BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SCA 10 HEARING: 6/13/12
AUTHOR: Strickland FISCAL: Yes
VERSION: 4/9/12 TAX LEVY: No
CONSULTANT: Grinnell
GOVERNMENT FINANCE
Requires 2/3 vote on bills for any new or higher state or
local tax; revises Gann limits.
Background and Proposed Law
I. State Taxes. The California Constitution provides that
any change in state statute that results in any taxpayer
paying a higher tax can only be enacted by two-thirds vote
of both houses of the Legislature, with specified
exceptions (Article XIIIA, Section Three). The
Constitution additionally allows the Legislature to amend
or repeal referendum statutes, and allows it to amend or
repeal initiative statutes with voter approval unless the
initiative specifically allows the Legislature to do so
without voter approval (Article II, Section Ten.)
Legislative Counsel has opined that the Legislature may by
majority vote of each house submit for voter approval an
increase to an existing tax or imposition of a new tax as
an amendment to an existing initiative statute, so long as
the proposal changes the scope or effect of the initiative,
and the initiative does not preclude the Legislature from
amending it (Legislative Counsel Request for Opinion,
#1100499, February 15, 2011).
Senate Constitutional Amendment 10 adds Section 23 to
Article IV of the Constitution to require a 2/3 vote of
each house of the Legislature for any change in state
statute that imposes a new or higher tax on any taxpayer as
a result of:
A bill passed by the Legislature,
An addition to, amendment or repeal of an
initiative statute that only becomes effective when
approved by voters,
An addition, amendment, or repeal of statutory
"in-lieu" provisions or findings of statewide concern.
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Any and every other possible type of modification
to state law.
II. Local Taxes. The California Constitution states that
local taxes are either general taxes, which are imposed for
general governmental purposes, or special taxes, which are
enacted to pay for specific purposes, such as police, fire
protection, or parks. Local general taxes require
majority-voter approval by the local electorate, but
special taxes must obtain 2/3-voter approval.
Under the constitutional municipal affairs doctrine,
charter cities can levy any taxes which are not preempted
by the state or federal governments. However, general law
cities can generally only impose those taxes allowed by
state law, but they can levy any tax which may be levied by
any charter city unless expressly precluded by state law.
In contrast to cities, counties can levy only the local
taxes allowed by state statutes such as transactions and
use (sales) taxes, utility user taxes, business license
taxes, and transient occupancy (hotel) taxes.
Additionally, charter counties don't have constitutional
authority to levy additional taxes.
Traditionally, Legislative Counsel assigns a majority vote
key to measures that allow local agencies to levy taxes,
most recently for SB 653 (Steinberg, 2011). In bills of
this kind, the Legislature allows local agency governing
boards to enact ordinances placing a measure enacting or
increasing a tax before its voters, an authority they could
not exercise but for the bill. Local voters enacted the
tax if and when they approve the ballot measure.
Therefore, Counsel did not consider the bill a tax increase
for the purposes of Section III of Article XIIA.
SCA 10 would instead provide that any bill authorizing any
local agency to levy a new or higher tax on any taxpayer in
the state must be approved by 2/3 vote of each house of the
Legislature.
The measure also states that its provisions shall supersede
any other provision of the Constitution that could be read
to allow change state statute to impose a new or higher tax
on any taxpayer by majority vote. SCA 10 also contains a
"look-back" provision similar to Proposition 26 (2010),
which repeals any bill enacted between December 1, 2011 and
SCA 10 - 4/9/12 -- Page 3
its enactment date that the measure would have prohibited.
The constitutional amendment additionally provides that any
person has standing to challenge a violation of its
provisions, and that the government bears the burden to
prove by a preponderance of the evidence that the bill was
lawfully enacted.
