McGeorge School of Law

Proposition 58

Analysis of Proposition 58:

The California Balanced Budget Act of 2004

By Dean Okimoto
JD, McGeorge School of Law, University of the Pacific
to be conferred December 2004
B.A., Mass Communications, University of California at Berkeley, 1999

Copyright © 2004 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 58, the California Balanced Budget Act of 2004, would amend the Constitution of the State of California, making several related changes: first, the enactment and maintenance of a balanced state budget; second, the establishment of specific reserve requirements; and lastly, a restriction on future deficit-related borrowing. Legislative Analyst's Office, Proposition 58, The California Balanced Budget Act. The Act, if adopted would place a constitutional spending limit amendment before the voters at the March 2, 2004, primary election. Cal. Sen. Rules. Comm., Analysis of ACA 5XXXXX, at 1 (December 12, 2003).

Proposition 58 seeks to amend Article XIII B of the California Constitution, which provides for a state appropriations limit that caps appropriation of tax proceeds. Id. Article XIII B, the existing limit, requires the state to maintain a "prudent reserve," but does not establish any specific criterion for the reserve or require any specific deposits into it. Id.

The goals of Article XIII B are to require the Governor to propose a balanced budget in January of every year. Id. Proposition 58 would require the State of California to adopt a balanced budget. Legislative Analyst's Office. In addition, Proposition 58 provides for mid-year adjustments in the event that the budget falls out of balance. Id. Furthermore, if the Governor determines the state is facing substantial shortfalls or spending deficiencies, the Governor may declare a fiscal emergency. Id. In such event, the Legislature would be called into special session to address the problem. If the Legislature then fails to pass and send legislation to the Governor addressing the budget problem within 45 days, the Legislature would be prohibited from one, acting on any other bills; or two, adjourning in joint recess until such legislation is passed. Id.

Moreover, Proposition 58 requires that a special reserve, called the Budget Stabilization Account be established in the state's General Fund. Id. Further, subsequent to the issuance of the bonds authorized in Proposition 57 of 2004, this measure would prohibit most future borrowing to cover budget deficits. Id. With regard to the bond authorized by Proposition 57 of 2004, the "single object or work" for which the Legislature may create debt includes the one-time funding of the accumulated state budget deficit and other obligations, as determined by the Director of Finance. Id. Lastly, these provisions of Proposition 58 take effect only if Proposition 57 of 2004 on the March 2, 2004, direct primary election is also approved by the voters. Id.

II. The Law

A. Existing Law

1. Background

Proposition 58 is a Constitutional Amendment that is a part of a continued response to help the State of California balance their budget. Id. According to the California Legislative Analyst's Office, California has experienced substantial budget difficulties in recent years. Id. After a period of high growth in revenues and expenditures in the late 1990s, California tax revenues plunged in 2001, and the budget fell out of balance. Id. Although the California Legislature reduced program spending and increased revenues to deal with part of the shortfalls, the State has also carried over large deficits, and engaged in a substantial amount of borrowing. Id. The state budget faces another substantial shortfall in 2004-05, and it has many other obligations that are outstanding at this time, such as deferrals and loans from special funds. Id.

2. Article XIII B of the California Constitution

Article XIII B of the California Constitution sets forth the existing law which provides for a state appropriations limit that caps appropriation of tax proceeds. Cal. Sen. Rules. Comm., Analysis of ACA 5XXXXX at 1. The existing limit requires the State to maintain a "prudent reserve," but does not establish any specific criterion for the reserve, or require any specific deposits into it. Id. Furthermore, there is no explicit existing requirement that the Legislature pass, or the Governor of California sign, a balanced budget. Id. The only existing constitutional requirement is for the Governor to propose a balanced budget in January of every year. Id.

B. Changes Proposed by Proposition 58

Assembly Constitutional Amendment 5 (Oropeza) authorized Proposition 58 to become operative only if Proposition 57 of 2004 is also submitted to and approved by the voters at the March 2, 2004, statewide primary election. Cal. Assembly Const. Amend. 5, 2003 Reg. Sess. 2 (December 12, 2003). Voter approval of Proposition 58 would result in Section 10 of Article IV being amended, Section 12 of Article IV being amended, Section 1.3 being added to Article XVI, and Section 20 being added to Article XVI. Id. at 3-6.

