BILL ANALYSIS
AB 656
Page 1
Date of Hearing: January 21, 2010
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Kevin De Leon, Chair
AB 656 (Torrico) - As Amended: January 14, 2010
Policy Committee: Higher
EducationVote:5-3
Revenue and Taxation 6-3
Urgency: Yes State Mandated Local Program:
Yes Reimbursable: No
SUMMARY
This urgency bill imposes a severance tax on oil and gas and
allocates the proceeds to the University of California (UC), the
California State University (CSU), and the California Community
Colleges (CCC). Specifically, the bill:
1)Imposes a new oil severance tax of 12.5% on oil and gas
extraction and places the proceeds into the newly-created
California Higher Education Fund (CHEF). The tax would become
effective on the first day of the calendar quarter commencing
six months following enactment.
2)Establishes the California Higher Education Endowment
Corporation (CHEEC), to be headed by a 13-member CHEEC
oversight board, which is responsible for allocation of CHEF
monies. The board members would be appointed by CSU Board of
Trustees (two members), the UC Board of Regents (two members),
the Chancellor of the CCC (two members), the Speaker of the
Assembly (two members), the Senate Rules committee (two
members), the Treasurer (one member) and the Superintendent of
Public Instruction (one member). The measure also specifies
that one member be a student enrolled at a public
postsecondary educational institution, who must be enrolled
during the duration of his or her two-year term.
3)Specifies that 50% of the CHEF funds be allocated to CSU and
25% each to UC and CCC for direct classroom instruction.
4)Requires the board to allocate a portion of the UC monies for
operation of the Charles R. Drew University of Medicine and
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Science, and requires the to board allocate a portion of the
CSU funds to campuses with nursing programs in counties with
the highest need based on several criteria.
5)Establishes various auditing and reporting requirements for
the CHEEC.
6)Requires that this funding not supplant GF support for the
three higher education segments and places minimum funding
requirements for the segments.
FISCAL EFFECT
1)The oil and gas severance tax will raise about two billion
dollars in its first full year, assuming average prices for
California crude oil of about $65 per barrel. The severance
tax, however, will reduce the value of oil in the ground,
which potentially will result in a minor reduction in its
assessed property value for local property tax purposes.
2)Administrative costs of the CHEEC would be supported by the
severance tax proceeds.
3)The bill increases state tax revenues by about $2 billion
annually per (1) above, which will increase the minimum
funding requirement for Proposition 98 by about $800 million.
Since the bill deposits proceeds of the severance tax directly
into a new fund for allocation by the CHEEC, an additional
$800 million of other General Fund revenues would have to be
redirected to Proposition 98, potentially resulting in reduced
funding available for non-Proposition 98 programs.
COMMENTS
1)Purpose . The author and proponents argue that, because
California is the only oil-producing state without an oil
severance tax, it is reasonable to assess such a tax and to
use the proceeds to support public higher education, which has
suffered reductions in state support, leading to significant
student fee increases at UC and CSU and reduced course
offerings at all the segments.
2)Higher Education Funding . UC and CSU receive their state
funding through the annual Budget Act. There is no funding
policy in statute for these institutions; thus their funding
is discretionary. Over the last several years, state support
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for UC and CSU has been generally stagnant or in decline. To
help maintain their programs in the face of reduced state
support, the university systems have in part significantly
increased student fees. In the current fiscal year, both
segments have also implemented systemwide staff furloughs and
other cost reduction strategies, including reducing enrollment
at CSU. The governor's budget proposal assumes that both
segments will reduce enrollment further in 2010-11.
Proposition 98, in general, provides K-14 schools with a
guaranteed funding source that grows each year with the
economy and the number of students through a combination of
General Funds and local property taxes. The Legislature
determines the allocation of Proposition 98 funds between K-12
and CCC; in general, CCC receives approximately 11%. Compared
to UC and CSU, state support to the community colleges has
been somewhat more stable due to Proposition 98.
Nevertheless, in the current fiscal year, many community
colleges have had to reduce course sections, even in the face
of surging demand due to the economic downturn and CSU
enrollment reductions.
3)Concerns . The additional revenues provided through this bill
would certainly help the segments to recover from their recent
budget challenges, and would likely obviate the need for large
student fee increases. In recent years, oil prices have
become quite volatile, however, thus annual revenues from the
severance tax could fluctuate significantly, and therefore
might not provide a reliable component of the segments' base
budgets.
Of more concern, however, is that both Legislative Analyst's
Office (LAO) and the governor have recently identified a state
budget shortfall of around $20 billion through June 2011. The
LAO, moreover, has forecast annual shortfalls in this range
for years to come. The bill requires that the severance
proceeds be used to supplement higher education funding.
While beneficial to the segments, the new revenues would
essentially contribute nothing toward solving the state's
ongoing budget imbalance.
Assuming the author's desire to earmark these additional
resources to higher education would be a legislative priority,
it is nevertheless unclear why allocation of these resources
should be accomplished by a new state entity (the CHEEC)
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rather than by the Legislature through the annual budget
process.
4)Opposition . Opponents include the associations representing
the oil industry and business and taxpayer associations.
Opponents argue that imposing this tax will reduce oil
production and new exploration in the state, resulting in job
losses in that industry, and increase the state's dependency
on oil from outside California. They also argue that the tax
burden on the state's oil industry, from corporate and
property taxes, is already comparable to oil producing states
that have a severance tax.
Analysis Prepared by : Chuck Nicol / APPR. / (916) 319-2081