III. Spending. In 1979, voters enacted Proposition 4,
which added Article XIIIB to the California Constitution,
and placed a ceiling on all governments' appropriations of
tax proceeds. The ceilings, known as "Gann Limits" after
the initiative's author, were based on each government's
spending in the 1978-79 base year plus adjustments for
population growth and inflation. Governments had to
refund any difference between taxes collected and the
ceiling in the subsequent year, a provision which
necessitated $1.1 billion in tax refunds from the state in
1986-87.
Two subsequent initiatives significantly changed Article
XIIIB to increase ceilings and compel fewer refunds: First,
Proposition 98 (1988) provided that instead of refunding
any difference between tax revenues collected and the
ceilings to taxpayers, the first portion shall be allocated
to schools, up to 4% of the initiative's minimum funding
guarantee. Second, Proposition 111 (1990) changed
Proposition 4's population growth measurement to also
include growth in the K-14 average daily attendance. That
initiative also pegged the inflation measurement solely to
per capita income growth, instead of the lesser of that
measure of the average change in the U.S. Consumer Price
Index. Lastly, Proposition 111:
Directed governments to calculate taxes collected
and the ceilings over a two-year period,
Expanded the forms of government income exempt from
the calculation.
Divided the difference equally between rebates to
taxpayers and Proposition 98 educational spending.
In 2004, the Legislature approved then voters enacted
Proposition 58, which amended Sections 10 and 12 of Article
IV of the Constitution, and added the first "rainy-day"
fund, the Budget Stabilization Account in Section 20 of
Article XVI. That measure enacted new rules and safeguards
on government spending, including:
Prohibited the Legislature from enacting a budget
SCA 10 - 4/9/12 -- Page 4
where estimated revenues are less than estimated
expenditures.
Allowed the Governor to declare a "fiscal
emergency," enabling him or her to submit legislation
to address the problem, and prohibited the Legislature
from acting on other bills or adjourning prior to
passing the Governor's legislation.
Specified fixed percentages of estimated annual
general fund revenues required to be transferred into
the BSA, reaching 3% of revenue in 2008-09 and
thereafter, until the BSA reaches $8 billion or 5% of
general fund revenues. The Legislature could enact a
statute directing the Controller to direct more
revenue to the BSA. However, the Governor can issue
an executive order to suspend or reduce transfers.
Limited BSA expenditures to repay the Economic
Recovery Bonds authorized by Proposition 57 (2004)
until $5 billion had spent, after which the BSA could
transfer moneys to the general fund upon majority vote
of the Legislature and the Governor's signature.
In 2008, the Legislature twice sought to improve the budget
process and enhance the BSA. First, it amended Section 12
of Article IV to require the Governor to identify one-time
sources of revenue as part of the Governor's Budget, and
added Section 21 to Article XVI to divert any revenue in
the May revise that exceeds 105% of the revenue estimate
from the Governor's Budget to Proposition 98, then to the
BSA until the 12.5% is reached, then to retire outstanding
budgetary obligations, as defined (SCA 13, Ashburn, 2008).
Second, the Legislature amended Section 20 of Article XVI
to enhance transfers to the BSA, which it renamed the
Budget Stabilization Fund (BSF) (SCA 30, Ashburn, 2008).
That measure also:
Increased the cap on transfers to the BSF from 5%
to 12.5% of general fund revenue.
Prohibited the Governor from suspending BSF
transfers to only those years when that fiscal year's
available resources plus balances from the previous
year are less than the prior year's expenditure levels
adjusted for inflation and population growth.
Restricted transfers from the BSF to the general
fund only for responding to emergencies declared by
the Governor, and limited transfers amounts in years
when revenue is insufficient to pay for current
service levels as adjusted by inflation and population
SCA 10 - 4/9/12 -- Page 5
growth.
Allowed BSF funds to be used for cash-flow
borrowing purposes.
In 2009, the Legislature replaced SCAs 13 and 30 on the
ballot before the voters could act on the measure (ACAx3 1,
Niello, 2009). In addition to again renaming the BSA the
BSF, that measure:
Required the Director of Finance's to forecast
revenues based on ten-year trends, minus tax changes
and bond proceeds.
