allocations from local transportation funds to designated purposes relating to local transportation.

     

    Summary of Legislative Analyst's

    Estimate of Net State and Local Government Fiscal Impact:

  • It is unlikely that this measure would have any fiscal impact on state and local governments.

     

    Final Votes Cast by the Legislature on ACA 30

    (Proposition 2)

    Assembly: Ayes 71 Senate: Ayes 32

    Noes 2 Noes 1

    Analysis by the Legislative Analyst

    Background

    California's highways, public streets and roads, and mass transportation systems are funded by a mix of federal, state, local, and private money.

     

    State Transportation Funds. State funds for transportation programs are derived from three major sources -- a "gas@ tax (currently, 18 cents per gallon of motor vehicle fuels, primarily gasoline and diesel), sales tax on gasoline and diesel, and taxes and fees on motor vehicles and their use, including truck weight fees, vehicle registration fees, and driver=s license fees.

    Currently, revenues derived from the gas tax on motor vehicle fuel used in vehicles on public roads and revenues from fees and taxes on motor vehicles are restricted to specified transportation purposes by the California Constitution. The State Constitution, however, permits these revenues to be loaned temporarily to the state General Fund with the condition that the loaned amount must be repaid. The state General Fund supports nontransportation activities such as education, corrections, and health and social services programs.

    Under current law, revenues from the sales tax on diesel fuel Public Transportation Account for use only for public transportation and transportation planning purposes. Currently, these funds may be loaned to the state General Fund. Loans must be repaid with interest.

    During a fiscal year, state transportation funds are often loaned on a short-term basis (sometimes as short as one day) to the state General Fund for cash flow purposes. Additionally, during the recession of the early 1990s, transportation funds were loaned to the General Fund on a longer-term basis (more than a fiscal year). The length of these loans was determined by the Legislature and Governor in statute.

     

    Local Transportation Funds. Current law authorizes each county to establish a Local Transportation Fund (LTF) for public transportation purposes. Revenues to each county's LTF are derived from one-quarter cent of the sales tax collected in that county.

     

    Proposal

    This measure amends the California Constitution to restrict the conditions under which state transportation funds, including gas tax revenues, revenues from fees and taxes on motor vehicles and their use, and funds in the Public Transportation Account, can be loaned to the state General Fund. Specifically, loans to the state General Fund in any fiscal year must be repaid within that fiscal year, except that repayment may be delayed up to 30 days after a state budget is enacted for the subsequent fiscal year. Loans extending over a fiscal year may be made only if the Governor declares a state of emergency which would result in a significant negative impact to the General Fund, or if there is a decrease in General Fund revenues from the previous year's level. Loans extending over a fiscal year must be repaid in full within three fiscal years.

    The measure also clarifies that the Legislature may authorize certain state transportation funds to be loaned to local agencies for transportation purposes allowed by the State Constitution. The measure requires such loans to be repaid with interest no later than four years after the loans are made. Additionally, the measure amends the State Constitution to designate the LTFs as trust funds and prohibits the funds from being abolished. The measure further prohibits LTF monies from being diverted from specified transportation purposes to other purposes.

     

    Fiscal Effect

    It is unlikely that this measure would result in any state or local fiscal impact. This is because the measure's restrictions generally would not result in additional borrowing costs or savings.

    Argument in Favor of Proposition 2

    PROTECT OUR TRANSPORTATION FUNDS

    Proposition 2 is your opportunity to protect California's highways and public transit systems. When the people voted earlier in this decade to provide additional fuel tax money for transportation, voters were told the funds would be earmarked in the State Constitution for the maintenance and construction of roads and public transit systems. Unfortunately, in recent years elected officials and bureaucrats have found ways to siphon more than a billion dollars of these funds into other government programs. PROPOSITION 2 WILL STOP THAT!

    Your YES vote on Proposition 2 will mean:

  • Bad roads cost the average Californian $144 a year in additional auto repairs.

  • The percentage of roads in poor condition in California has doubled in this decade.

  • The number of structurally deficient bridges has increased 45 percent in five years.

  • More than 60 percent of our bridges are over thirty years old -- the age when they require major repairs to remain structurally sound.

  • Funding for road and bridge improvements has lagged 30 percent behind goals specified in the State Transportation Blueprint approved by the voters in 1990.

     

    Traffic Congestion Relief

  • Highway travel is increasing at a rate ten times faster than new capacity has been added in the 1980s and >90s, so we must complete critical segments of our road system to meet this need.

  • Travel on urban highways has increased 34 percent in the past ten years.

  • In California, 49 percent of urban highways are now seriously congested.

  • Crushing commuter loads and air quality concerns require an expansion of public transit.

    California's transportation system is the backbone of our state's economy. We depend on highways to get us to our jobs, our homes, our schools and for our fire, police, and other emergency service vehicles. Traffic congestion and bad roads hurt our economy by wasting our time, delaying freight, damaging our vehicles, and increasing pollution. Public transit is particularly critical in providing commuter transportation for employees without cars, and to give our elderly and handicapped citizens equal access.

