COUNTY OF SAN MATEO

Inter-Departmental Correspondence

County Manager’s Office

DATE:

September 27, 2005

BOARD MEETING DATE:

October 4, 2005

SPECIAL NOTICE/HEARING:

None

VOTE REQUIRED:

Majority

TO:

Honorable Board of Supervisors

FROM:

John Maltbie, County Manager

SUBJECT:

County Manager’s Report #15—Resolution in opposition to Proposition 76, State Spending and School Funding Limits—the “California Live Within our Means Act”

RECOMMENDATION:

Adopt a resolution in opposition to Proposition 76, State Spending and School Funding Limits—the “California Live Within our Means Act.”

VISION ALIGNMENT:

Commitment: Responsive, effective and collaborative government

Goal(s): Goal #20—Government decisions are based on careful consideration of future impact, rather than temporary relieve or immediate gain.

BACKGROUND:

Upon taking office in October 2003, Governor Schwarzenegger proposed the California Recovery Plan, which included in part a constitutional spending limit. Introduced as ACAx1 4, the Governor’s proposal was ultimately rejected by the Legislature. However, as part of a negotiated budget agreement between the Legislature and the Governor, Propositions 57 (bonds) and 58 (a balanced budget measure) were presented to and approved by voters in Mary 2004.

As part of his State of the State address in January 2005, Governor Schwarzenegger proposed reform ideas calling for a new constitutional spending limit that was in accord with the California Live Within our Means Act (CalWOMA, now Proposition 76). Shortly thereafter the Governor formally supported the constitutional initiative.

CalWOMA would create a new state budget spending limit, grant the Governor new powers to unilaterally reduce state spending and revise key provisions regarding special funds of interest to local governments and funding for schools (Prop 98 guarantees).

State spending limit

If approved, CalWOMA would limit expenditures from the state’s General Fund and special funds to the prior year’s actual spending (which can be less than the spending limit), adjusted by the prior three years’ average revenue growth rate.

If the revenues exceed the spending limit, the surplus would be divided (in a manner not yet determined) between the General Funds and each of the special funds. Surplus revenues dedicated to the special funds would be held in reserve.

State revenues have relied on income taxes, sales taxes and other volatile revenue sources that can fluctuate widely from year to year. As a result, annual budgets can be (and many argue have been) predicated on unrealistic revenue growth projections that have resulted in expenditure growth that has exceeded revenues—creating a structural budget imbalance.

Should reserve funding as proposed in Proposition 76 be adequate, the effect would be to “smooth out” state spending which has mirrored the volatile nature of the state’s mix of revenue sources. While the Proposition 76 spending limit would prohibit taking advantage of revenues in excess of the limit, it would reserve those funds for use during years when the spending limit is greater than revenues.

However, if the reserves are not adequate to meet the spending limit, Proposition 76 would result in less spending in subsequent years. Since Proposition 76 bases spending on the prior year’s actual expenditures, a “lean” year’s spending would become the subsequent year’s limit. Should this happen over successive years; it would result in the limit being ratcheted down over time.

Expanded powers for the Governor

Current law requires the Governor to propose a balanced budget by January 10 and that the Legislature pass a budget by June 15. In addition to approving or vetoing the budget bill as proposed, the Governor also has authority to veto individual line items and thus reduce spending in many (but not all) areas of the budget as passed by the Legislature. Approved in March 2004, Proposition 58 now requires that budgets passed by the Legislature and signed into law be balanced.

These requirements, in part, have made it difficult for the Legislature to pass and the Governor to approve state budgets in a timely manner. While a limited number of expenses continue to be funded, most expenses do not have authority to continue without an approved state budget. As a result, some programs stop operating. Others continue through temporary loans and “IOUs” to employees.

If approved, Proposition 76 would provide that spending levels authorized in the prior-year’s budget act remain in effect until a new budget is enacted. Maintaining “status quo” will relieve most state-funded programs the annual uncertainty/expectation of a late budget.

