California Special Election – Propositions on the ballot

UPDATE: Propositions 1A, 1B, 1C, 1D, 1E – Defeated. Proposition 1F – Passed.

The Californian budget process has always been a mess. Faced with an unprecedented financial crisis, Republican Governor Arnold Schwarzenegger and the Democratically-controlled State Legislature passed an austerity budget in February that closed California’s $42 billion shortfall through a combination of cuts to social services and education, and tax hikes.

The peculiarity of California is that the state constitution places an extraordinary burden on voters to make legislative decisions. Some of the budget measures passed by Sacramento have to be voted on by the electorate in order for them to take full effect. On Tuesday, voters will head to the ballot box to decide the fate of Propositions 1A through 1F.

Despite an aggressive push by the governor, turnout is expected to be low even though these propositions directly and immediately affect Californian residents and impact the ratings of California state bonds. If you are a registered voter and have not yet cast your vote, I urge you to read through the following information and make the trip to your polling place tomorrow.

Here is a summary of my recommendations on the various propositions on the ballot in November.

Proposition 1A – Vote YES
Proposition 1B – Vote YES
Proposition 1C – Vote YES
Proposition 1D – Vote YES
Proposition 1E – Vote YES
Proposition 1F – Vote YES

Proposition 1A – This measure changes the state budgeting practices. In a complicated way it attempts to do the following –

– Increase the size of the “Rainy Day” fund: This makes it possible for the legislature to divert more funds from the General Fund into a reserve when revenues are good. The idea is to stabilize the spending over lean and good years. The state would look at historic trends in revenue and when the current year’s revenue went over those trends the money would have to be put in the reserve fund.

– Spending out of the reserve fund would be restricted to certain causes.  If Prop 1B passes some of the reserve fund would go to education to ameliorate some of the cuts to K-12 spending this year. After spending on education or if Prop 1B fails those funds would be used to pay down debt or spending on infrastructure.

– The Governor gets the authority to make further spending cuts without legislative approval on two matters – spending on general state operations and cost-of-living adjustments to programs in the budget( not salaries.)

– State tax increases that were put in place in February would not expire in 2010-2011 but would continue till 2012-2013.

Arguments: Opponents argue that the proposition is full of loopholes and there was not enough transparency in the drafting process. They also suggest that this measure gives the Governor too much power to cut spending, even in good years. However, the status quo has hardly been working for California. Any attempt to even out revenues over good and bad years can only be beneficial to residents. Also the emphasis on restoring funding to education outof the reserve fund has this mother of two cheering.

My opinion: VOTE YES.

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Proposition 1B: Currently, Proposition 98 establishes a minimum funding level for education. However, loopholes in the law allow for the minimum funding to be calculated by a different formula if revenues are low. The legislature can also override Prop 98 in bad years and provide less than is required by law. When spending is less than mandated, a future obligation (called a “Maintenance factor obligation” ) is created to provide those funds. As of now, this obligation is around $1.4 billion.

Prop 1B allows for the creation of a “Supplemental Education” obligation of $9.3 billion starting 2011-2012. Funds for these come from Prop 1A. These payments are supposed to take care of the Maintenance Factor Obligation that will keep increasing for the next couple of years becaue of the cuts in education spending.

Arguments: The measure does not deal with the underlying problems in Maintenance Factor Obligation calculation or the ability of the legislature to override prop 98. What it does is restore some of the cuts that have been made this year in education, with payments starting in 2011-2012. The idea is that some money will be diverted to the “Rainy Day” fund under Prop 1A and can be used for education in the future.

It is not a well-written law but provides for immediate help ( even if it starts 2 years from now!) to schools and community colleges providing Prop 1A passes.

My opinion: VOTE YES.

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Proposition 1C: Changing the state’s operation of the lottery. Under current law, 50% of the state’s lottery revenues have to go back as prizes and spend no more than 16% on operating expenses. 34% of the funds go to educational institutions ( a very small part of overall education funding). Funds cannot be used for any other purposes.

This measure allows the state to give away a higher percentage to winners ( presumably to attract more lottery revenues), reduce the operating expenses to 13% and no longer dedicate the remaining funds to education( the shortfall would be made up from the General Fund).

More importantly, the measure would allow the state to borrow against future profits from the lottery, upto $5 billion of which is already in the state’s budget right now. The borrowing would be paid off by future lottery profits.

Arguments: This measure does not impact education funding as the shortfall is supposed to be made up by the General fund. In a time of financial crisis, this is a simple way to get some much needed funds right away against the hope that the economy will improve in future years. The success of the measure hinges on the improvement in lottery ticket sales due to the higher payout.

My opinion: VOTE YES.

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Proposition 1D: Protects Children’s Services funding and helps balance the state budget. There is a law on the books ( Proposition 10) that allows for diverting a portion of tobacco taxes towards the First % program that deals with development programs for children up to the age of 5. The funds go to state and county commissions every year and any unspent amount is carried over to the next year.

As it happens the commissions are sitting on an unspent fund of about $2.5 billion which as of now cannot be used for any purpose other than the First 5 program.  What this new proposition does is allow for a temporary redirection of these unspent funds to other state health and human services for young children that do not fall under the First 5 program. This ensures that those vital services don’t get cut at a time of economic uncertainty.
Arguments: The biggest argument against this proposition is that it diverts money from the First 5 program. However, since these are unspent funds that the various commissions are sitting on, there is no reason why these funds cannot be used right away in other places where they are needed. This is also a temporary measure whose effects will disappear after 2013-2014.

My opinion: VOTE YES

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Proposition 1E: Temporary reallocation for Mental Health Services funding. Helps balance state budget. Currently, Proposition 63, also known as the Mental Health Services Act, provides state funding for mental health programs through an income tax surcharge of 1% of income over $1 million. The funds are used for a variety of mental health services such as care, education and early intervention and cannot be reduced or diverted as the law stands now.

The new proposition allows for temporary redirecting ( 2009-10 and 2010-11) of some of the funds towards the Early and Periodic Screening, Diagnostic and Treatment program (EPSDT), which services Medicare beneficiaries under age 21. That way, funds for EPSDT don’t have to come form the General Fund at a time of fiscal crisis.

Arguments: While this proposition takes money away from the Prop 63 beneficiaries, currently unspent funds of $2.5 billion are sitting in state coffers under Prop 63. The idea is to temporarily be able to use this money at a time of fiscal crisis to fund another mental helath services program that would otherwise suffer.

My opinion: VOTE YES.

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Proposition 1F: Prevents increases in salaries of elected officials during budget deficit years. Salaries of elected officials in California are set by the California Citizen’s Compensation Commission based on several factors. The financial condition of the state is not one of them. in addition Proposition 6 prevents reduction of salaries during lean years.  This Proposition amends the Constitution to prevent the commission from raising the salaries during a deficit year( when the General Fund ends the year in a deficit.

Fiscally, the proposition does not have a huge impact. However, it is hoped that the potential impact of lower salaries for elected officials will  make them work harder towards balancing the budget!

Arguments: This is a largely symbolic gesture that ensures that politicians will not continue to get wage increases while their constituents suffer. If it makes you feel good, by all means vote for it.

My opinion: VOTE YES

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