Election 2014 FAQ: Prop 2 — state budget and rainy day fund

Proposition 2 is a constitutional amendment put on the ballot by the California legislature to change the rules governing the state's rainy day fund. It also contains a new statute that will affect how schools manage their own reserve funds. 

Who's behind this ballot measure?

In 2004, voters passed Proposition 58, a cornerstone of then-Gov. Arnold Schwarzenegger's plan to help fix the state budgeting process. Prop 58 established a rainy day fund known as the Budget Stabilization Account (BSA) to help the state weather downturns in the economy. Since a significant portion of the general fund comes from income taxes, a bad year for residents means less money for the state.

Prop 2 modifies the rules that govern how the state contributes money to the BSA and, in turn, how money in the account is used. It was authored by former Assembly Speaker John A. Perez (D-Los Angeles). The final vote to place it on the ballot was unanimous in both houses — 36-0 in the state Senate and 78-0 in the Assembly.

What would it do?

If approved, Prop 2 would:

• Require the state to put matching minimum amounts toward savings (in the BSA) and debt each year for 15 years — specifically, 0.75 percent of general fund revenues. Payments would be larger in years when revenues are higher from capital gains taxes.
• Allow the governor to declare a "budget emergency" in order to reduce the payment amounts in a given year, but only in the case of a natural disaster or if there is not enough money to keep general fund spending at the highest level of the past three years.
• Limit the amount the state could take out of the BSA to the amount needed to cover such a natural disaster or to keep spending up, with a maximum withdrawal of half the BSA. If a budget emergency is declared two years in a row, all of the money can be withdrawn in the second year.
• Increase the maximum size of the BSA to 10 percent of the general fund, which would amount to $11 billion currently — any extra money after the maximum is reached would go toward infrastructure projects.
• Create a state reserve for schools. Money would be contributed only in years when capital gains tax revenues are above average and spending already covers any increases in the number of students and cost of living.
• Create a new law that limits the amount of reserves school districts can keep at the local level (community colleges excluded) — for most school districts, between 3 percent and 10 percent of their annual budget. The law goes into effect only when the state has begun putting money into its school reserve fund, and it could be changed later by the legislature without a vote of the people, since it is not a constitutional amendment.

How is this different from existing laws?

The Legislative Analyst's Office provides a comparison of existing law and Prop 2 in the following areas:

STATE DEBTS

	TODAY'S LAWS	CHANGES MADE IF PROPOSITION 2 PASSES
Required extra spending on existing state debts each year(a)	None.(b)	A minimum of $800 million. Up to $2 billion or more when capital gains tax revenues are strong.(c)

STATE RESERVES

	TODAY'S LAWS	CHANGES MADE IF PROPOSITION 2 PASSES
Basic amount that goes into the Budget Stabilization Account (BSA) each year	A little over $3 billion.	A minimum of $800 million. Up to $2 billion or more when capital gains tax revenues are strong.(c)
When can state put less than the basic amount into the BSA?	Any time the Governor chooses.	Only when the Governor calls a "budget emergency" and the Legislature agrees.(d)
How much can state take out of the BSA?	Any amount available.	Up to the amount needed for the budget emergency. Cannot be more than half of the money in the BSA if there was no budget emergency in the prior year.
Maximum size of the BSA	$8 billion or 5 percent of General Fund revenues, whichever is greater (currently $8 billion).	About 10 percent of General Fund revenues (currently about $11 billion).

SCHOOL RESERVES

	TODAY'S LAWS	CHANGES MADE IF PROPOSITION 2 PASSES
State reserve for schools and community colleges	None.	Money would go into a new state reserve for schools and community colleges in some years when capital gains revenues are strong.
Limit on maximum size of school district reserves	None.	Sets maximum reserves that school districts can keep at the local level in some years.

LAO NOTES:
(a) The term "state debts" includes debts for pension and retiree health benefits and specified debts owed to local governments and other state accounts.

(b) Proposition 58 (2004) requires that half of the money put into the BSA be used to pay down certain state bonds faster. This year’s budget is expected to pay off the rest of those bonds, meaning this requirement will no longer apply beginning with next year’s budget.

(c) After 15 years, debt spending under Proposition 2 becomes optional. Amounts that would otherwise be spent on debts after 15 years instead would be put into the BSA.

(d) Governor could call a budget emergency for a natural disaster or to keep spending at the highest level of the past three years—adjusted for population and cost of living.

How much will it cost taxpayers?

The fiscal impact of Prop 2 is not immediately clear, since it will depend on how it is implemented at the state and local levels moving forward, according to the LAO. However, the LAO estimates that Prop 2:

• Would likely lead to a faster payoff of debts, which in turn could lead to less spending on interest and more money for other budget items.
• Could lessen the "ups and downs" of state spending if, on balance, Prop 2 results in more money being put into the BSA over time.
• Would likely not lead to the establishment of a state reserve account for several years, until the conditions can be met. Money would be deposited only sporadically — in years when the economy is particularly strong.
• Would in many cases lead to schools keeping less in their reserve funds than they currently do, making it more difficult to balance their budgets in down years.

Who's supporting it and why?

The biggest financial supporter of Prop 2 is the United Brotherhood of Carpenters and Joiners of America, which has given $500,000 as of September 24.

Other major financial backers comprise a rather eclectic mix of union, business and private interests, including Reed Hastings of Netflix, insurance provider Health Net, the American Council of Engineering Companies and Abraxis Bioscience.

However, three of the five campaign committees formed to raise money for Prop 2 are also raising money for Prop 1, making it difficult to determine how individual donors' money was actually spent.

Supporters, which include Pérez, Gov. Jerry Brown and Allan Zaremberg, the president of the California Chamber of Commerce, argue that Prop 2 will strengthen the state's rainy day fund and help avoid a boom-and-bust cycle of painful cuts and tax increases. They also argue that a stable budget will offer protection against cuts to education spending.

More: Yes on 2 campaign

Who's opposing it and why?

The grassroots parent organization Educate Our State leads the opposition campaign, though no major financial opposition to Prop 2 had been reported as of September 24.

Educate Our State takes issue in particular with the new law created by Prop 2 that would limit the amount districts can keep in their reserve funds, forcing them to spend any excess once the state's school reserve fund is established. Educate Our State argues that decisions over how to weather economic ups and downs should be made at the local level.

More: No on 2 campaign

…a YES vote means…

You accept the changes to the rules governing the state's rainy day fund, the creation of a state reserve for schools and the new limits on school districts' reserves.

…a NO vote means…

You reject the changes proposed: existing laws will continue to govern the state's Budget Stabilization Account, no state reserve for schools will be created, and school districts will retain full control over their reserve funds.