Diverted any revenue above the trend line to
unfunded, current-year Proposition 98 obligations.
Any remaining funds are then directed to the BSF until
the 12.5% target is reached, and funds left after that
must be used to retire outstanding budgetary
obligations, as defined.
Contingent upon enactment of ACAx3 2 (Bass),
transferred one-half of the annual BSF transfer (1.5%
of general fund revenue) to the Supplemental Education
Payment Account (SEPA), in lieu of Proposition 98
maintenance factor amounts until the account totals
$9.3 billion.
After the SEPA reaches its target, sent funds for
one-time infrastructure and capital outlay projects,
or to retire other bonded indebtedness.
Reduced transfers to the BSF to pay off the
Economic Recovery Bonds to compensate for payments
directed to SEPA.
Prohibited the Governor from suspending transfers
to the SEPA.
ACAx3 1 also reenacted the following elements from SCAs 13
and 30:
Increased the cap on transfers to the BSF from 5%
to 12.5% of general fund revenue, after which
transfers cease.
Prohibited the Governor from suspending BSF
transfers to only those years when that fiscal year's
available resources plus balances from the previous
year are less than the prior year's expenditure levels
adjusted for inflation and population growth.
Required the Governor to identify one-time sources
of revenue as part of the Governor's Budget.
Allowed BSF funds to be used for cash-flow
borrowing purposes.
SCA 10 - 4/9/12 -- Page 6
However, at the May 19, 2009 special election, voters
rejected ACAx3 1 (Proposition 1A), so none of the above
changes took effect.
In 2010, the Legislature enacted ACA 4 (Gatto), which again
amended Section 12 of Article IV to require the Governor to
identify one-time revenues when submitting the Governor's
Budget, and Section 20 of Article XVI similar to ACAx3 1,
with the following exceptions:
Required ongoing transfers of 3% of general fund
revenues to the BSF.
Ended transfers to the BSF when it totals 10% of
general fund revenue, higher than Proposition 58's 5%,
but short of ACAx3 1's 12.5%.
Removed transfers to and all references to the
SEPA, as voters also rejected ACAx3 2 (Proposition 1B)
at the May 19, 2009 special election.
States that of the three percent of general fund
contributions to the Budget Stabilization Fund, half
must be transferred to the Supplemental Budget
Stabilization Account each year to pay for one-time
infrastructure and capital outlay projects, or to
retire other bonded indebtedness.
Limited the suspension of the annual three-percent
transfer of funding from general fund to the BSF when
revenue estimates are less than that necessary to
support the prior year's expenditures adjusted for
population and inflation.
Instead of requiring the Director of Finance to
calculate revenue trends on a ten year trends, it
instead required the Director of Finance to forecast
the revenue level for the current year and budget year
based upon a linear regression analysis of revenues
over the last twenty years.
Further limited the amount of funding that can be
transferred from the BSF to the general fund to cover
a shortfall to be:
o No more than fifty percent of the balance
of the fund in the first year a transfer is made.
o No more than fifty percent of the
remaining balance of the BSF if a transfer was
made in the previous year.
o If transfers have been made in the
previous years, the amount is limited to the
amount of the shortfall.
SCA 10 - 4/9/12 -- Page 7
o This limit does not apply to transfers
made in the event of an emergency.
Once the BSF exceeds ten percent of general fund
revenue, directed unanticipated revenues to retire
outstanding budgetary obligations in the following
order:
o First use of these funds would be for
outstanding obligations for local government
payments, transportation funding obligations, and
bonded indebtedness.
o Any remaining funds could be used for one
time expenditures, unfunded liabilities-including
pension liabilities, transferred to the Budget
Stabilization Fund, or returned to taxpayers on a
one-time basis.