1. Article of Proposition 58

a. Section 10 of Article IV is amended

Section 10 of Article IV creates a process for mid-year budgetary adjustments. Cal. Sen. Rules. Comm., Analysis of ACA 5, at 2. Following the enactment of the budget bill, the Governor may declare a fiscal emergency and call a special session. Id. If the Governor declares a fiscal emergency, the Governor must propose legislation to restore balance upon finding a serious fiscal imbalance between General Fund revenues and expenditures. Id. Also, this measure provides that the Legislature has up to 45 days to pass and send to the Governor either the Governor's proposals, or an alternative statute to address the fiscal emergency that is at issue in the Special Session. Id. Further, if the 45-day requirement is not met, this measure prohibits the Legislature from acting upon any other bills or adjourning for a joint recess until it passes and sends a bill to the Governor to address the fiscal emergency. Id.

b. Section 12 of Article IV is amended

Section 12 of Article IV requires a balanced budget. Id. This measure prohibits the Legislature from sending a bill to the Governor or the Governor from signing a budget bill if General Fund appropriations exceed general fund revenues for that fiscal year. Id. For this purpose, the revenues are based on estimates set forth by the Legislature in the budget bill. Id. Furthermore, appropriations include all General Fund appropriations in the budget bill, any other bill enacted for the fiscal year as of the date of the budget bill's passage, and the amount of funds transferred into the Budget Stabilization Account. Id.

c. Section 1.3 is added to Section XVI

Section 1.3 is added to Section XVI to encompass a single object of work, definitions, and prohibitions on borrowing. Id. For the purposes of Proposition 57, the California Economic Recovery Bond Act of 2004, which will be placed before the voters on March 2, 2004, statewide primary election, provides that a single object of work includes the funding of an accumulated budget deficit. Id. at 2-3.

Also, this measure defines "accumulated state budget deficit" as the aggregate of both the estimated negative balance of the Special Fund for Economic Uncertainties arising on or before June 30, 2004, not including bonds to finance this deficit, and the other General Fund obligations incurred by the state prior to this date. Id. at 3. Currently, the State Department of Finance estimates the aggregate amount of the estimated negative balance of the Special Fund for Economic Uncertainties arising on or before June 30, 2004, not including bonds to finance this deficit and other General Fund obligations incurred by the State prior to this date, to be $15 billion, which is the bond amount Proposition 57, the California Economic Recovery Bonds Act of 2004, seeks to get approved on March 2, 2004. Id. The Department of Finance is required to certify any "other General Fund obligations." Id.

Further, subsequent deficit borrowing is prohibited once the $15 billion bonds are issued. Id. Specifically, the State of California is prohibited from using general obligation bonds, revenue bonds, and/or bonds for which there is no legal obligation of repayment in order to fund a year end state budget deficit. Id. However, the State is not prohibited from using short-term borrowing, such as Revenue Anticipation Warrants and Revenue Anticipation Notes. Id.

d. Section 20 is added to Article XVI

Section 20 is added to Article XVI in order to establish a new Budget Stabilization Fund. Id. This measure provides that the State Controller must follow a specified scheme to transfer moneys into this fund. Id. As specified, no later than September 30, 2006, one percent must be transferred. Id. No later than September 30, 2007, two percent must be transferred. Id. at 3-4. No later than September 30, 2008, and annually thereafter, three percent must be transferred. Id. at 4. The designated percentages are based on the estimated amount of General Fund revenues for the current fiscal year. Id. Estimated General Fund revenues are the General Fund revenues that are set forth in the budget bill for that fiscal year. Id.

Further, this measure does not require the transfer of moneys into the Budget Stabilization Account in any year, if the balance would result in an amount greater than five percent of the General Fund revenues that are set forth in the budget bill for that fiscal year or $8 billion, whichever is greater. Id. Funds that are transferred into the Budget Stabilization Account are considered General Fund revenues for the purposes of the California State Constitution. Id. The Budget Stabilization Account provisions do not change the Proposition 98 priority payment or the appropriations limit. Id. However, this measure provides that the transfer of money into the Budget Stabilization Account may be suspended or reduced for a fiscal year, if the Governor issues an executive order no later than June 1 of the preceding fiscal year. Id. If the Governor issues such an order, the State Controller will not make all or some of the transfer. Id.

Additionally, this measure provides that each fiscal year, 50 percent of the Budget Stabilization Account up to the aggregate amount of $5 billion must be deposited in the Deficit Recovery Bond Retirement Sinking Fund Subaccount for the purpose of retiring the deficit recovery bonds. Id. Further, this measure provides that the funds in the Special Fund must be continuously appropriated to the State Treasurer for the purpose of retiring the deficit bonds at the times and in the manner that the State Treasurer deems appropriate. Id. This measure provides that any remaining funds in the Special Fund after the deficit bonds are paid fully may be transferred, by statute, into the General Fund rather than the Budget Stabilization Account. Id. In accordance with this measure, the other 50 percent of funds transferred into the Budget Stabilization Account by the State Controller may, by statute, be transferred into the General Fund. Id. at 5.