    Proposition 2 will prevent the Governor and the Legislature from borrowing transportation funds for other purposes except in specified economic emergencies. And it requires a prompt payback when they do borrow. PROPOSITION 2 WILL RESTORE FISCAL RESPONSIBILITY TO CALIFORNIA'S TRANSPORTATION TRUST FUNDS.

    That's why Proposition 2 is supported by these organizations:

    California Taxpayers' Association

    State Federation of Labor

    California Alliance for Jobs

    League of California Cities

    California Chamber of Commerce

    California Manufacturers Association

    Transportation California

    California State Association of Counties

    California Transit Association

    Amalgamated Transit Union--AFL-CIO

    California Trucking Association

    California Coalition for Environmental And Economic Balance

    Proposition 2 will make sure your fuel tax dollars go where you voted for them to go. Good roads and public transit make a vital contribution to our quality of life. Keep California going in the right direction by voting YES on Proposition 2.

    KEVIN MURRAY
    Assembly Transportation Committee Chair

    ALLEN ZAREMBERG
    California Chamber of Commerce President

    DONALD R. DOSER
    AFL-CIO Operating Engineers Business Manager

     

    Proposition 2: Text of Proposed Law

     

    This amendment proposed by Assembly Constitutional Amendment 30 (Statutes of 1998, Resolution Chapter 77) expressly amends the California Constitution by repealing and adding a section thereof, and by adding an article thereto; existing provisions proposed to be deleted are printed in strikeout type and new provisions proposed to be added are printed in italic type to indicate that they are new.

     

    PROPOSED AMENDMENT OF ARTICLE XIX AND

    PROPOSED ADDITION OF ARTICLE XIX A

    First-That Section 6 of Article XIX thereof is repealed.

    SEC. 6: This article shall not prevent the designated tax revenues from being temporarily loaned to the State General Fund upon condition that amounts loaned be repaid to the funds which they were borrowed.

    Second-That Section 6 is added to Article XIX thereof, to read:

     

    SEC. 6. The tax revenues designated under this article may be loaned to the General Fund only if one of the following conditions is imposed:

    (a) That any amount loaned is to be repaid in full to the fund from which it was borrowed during the same fiscal year in which the loan was made, except that repayment may be delayed until a date not more than 30 days after the date of enactment of the budget bill for the subsequent fiscal year.

    (b) That any amount loaned is to be repaid in full to the fund from which it was borrowed within three fiscal years from the date on which the loan was made and one of the following has occurred:

    (1) The Governor has proclaimed a state of emergency and declares that the emergency will result in a significant negative fiscal impact to the General Fund.

    (2) The aggregate amount of General Fund revenues for the current fiscal year as projected by the Governor in a report to the Legislature in May of the current fiscal year, is less than the aggregate amount of General Fund revenues for the previous fiscal year, adjusted for the change in the cost of living and the change in population, as specified in the budget submitted by the Governor pursuant to Section 12 of Article IV in the current fiscal year.

    (c) Nothing in this section prohibits the Legislature from authorizing, by statute, loans to local transportation agencies, cities, counties, or cities and counties, from funds that are subject to this article, for the purposes authorized under this article. Any loan authorized as described by this

    subdivision shall be repaid, with interest at the rate paid on money in the Pooled Money Investment Account, or any successor to that account, during the period of time that the money is loaned, to the fund from which it was borrowed, not later than four years after the date on which the loan was made.

    Third-That Article XIX A is added thereto, to read:

     

    ARTICLE XIX A

    LOANS FROM THE PUBLIC

    TRANSPORTATION ACCOUNT OR LOCAL

    TRANSPORTATION FUNDS

     

    SECTION 1. The funds in the Public Transportation Account in the State Transportation Fund, or any successor to that account, may be loaned to the General Fund only if one of the following conditions is imposed:

    (a) That any amount loaned is to be repaid in full to the account during the same fiscal year in which the loan was made, except that repayment may be delayed until a date not more than 30 days after the date of enactment of the budget bill for the subsequent fiscal year

    (b) That any amount loaned is to be repaid in full to the account within three fiscal years from the date on which the loan was made and one of the following has occurred:

    (1) The Governor has proclaimed a state of emergency and declares that the emergency will result in a significant negative fiscal impact to the General Fund.

    (2) The aggregate amount of General Fund revenues for the current fiscal year, as projected by the Governor in a report to the Legislature in May of the current fiscal year, is less than the aggregate amount of General Fund revenues for the previous fiscal year, as specified in the budget submitted by the Governor pursuant to Section 12 of Article I-V in the current fiscal year

    SEC. 2. (a) As used in this section, a "local transportation fund" is a fund created under Section 29530 of the Government Code, or any successor to that statute.

    (b) All local transportation funds are hereby designated trust funds.

    (c) A local transportation fund that has been created pursuant to law may not be abolished.

    (d) Money in a local transportation fund shall be allocated only for the purposes authorized under Article 11 (commencing with Section 29530) of Chapter 2 of Division 3 of Title 3 of the Government Code and Chapter 4 (commencing with Section 99200) of Part 11 of Division 10 of the Public Utilities Code, as those provisions existed on October 1, 1997. Neither the county nor the Legislature may authorize the expenditure of money in a in local transportation fund for purposes other than those specified in this subdivision.