The Legislature enacted the measure in October, 2010, and
it would have come before voters for approval in the June,
2012 election. However, the Legislature last year required
that initiatives may only be considered by voters in
November elections (SB 202, Hancock, 2011)
Proposed Law
SCA 10 revises Gann Limits to cap spending for the state of
California and all local agencies, equal to the
appropriations for the prior year adjusted for change in
the cost of living and change in population. The annual
calculations shall be reviewed as part of annual financial
audit conducted by the Controller. Instead of calculating
proceeds of taxes and spending limits over two years, the
measure returns to Proposition 4's initial one-year limits.
The measure adds new Section 1.9 to Article XIIIB to
require the state or any local agency to divert any
difference between the total amount of all proceeds of
taxes and the measure's spending limit to debt service in
any fiscal year following a fiscal year where:
The state or local agency's spending proceeds of
taxes exceeds the measure's ceiling, and
The total amount of debt service exceeds 5% of the
ceiling.
Additionally, if the excess is less than $2 billion, and
debt service is less than 5% of allowed spending, the state
SCA 10 - 4/9/12 -- Page 8
must transfer half of the excess revenue to Proposition 98,
but provides that the transfer neither changes the
initiative's minimum guarantee nor its maintenance factor.
The other half must be transferred to a prudent reserve
fund. If the excess is more than $2 billion and debt
service is less than 5%, then the excess revenue shall be
refund to taxpayers by a reduction of tax rates or fees
within the next two subsequent fiscal years. For local
agencies, refunds are necessary whenever proceeds of taxes
exceed the appropriations limit and debt service is less
than 5%, regardless of the size of the excess.
For local agencies, SCA 10 includes in the proceeds of
taxes any proceeds of an entity of local government from
regulatory licenses, and user fees and charges that exceed
the costs reasonably borne by the local agency to provide
the regulation, product, or service. The measure also
explicitly applies the Gann limits on charter cities,
charter counties, charter cities and counties, and
community college districts. The constitutional amendment
revises the current method used by the state and local
agencies other than school districts or community college
districts to measure population changes to provide that any
measurement provided by the Legislature shall be revised as
necessary to reflect the periodic census by the United
States Department of Commerce, or its successor.
Additionally, SCA 10 recalibrates the limit for the state
and agencies other than school districts and community
college districts to incorporate the changes in the cost of
living measurement, retroactive to 2010-11.
The measure enacts a constitutional definition of debt that
only includes voter-approved debt, thereby excluding debt
lawfully issued that doesn't require voter approval. SCA
10 also redefines "capital outlay" to include only
appropriations for fixed assets, including land and
buildings, with a useful life of more than ten years and a
value of $100,000 or more.
SCA 10 prohibits any future statutory initiative from
exempting or having the effect of exempting appropriations
from the Gann limit for either the state or local agencies.
The measure also states that it shall be liberally
construed to effectuate its provisions, and includes a
severability clause that protects any of its individual
provisions not explicitly determined by a Court to be
SCA 10 - 4/9/12 -- Page 9
unconstitutional.
The constitutional amendment additionally provides that any
person has standing to challenge a violation of its
provisions, and that the government bears the burden to
prove its compliance by a preponderance of the evidence.
The measure also makes conforming changes and makes
legislative findings.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . According to the Author, "The
California State Legislature needs to control spending.
Governor Brown's most recent budget increases General Fund
spending by seven percent, once again outpacing expected
revenues. Meanwhile, counting pension liabilities,
California's total debt is at $200 billion. In 1979 voters
passed a spending cap, known as the Gann Limit, which
capped growth in government to the combined annual increase
in inflation and population growth. However, over the last
30 years the effectiveness of the limit has been diminished
due to exemptions for education and transportation funding.
While still on the books, it no longer serves as an
effective way to rein in government.
Beyond controlling spending, limiting ways that the
Legislature can increase revenue is also important. In
2009, the California Legislature approved a $12 billion tax
hike, the largest by any state in the history of the
nation. Yet three years later, we find ourselves with the
same budget deficit we did then. Something needs to change.
This is why SCA 10 clarifies Proposition 26 to ensure that
if any statute causes a taxpayer pays a higher tax it
requires a two-thirds vote of the Legislature."