III. Drafting Issues

At first glance, there does not appear to be any significant drafting issues. However, upon further reflection, within the text of Proposition 58 there exists ambiguous terminology, thus making it difficult to fully grasp the details of the proposed changes.

First, as stated above, Proposition 58 states that if the Governor determines that, for any fiscal year, the "General Fund revenues will decline substantially below the estimate of General Fund revenues upon which the budget bill for that fiscal year, as enacted, was based, or General Fund expenditures will increase substantially above that estimate of General Fund revenues, or both, the Governor may issue a proclamation declaring a fiscal emergency and shall thereupon cause the Legislature to assemble in special session for this purpose." Cal. Assembly Const. Amend. 5, 2003 Reg. Sess. 4. One concern regarding ambiguous language is what constitutes the General Fund revenues to decline "substantially below" or increase "substantially above" the estimate of General Fund revenues in order for the Governor to issue a proclamation declaring a fiscal emergency. However, in this situation, it is up to the Governor's judgment to define when the General Fund revenues either decline substantially below, or increase substantially above, the estimate of General Fund revenues. Telephone Interview with Dan Rabovsky, California State Assembly Budget Committee Staff (January 29, 2004) (notes on file with the McGeorge School of Law, University of the Pacific, Capital Center for Government Law and Policy). Thus, there is little likelihood that Proposition 58 will be challenged on the ground that it contains this ambiguous phrase.

Second, as mentioned earlier, the State Controller must transfer from the General Fund to the Budget Stabilization Account the following amounts: one, "[n]o later than September 30, 2006, a sum equal to 1 percent of the estimated amount of General Fund revenues for the 2006-07 fiscal year"; two, "[n]o later than September 30, 2007, a sum equal to 2 percent of the estimated amount of General Fund revenues for the 2007-08 fiscal year," ; and three, "[n]o later than September 30, 2008, and annually thereafter, a sum equal to 3 percent of the estimated amount of General Fund revenues for the current fiscal year." Cal. Assembly Const. Amend. 5, 2003 Reg. Sess. 6. A plain reading of this text provides the reader with no idea as to what the sum equal to these percentages of the estimated amount of General Fund revenues for each year equate in terms of dollars and cents. However, because the State Controller does not know these amounts since these percentages of the estimated amount of General Fund depends on the revenues for that fiscal year, the California legislature may not want a specified amount written into the bill. Telephone Interview with Dan Rabovsky (notes on file with the McGeorge School of Law, University of the Pacific, Capital Center for Government Law and Policy). Therefore, it is unlikely that Proposition 58 will be challenged on this ambiguous phrase either.

Third, the text of Proposition 58 provides that the "transfer of monies from the General Fund to the Budget Stabilization Account may be suspended or reduced for a fiscal year as specified by an executive order issued by the Governor no later than June 1 of the preceding fiscal year." Cal. Assembly Const. Amend. 5, 2003 Reg. Sess. 6-7. Proposition 58 does not specify under what conditions the Governor may issue an executive order to either suspend or reduce transfer of moneys from the General Fund to the Budget Stabilization Account for any given fiscal year. However, because there is no clear guidance provided in the text of Proposition 58, it will be up to the Governor's discretion in determining what conditions suffice to issue such an executive order. Telephone Interview with Dan Rabovsky (notes on file with the McGeorge School of Law, University of the Pacific, Capital Center for Government Law and Policy). Therefore, it seems unlikely that Proposition 58 will be challenged on this omission of specified conditions as well.

IV. Constitutional Issues

A. Federal Constitution

There are no federal constitutional issues raised by Proposition 58.

B. State Constitution

1. Constitutional Amendments

California Constitution Article XVIII provides that a majority of voters must approve all state constitutional amendments. Cal. Const. art. XVIII (West 2002). Further, proposed constitutional amendments are required to appear on the statewide ballot, and pass with a majority vote prior to an amendment taking effect. Id. The Legislature may submit to the voters any proposed amendment or revision of the state constitution. Id.

Here, ACA 5 (Oropeza), now known as Proposition 58, passed by two-thirds vote by each house in the Legislature, which requires amendments to the California Constitution be submitted to the voters at the March 2, 2004, statewide primary election. Cal. Assembly Const. Amend. 5, 2003 Reg. Sess. 2. Therefore, these proposed amendments to the California State Constitution will only go into effect if approved by the majority of voters.