Current law, under proposition 58, allows the Governor to declare a fiscal emergency when a current-year budget becomes unbalanced (where expenditures exceed revenues). It also allows the Governor to call the Legislature into a special session to address the imbalance. Proposition 58 provides that if the Legislature is unable to address the problem within 45 days, they are prohibited from acting on other legislation and cannot adjourn in recess.

Proposition 76 would expand the Governor’s powers. In addition to declaring a fiscal emergency and calling for a special session, the Governor would be allowed unilaterally to reduce most state spending if the Legislature cannot enact legislation within the 45-day period (30 days in the event of a late budget). The Legislature could not override these reductions.

DISCUSSION:

Noting the ongoing difficulty in addressing California’s budget problems, CalWOMA supporters argue that this proposition would prevent on-going spending obligations that now outpace revenues. Through the creation of a constitutional spending limit, CalWOMA would prevent (or reduce the likelihood and impact of imbalances).

In contrast, opponents argue that Proposition 76 would limit spending despite increasing demands for services. The California Budget Project (CBP) finds that Proposition 76 could result in less spending over time as reserves grow. CBP believes the accumulation of large reserves for the state’s General Fund and special funds could precipitate tax reductions that would further lower the spending limit.

State spending limit

Urban Counties Caucus staff reports that CalWOMA will limit expenditures from voter-approved taxes and county-related special funds in the same way that it will limit state General Fund and other special fund expenditures. That is, county-related special funds would be limited to the prior years expenditures adjusted for the prior three-year average revenue growth rate. Impacted revenues could include Realignment, Proposition 10 (funding for First 5), Proposition 36 (substance abuse funding), Proposition 42 (transportation), Proposition 63 (mental health), Proposition 99 (tobacco tax) and possibly Proposition 172 (public safety). The general concern of CalWOMA opponents applies to county-related special funds—that CalWOMA limits expenditures based on funding, regardless of need. Echoing this concern, UCC staff note, “The [CalWOMA] formula is blind to needs created by population or caseload growth—increases over which counties have little control.”

Expanded powers for the Governor

The proposed expansion of powers for the Governor could have a negative impact on county-related programs and conflict with Proposition 1A, which was approved last year as a measure to protect local governments from state mandates. The LAO notes that while Proposition 76 would give the Governor authority to reduce expenditures to entitlement programs (i.e. health and social programs administered by counties), it does not give the Governor authority to alter the services. That is the Governor can cut funding, but cannot alter program requirements (through mechanisms like reducing eligibility for services or the scope of such services). As a result, services would continue while funding would be reduced. Presumably, when state funds are exhausted, the state would no longer have an obligation to fund the entitlement for the remainder of the year. The corollary to this presumption is that counties would still be required to provide the services, but without state funding. Requiring these services without state funding seems to violate Proposition 1A. Even where some mandates may be relieved, the pragmatic effect could be to shift demand for state-funded services to existing county services. For example, reductions in state-mandated (and funded) health programs could result in increased usage of indigent health care services.

In addition, UCC staff note that Proposition 76 authorizes the Governor, in suspending funding for mandates in the mid-year, to make the suspension retroactive to the start of the fiscal year. This could result in counties not being paid for services already provided.

Even if counties could avoid increasing local expenditures to compensate for state funding reductions, doing so would harm clients and those in need. Needy clients and families would suffer with spotty unreliable services. At the service level, the impact of switching services on and off could easily result in a destabilization of service infrastructure. Aside from the difficulty of counties expanding and contracting staff and infrastructure to meet state funding, nonprofit partners (and their employees and creditors) that provide many of these services will not be able to withstand such funding uncertainty and will simply close permanently.

The Urban Counties Caucus had a lengthy discussion about Proposition 76. Noting a CSAC Government Finance and Operations Policy Committee recommendation to oppose Proposition 76, CSAC President Greg Cox expressed caution to UCC about how an oppose position might impact relations with the Governor. Opponents noted the impact Proposition 76 could have long after Governor Schwarzenegger leaves office. A motion to oppose Proposition 76 failed (4:4). Instead, UCC approved a motion to remain neutral on Proposition 76 (5:3).

In contrast, the CSAC board approved a support position (16:10) of Proposition 76.

The Legislative Committee has not considered this issue.

FISCAL IMPACT:

Unknown.