2. Mother, may I ? Traditionally, the Legislature has been
able to authorize local agencies that aren't charter cities
to levy new or higher taxes with bills enacted by majority
vote; charter cities have the power to tax anything the
state doesn't, and would be largely unaffected by SCA 10's
tax provisions. The Legislature authorized local agencies
SCA 10 - 4/9/12 -- Page 10
to levy several such taxes, which are enacted by local
agency governing boards enacting an ordinance submitting
the tax levy to voters, who must approve the general (50%)
or special (2/3) tax. SCA 10 would instead provide that
all legislative bills authorizing local agencies to levy
new or higher taxes must be enacted by 2/3 vote, making it
more difficult for local agencies to choose to tax
themselves, and transferring additional power to
legislators that oppose tax increases. 90% of a city's
residents may want to tax themselves in a new or different
way, but they would have to convince more legislators to do
so, enhancing the power of tax opponents in a manner
similar to proposals for new or higher state taxes or
pre-Proposition 25 (2010) state budget negotiations. The
Committee may wish to consider the reasons for raising
hurdles for the Legislature to allow local agencies to levy
taxes.
3. Madison versus Jefferson, redux . California has
garnered worldwide attentions for its unique tension
between Madisonian representative democratic government and
direct democratic tools like the initiative, referendum,
and recall. In April, 2011, the Economist magazine wrote
of California's governance ills:
The main culprit has been direct democracy: recalls,
in which Californians fire elected officials in
mid-term; referendums, in which they can reject acts
of their legislature; and especially initiatives, in
which the voters write their own rules. Since 1978,
when Proposition 13 lowered property-tax rates,
hundreds of initiatives have been approved on subjects
from education to the regulation of chicken coops.
This citizen legislature has caused chaos. Many
initiatives have either limited taxes or mandated
spending, making it even harder to balance the budget.
Some are so ill-thought-out that they achieve the
opposite of their intent: for all its small-government
pretensions, Proposition 13 ended up centralising
California's finances, shifting them from local to
state government. Rather than being the curb on elites
that they were supposed to be, ballot initiatives have
become a tool of special interests, with lobbyists and
extremists bankrolling laws that are often bewildering
in their complexity and obscure in their
ramifications. And they have impoverished the state's
SCA 10 - 4/9/12 -- Page 11
representative government. Who would want to sit in a
legislature where 70-90% of the budget has already
been allocated?
While SCA 10's changes to existing Gann limits are far from
revolutionary (see Comment #4), does the Legislature want
to further inhibit its plenary authority to allocate
resources to reflect it priorities in the state budget
beyond ACA 4? Given the difficulty of accurately computing
Gann limits (see Schedule 12A in the Governor's Budget),
and the measure's explicit placing of the burden on all
governments in California that they accurately calculated
the limits, will SCA 10 result in more litigation of state
and local agency budgets, further involving courts in
budgetary decisions? The Committee may wish to consider
whether SCA 10 accurately reflects its view of the balance
between representative government and direct democracy.
4. The right fit . One of the most important factors in
choosing the right cap is its fit. As the above
legislative history demonstrates, the Legislature has
struggled to enact a spending cap that exceeds the
protections from Proposition 58 (2004). While voters will
act on ACA 4 in November, SCA 10 provides an alternative
that revises California's current Gann limit spending cap,
to:
Return to annual calculations of proceeds of taxes,
change in population, and change in inflation, instead
of Proposition 111's two-year measures.
Redirect excess spending to retire bonded
indebtedness when debt service comprises more than 5%
of general fund revenue instead of splitting it
between Proposition 98 and tax refunds.
Preclude legislative or initiative statutes from
exempting appropriations or revenues from Gann limits.
Placing the affirmative burden on government to
prove by a preponderance of the evidence that it
calculated limits successfully.
According to the Department of Finance, the state currently
has more than $17 billion in room between the proceeds of
taxes and its Gann limit in the current and budget years.