2. Single Subject Rule

California Constitution Article II, Section 8(d) provides that "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) (West 2002). In Legislature v. Eu, 54 Cal. 3d 492 (1991), the California Supreme Court has interpreted the Constitution's single subject rule broadly, holding that so long as the provisions of an initiative are reasonably related to a common theme or purpose, the measure does not violate the single subject rule. In Legislature, the State's high court found that Proposition 140, the Political Reform Act of 1990, did not violate the single subject rule, because the three separate reforms of the proposition were all aimed at the general goal of incumbency reform. Id. The Court stated the issue was not whether each section will be functionally effective, but whether the sections were reasonably germane to the single subject of incumbency reform. Id. at 514.

The provisions of Proposition 58 do not appear to violate the single subject rule. The goals of Proposition 58 are to require a balanced budget by maintaining a special reserve, and all of its provisions are related to that aim. Telephone Interview with Dan Rabovsky (notes on file with the McGeorge School of Law, University of the Pacific, Capital Center for Government Law and Policy). However, although Proposition 58 includes a one-time funding of the accumulated state budget deficit, it can be argued that the bond authorized by Proposition 57 of 2004, the "single object or work" for which the Legislature may create debt, includes the one-time funding of the accumulated state budget deficit, and that other obligations do not fall within the same subject. Further, the one-time funding of bonds in order to balance the budget is not even included in this proposition. On the other hand, funding the current budget deficit is reasonably germane to maintaining a balanced budget. Therefore, Proposition 58 does not violate the single subject rule.

V. Public Policy Considerations

A. Proponents

Proponents of Proposition 58 claim that California state government spending is out of control. California Secretary of the State, California Official Voter Information Guide, Analysis of Prop. 58 The California Balanced Budget Act of 2004, Arguments and Rebuttals (accessed January 29, 2004). Over the past three years, the California state spending has significantly exceeded state revenues. Id. Proposition 58 will require the California State Governor and State Legislature to enact a balanced budget. Id. Currently, the Governor is only required to propose, not enact, a balanced budget. Id. This loophole has led to huge budget deficits that have grown to haunt California. Id.

Presently, California faces an unprecedented deficit in the budget. Id. Proponents assert that government overspending has led to serious shortfalls that threaten the State of California's ability to pay its bills and access financial markets. Id. Proposition 58 is a safeguard against such government overspending ever happening again. Id. Proposition 58 will prevent the California Legislature from enacting budgets that spend more money than the State of California has in its budget. Id.

Proposition 58 will require, for the first time, that the California Governor and the Legislature pass a balanced budget. Id. Proposition 58, along with Proposition 57 of 2004, the California Economic Recovery Bond Act, will provide the tools that is needed to resolve California's current budget crisis. Id.

For the past 3 years, California faced unprecedented budget deficits. Id. However, the problem was ignored, spending exceeded revenues, and there was no process in place to address the fiscal crisis. Id. Proposition 58 will allow the California Governor to call the Legislature into a Special Session to deal with future fiscal crisis. Id. If the Legislature fails to act within 45 days, then the Legislature cannot call a recess, nor can the Legislature pass any other legislation. Id. Proposition 58 will require that the Governor and Legislature work together to find a solution to the problem before it is too late. Id.

Proposition 58, the California Balanced Budget Act, along with Proposition 57 of 2004, the California Economic Recovery Bond Act, will provide California's leaders with the necessary tools to restore confidence in the financial management of the State of California. Id.

The proponents include Governor Arnold Schwarzenegger, State Controller Steve Westly, Superintendent of Public Instruction Jack O'Connell, the California Chamber of Commerce, the California Taxpayers' Association, and all 80 members of the California State Assembly, both Republicans and Democrats. Id.

B. Opponents

Opponents argue that the same legislature that created the biggest budget deficit

in the history of California now wants to paper over that deficit by borrowing $15 billion, at a total cost of over $2,000 per California family. Id.

Currently, California's Constitution prohibits the legislature from doing so. Id. Since 1849, the Constitution's "single object of work" provision has limited long-term borrowing to projects that will serve future generations, such as schools, parks, or water projects. Id. Proposition 58 sweeps this provision aside, and allows the legislature to steal from the future, which no generation in California's history has ever done. Id.

