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Voters Get to Act on State Reforms in May

It’s now March, 2009 and we finally have a state budget. Unlike prior budgets which covered a twelve-month period, this one covers seventeen months, ending June 30, 2010. Along with our new budget came a package of “Budget Reforms” whose fate must be decided by the voters in a special election to be held on May 19, 2009. Although the Legislature had many months to debate the budget that was finally passed, the voters will have little time to consider the package of “reform” propositions that will have a significant impact on our state. Additionally, it appears that the achievement of the overall budget goals will depend on the passage of the propositions. The following is my assessment of the propositions: Proposition 1A: Similar to the current law, Proposition 1A requires the state to direct 3% of General Fund revenues into a “rainy day” budget stabilization fund (“BSF”) each year. However, whereas under current law the Governor can stop the transfer in any year by issuing an executive order, under Proposition 1A, beginning in the fiscal year 2011-2012, the Governor could only stop the transfer, in years when the state did not have enough revenues to pay for state spending equal to the prior year’s level of spending grown for changes in the population and inflation. Other provisions in Proposition 1A include a mandated increase in the amount of the BSF from the current 5% to 12.5% of General Fund revenues (along with a requirement that money can only be taken out of the BSF when there is a budget deficit or an emergency, such as a fire, earthquake or flood) and a spending cap that ensures that, each year, the state budget is consistent with state revenue trends over the past 10 years. Any money above this amount will be saved in the BSF until the BSF reaches 12.5% of General Fund revenues (preventing unsustainable spending of one-time revenue spikes). Some revenues in the BSF would be spent on particular purposes. If proposition 1B passes, each year, beginning in 2011-2012, 1.5% of General Fund revenues would be paid from the BSF to schools and colleges until $9.3 billion is reached. As a result, at least 1.5% of General Fund revenues would be transferred from the General Fund into the BSF every year until the entire amount is paid. After the $9.3 billion in educational payments is made (or if Proposition 1B doesn’t pass) 1.5% of General Fund revenues each year would be dedicated to paying for infrastructure or state bond debt. As a result of components negotiated in the budget, the passage of Proposition 1A will give the Governor authority to reduce certain types of expenditures such as spending for general state operations or capital outlay by up to 7% and cost of living adjustments for programs specified in the annual budget, without legislative approval and will extend the sales and use tax increase for one year and the vehicle license fee and personal income tax increase for two years. Unfortunately, if we want to stabilize spending and have a significant “rainy day” savings account, thanks to the trade-offs negotiated by the Legislature in the budget, it will cost us the extended taxes (estimated at $16.2 billion) to get it. Although I am certainly no supporter of increased taxes, the extension is limited and I (personally) wouldn’t want to pass up the opportunity to finally stop runaway spending. Proposition 1B: The budget cut approximately $12 billion from the state’s schools and colleges. Proposition 1B provides for replacement of $9.3 billion of these funds through annual installments. The funding mechanism for payment of the installments is described above in the discussion of Proposition 1A. If Proposition 1B doesn’t pass, California could be permanently downgrading its public school system. Proposition 1C: Proposition 1C gives the lottery the flexibility to increase the percentage of prize payouts to attract more spending for lottery tickets and increase lottery profits. Under this measure, the lottery commission could set prize payouts above 50% of lottery sales at the level it determines will produce the maximum amount of profits each year. Operating expense limits will be reduced from 16% of lottery funds to 13% allowing unused funds to be carried over to future years. As one of the major components of the plan by the Legislature and the Governor in February 2009 to balance the state budget, this measure would allow the state to borrow $5 billion in the 2009-10 fiscal year from future lottery profits (anticipated to increase by this amount due to the proposed changes). Additional borrowing would be allowed in the future as well. Although lottery profits now dedicated to schools and colleges would be used to pay back borrowings, state payments to education from the General Fund would be increased to make up for the loss of the lottery payments. Additionally, the State would maintain ownership of the lottery posing no risk to taxpayers and new accountability standards, including independent audits and public reports would be employed. If this proposition doesn’t pass, the $5 billion relied upon to balance the state budget will not be there. Proposition 1D: This proposition temporarily redirects a portion of excess funds from a voter approved tobacco tax to pay for child health and social services in the next two years. These revenues would be used to offset existing General Fund costs, thereby achieving savings to help address the state’s current budgetary problems. Proposition 1E: This proposition temporarily redirects a portion of surplus, unused funds from the Mental Health Services Act to fund children’s mental health programs that are at risk of elimination due to the budget crisis, including health care screening, diagnosis and treatment. Proposition 1F: This proposition prohibits legislators, the Governor and other state politicians from receiving pay raises whenever California is running a budget deficit. Gregory N. Lippe, CPA, is managing partner of the Woodland Hills-based CPA Firm of Lippe, Hellie, Hoffer & Allison, LLP, Chairman of the Valley Industry and Commerce Association (VICA) and a Director of First Commerce Bank.

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