SCA 10 may reduce that room by switching from two-year to
annual measurements, but any reduction would rely on
assumptions about future revenues and expenditures, and
require complex mathematical calculations; the Department
SCA 10 - 4/9/12 -- Page 12
of Finance had to recalculate the limits after the release
of the Governor's Budget this year. Meanwhile, ACA 4
amends a different part of the Constitution to increase
transfers to the "rainy-day fund" of the BSA, and limits
the Governor's ability to suspend transfers or move moneys
from the BSA to the general fund. SCA 10 proponents
respond that ACA 4's maintains too much discretion to
transfer money out of or suspend transfers to the BSA, and
transfers go to purposes that don't sufficiently reduce the
state's outstanding debt and budget deficit. While the two
are not mutually exclusive, the Committee may wish to
consider whether SCA 10 is a better fit than, or whether it
should defer action until the voters have weighed in on,
ACA 4.
5. Don't go there . After Governor Brown proposed a ballot
initiative to increase taxes as part of his budget in
January, Senator Bob Dutton obtained an opinion from the
Office of Legislative Counsel that the Legislature could
place such a measure before voters by enacting a bill by
majority vote. Such a bill would have to amend an existing
initiative statute in such a way that it "changes the scope
or effect of the initiative statute," and the initiative
statute amended must be "absent any provision in the
initiative permitting an amendment without approval by
electors." SCA 10 would instead amend the Constitution
that any such amendment must be approved by 2/3 vote of
each house of the Legislature.
6. Not supposed to . SCA 10 amends the Constitution to
count toward the proceeds of taxes for the purpose of
calculating Gann limits any fees collected by state and
local agencies that exceed the cost of the regulation or
service giving rise to the fee. However, the Constitution
and state law deems as taxes and fees collected by local
agencies which exceed reasonable costs. Including these
revenues in the calculation of proceeds of taxes, agencies
would be confessing to breaking the law. As such, this
provision may not result in the desired change, and the
Committee may wish to consider removing this provision from
the bill.
7. Fact check . SCA 10 contains legislative findings and
declarations which may be considered subjective, undefined,
unjustified, and not reflective of the intent of the
Legislature:
SCA 10 - 4/9/12 -- Page 13
"it will repair California's broken budget system"
"the failed pattern of wasteful government
spending"
"California politicians waste too much of our tax
money. They do not prioritize programs or cut waste.
Instead, they threaten massive tax hikes?"
"This measure ? forces politicians to prioritize
programs and clean up the waste and abuses."
"in spite of eye-popping tax and spending
increases, California government continues to fail the
people. The politicians ? use gimmicks and borrowing
to claim budgets are balanced when they know they are
not."
"Today, our roads are crumbling, our schools are
failing, and our public universities are becoming
unaffordable. Our water system is broken, our prisons
are overflowing, and we have fewer police officers
patrolling our streets."
"no amount of increased taxes and spending will
ever fix the problem because the special interests who
control our state and their politician friends will
simply divert any extra taxpayer dollars to their own
benefit?"
"the politicians no longer represent the taxpayers,
only the special interests who demand higher spending
and taxes with no accountability and no assurance the
money is not wasted."
"since the politicians can no longer be trusted to
spend taxpayer money wisely,"
8. Suggested amendments . Committee staff recommends the
following amendments:
Deleting lines 39 and 40 from Page 6. It's unclear
what action the Legislature could take using this
language by majority vote that the measure does not
otherwise require 2/3 vote to enact.
Including debt issued according to law that doesn't
require voter approval (revenue bonds,
appropriations-backed lease revenue bonds, other forms
of municipal debt) in the exclusion of appropriations
for debt service from the definition of appropriations
subject to the limit (Page 12, lines 32 -36 and Page
13, line 1).
Clarifying that investment "returns" are exempt
from the proceeds of taxes calculation (Page 10, line
38).
SCA 10 - 4/9/12 -- Page 14
Support and Opposition (6/7/12)
Support : Howard Jarvis Taxpayers Association
Opposition : None received.