Once again state voters will have an opportunity to vote on a proposition affecting California’s finances. Its purpose is to pay state debt sooner and set aside funds each year for future economic emergencies and exigencies.
For the next 15 years, Prop 2 requires the state to spend at least 0.75 percent of General Fund revenues each year to pay down 1) debts for pension and retiree health benefits and 2) specified debts to local governments and other state accounts. (The funds spent on pension and retiree health costs must be in addition to payments already required under law.)
As of 2014-15, the 0.75 percent allocated to debt equals about $800 million annually.
Also, when state tax revenues from capital gains are higher than average, Prop 2 requires the state to spend some of these higher-than-average revenues on these state debts. In the past decade, this occurred about half the time.
One effect of this proposition is that more funding for debt payments reduces the availability of funds for other programs, such as schools, jails and social services.
The proposition would also require the state to set aside in reserves the same amount as goes toward paying debt each year for the next 15 years. The addition to the state reserves would range from $800 million to $2 billion each year.
However, the amount dedicated to reserves could be reduced in some situations if the governor calls a “budget emergency.” The situations, for which the governor can declare a budget emergency are 1) if a natural disaster, such as a flood or an earthquake, occurs, or 2) not enough money is available to keep General Fund spending at the highest level of the past three years (adjusted for changes in the state population and the cost of living).
However, the legislature would have to agree to reducing the set-aside for reserves.
Under current law, the governor has no restrictions on reducing the reserve allocation.
Existing law sets a maximum reserve total of $8 billion. Prop 2 would set the limit at 10 percent of the General Fund, about $11 billion now.
School district reserves
Prop 2 also specifies critieria for establishing and funding a state reserve for school districts. Before money would go into this reserve, the state would have to make sure the amount spent on schools and community colleges grows along with the number of students and the cost of living. And it does not directly change the total amount of state spending for schools and community colleges over the long run.
However the proposition includes a new state law that sets a maximum amount of reserves, which school districts could keep at the local level. (This would not affect community colleges.) For most school districts, the maximum amount of local reserves under this new law would be between 3 and 10 percent of their annual budgets, depending on their size. In the past, most school districts have kept reserve levels much higher than these maximum levels.
The minimum school district reserve requirements that exist under today’s law would still apply. Therefore, district reserves would have to be between the minimum and the maximum in these years.
This new law would apply only in a year after money is put into the state reserve for schools described above.
These provisions have been the lightning rod for opponents to Prop 2. Mostly they represent groups in favor of greater educational spending or autonomy.
“After even a penny goes into Prop 2’s ‘school rainy day fund,’ local school districts will only be allowed to save for — at most — a few weeks of expenses. Why does it matter if Sacramento determines what districts can save? For the last seven years, Sacramento has delayed billions in payments to schools until after the end of each school year — funds needed to pay teachers, staff and suppliers. Without locally controlled reserves, districts would have faced higher borrowing costs and deeper cuts. Depending on Sacramento is a losing proposition for schools,” wrote the directors of Educate our State.
The governor, the State Assembly speaker and the California Chamber of Commerce president support Prop 2. They argue, “California needs Proposition 2 because it prevents the state from spending more than it can afford. Only three years ago, California faced a $26 billion budget deficit that required the legislature to make painful cuts and voters to approve temporary tax increases. Proposition 2 will make sure that we don’t repeat this cycle of boom and bust budgeting.”
In an early September poll, the Public Policy Institute of California found 43 percent of likely voters supported Prop 2 and about a third opposed it. The undecided voters were about 24 percent of the electorate.
The polls authors reported, “Just 30 percent of likely voters say the outcome of the vote on this measure is very important to them. At the same time, a solid majority of likely voters (62 percent) say the state’s budget situation is a big problem, and 53 percent say the state budget process is in need of major changes.”