Special Election: Proposition 76

Back in March 2004, Gov. Schwarzenegger teamed with Democrats to pass
Proposition 58. The measure, which was touted as “budget reform,” was in
actuality a relatively benign measure that served as a sort of political
marker for dealing with the state’s systemic budget crisis.

For years, critics on both sides of the aisle have said California’s budget
system is too volatile. Because of the dependence on income tax revenues,
which can swing wildly depending on the economic climate, the state often
finds its budgets billions out of whack. And Republicans blame Democrats and
the Davis administration for spending the income tax windfall from the
dot-com boom years – money that has since dried up – on ongoing programs
that require funding year after year.

Prop. 76 is Gov. Schwarzenegger’s effort to put some teeth into the reform
that Prop. 58 promised. Among the findings in the law are that the
Legislature is “institutionally incapable of passing balanced budgets.” The
law also states that the governor “needs the authority … to make spending
reductions to keep the state from spending more than it is taking in.”

Among the most controversial provisions in Prop. 76 is the rewriting of
Proposition 98, the 1988 initiative which created a formula to provide
minimum funding levels for K-12 and community colleges. Specifically, Prop.
76 eliminates the “maintenance factor” in Prop. 98. The maintenance factor
is the gap that occurs when the state provides less money to schools than is
required by Prop. 98. Under current law, the state is obligated to repay
that difference, called the maintenance factor, back to schools over time.
Prop. 76 would eliminate that requirement.

Prop. 76 also states that any money given to schools above and beyond the
minimum guaranteed in Prop. 98 would not be used to calculate the following
year’s funding guarantee.

In political parlance any “over-appropriation” made to schools above what is
guaranteed in Prop. 98 would not be counted in the Prop. 98 base.

Proposition 76 also seeks to limit state spending. Under the law, the state
cannot increase general fund expenditures by more than the average annual
growth over the last three years. So, for example, let’s say that the state
budget is $100 billion in Year 1, $110 billion in Year 2 and $115 billion in
Year 3 and $121 billion in Year 4. Prop. 76 would cap state general and
special fund spending for Year 5 at $121 plus an additional $7 billion (the
three year average in general fund growth) for a total cap of $128 billion.

Any money in the state coffers in excess of that $128 billion would be
divided three ways: 50 percent would be used to pay back existing state
debts to schools, transportation projects and to pay down the deficit bonds
passed by voters in 2004. Another 25 percent would be used for a new reserve
fund, called the “budget stabilization account.” And the final 25 percent
would be used for a new fund to be dedicated to road and highway
construction and to build and modernize public schools.

The measure allows these spending limits to be suspended if the governor
declares an emergency based on terrorist attack or natural disaster.

If revenues slip the middle of a fiscal year, the governor may call a
fiscal state of emergency, and call the Legislature into special session.

The Legislature then has 45 days to pass a series of cuts and/or tax
increases to alleviate the budget problem. If the Legislature cannot agree
on a plan, the governor is given new authority to make cuts on his own.
After that 45-day window, the Legislature will remain in special session,
unable to take up any other legislation, until a spending cut and/or tax
hike plan is sent to the governor.

Proposition 76 also prevents the state from borrowing against special
accounts to balance the general fund’s books. In the past, the state has
raided local government and transportation fund coffers, among others, to
balance its budgets. Proposition 76 would prevent that.

It also requires the state to repay all of the money borrowed from the
Proposition 42 transportation accounts. That money must be paid back no
later than 2021