Presently, our State has the lowest credit rating in the nation, challenging Singapore and Malaysia, but the legislature wants to borrow $15 billion more to pay for their own mistakes, and stick the residents of California with the bill. Id. California's Constitution will not let them. Id. However, Proposition 58 shreds that provision, thus making it possible for the legislature to plunge California $15 billion deeper into debt. Id. This is Proposition 58's real purpose. Id.

The proponents have the audacity to call Proposition 58 a "Balanced Budget Act." Id. How can the legislature do this? Id. The answer is simple: the Legislature suspended the law that guarantees an unbiased ballot title and summary. Id. Daniel Weintraub, a well respected newspaper columnist in California, wrote that "the balanced-budget requirement doesn't actually require that lawmakers approve a balanced budget." Id.

Do not be fooled into believing what the proponents claim. Id. Long-term borrowing to balance the budget is already prohibited by California's Constitution. Id. This is the part that the Legislature is suspending. Id. California has gotten into their current budget deficit because of short-term borrowing, and short-term borrowing is exempt from Proposition 58. Id. As Weintraub said, Proposition 58 "does not outlaw borrowing to paper over a deficit." Id.

California already has a prudent reserve requirement in current law, but legislatures and governors have ignored it. Id. Proposition 58 will allow them to continue to ignore it. Id. Again, as Weintraub said: "The governor could suspend transfers into the reserve at any time. And the Legislature could transfer money out of the reserve . at any time." Id. This is no protection at all. Id.

The Governor already has the power to call the Legislature into a special session to address a developing budget shortfall. Id. Proposition 58 requires the Legislature to take action before they can move on to other business. Id. However, this is loophole-ridden. Id. As Weintraub wrote: "As long as they passed any bill to address the shortfall, they could continue as usual, even if the Governor vetoed their approach. In practice, such a provision is unlikely to yield anything very different from the stalemates we see today." Id.

If the Legislature is serious about a balanced budget, they would restore the Governor's power to make mid-year spending reductions to keep the budget in balance. Id. If the Legislature is serious about a spending restraint, they would restore the Gann Spending Limit that produced balanced budgets and prudent reserves from 1979 to 1990. Id. However, the Legislature is serious about one thing, they want to borrow more money, and Proposition 58 grants them the power to do so. Id.

The opponents include the Chair of San Diego Tax Fighters Richard Rider, President of Association of Concerned Taxpayers Bruce Henderson, and Executive Director of Santa Barbara County Taxpayers Association Joe Armendariz. Id.

Other opponents, such as the National Tax Limitation Committee, a conservative group, has not yet taken a formal position, is already working on its own spending cap plan for the November ballot to supercede the March measure. Harrison Sheppard, Los Angeles Daily News

(accessed January 5, 2004). This committee opposes the spending limit, because they do not think the Governor has done a proper job of negotiating, since there is no meaningful spending limit. Id. This committee believes the Governor made a campaign promise to support a meaningful spending limit, and want to hold him accountable to that pledge. Id.

VI. Conclusion

On March 2, 2004, the voters of California will determine whether to approve Proposition 58, the Balanced Budget Act of 2004, which will amend the proposed changes to the California State Constitution. Proposition 58 would require that the State of California adopt a balanced budget. Legislative Analyst's Office. In addition, Proposition 58 provides for mid-year adjustments in the event that the budget falls out of balance. Id. Furthermore, if the Governor of California determines that the State is facing substantial shortfalls or spending deficiencies, the Governor may declare a fiscal emergency. Id.

Public policy concerns deserve consideration, such as the fact that California's Constitution "single object of work" provision has limited long-term borrowing to projects that will serve future generations, such as schools, parks, or water projects. California Secretary of the State . An additional consideration is that California has the lowest credit rating in the nation, but the Legislature wants to borrow $15 billion more to pay for their own mistakes, and stick the residents of California with the bill. Id.

On the other hand, the proponents claim that Proposition 58 will require the Governor and Legislature to enact a balanced budget. Id. Further, Proposition 58 will provide for mid-year adjustments if the budget falls out of balance, and the Governor can declare a fiscal emergency, requiring the Legislature to deal with the future fiscal crisis prior to a recess or passage of any other legislation being done. Id.

For the State of California to successfully sell and issue $15 billion in bonds, the California voters need to approve both Proposition 57, the Economic Recovery Bond Act of 2004, and Proposition 58, the Balanced Budget Act of 2004. However, if voters approve one proposition and not the other, then the bond measure will not pass. Therefore, the State of California will remain with the same budget deficit. Further, programs such as education and health care may be cut, and taxes may be raised in order to get the State of California out of its current budget deficit.