Political scientists on the right, on the other hand, support the 2/3 vote requirement because it restrains the size of government.  

University of California Berkeley professor of public policy John Ellwood said one school, of which he is a believer, believes that the immediate governance crisis–characterized by perpetual partisan gridlock over the passage of a state budget–can largely be solved by eliminating the 2/3 vote requirement to pass a budget and raise taxes and replacing it with a simple majority vote requirement.

A second school of thought believes that California’s governance problems cannot be solved by solving one problem and that a number of things must be addressed including the lowering of the 2/3 vote requirement, reform of the direct initiative process, term limit reform, and reapportionment reform.  Ellwood said Roger Noll, professor of economics emeritus at Stanford University, and Bruce Cain, Heller Professor of Political Science at the University of California Berkeley, are believers of the second school. 

All of the academics interviewed for this article are widely accepted to be among the foremost experts in California politics.  Ellwood specializes in financial management and public sector budgeting at Goldman School of Public Policy at the University of California, Berkeley.  Ellwood has served as a staff member of the U.S. Senate Budget Committee and was a member of the original management team of the Congressional Budget Office (CBO).

Noll is a Senior Fellow at the Stanford Institute for Economic Policy Research, where he directs the program in regulatory policy.  Cain is the director of the Institute of Governmental Studies and director of the University of California Washington Center, based in Washington, DC.     

Proposition 25 on the November ballot would lower the legislative vote requirement to pass a state budget from 2/3 to a simple majority, but retain the state’s 2/3 vote requirement to increase taxes. 

Left-Leaning Political Scientists Agree that California’s 2/3 Vote Requirement is “Backwards”, Political Scientists on the Right Support the 2/3 Vote Requirement

Roger Noll said “the problem is that John [Ellwood], Bruce [Cain] and I represent the range of views on the left 55% of the political spectrum.  The right 45% loves the 2/3 vote requirement because, they believe, it reduces the size of government.”

Cain said a consensus of conservative political scientists would likely “agree in principle that a majority vote is best but do not trust the legislature, and so are reluctant in this instance to favor the majority vote.”

A number of conservative academics were contacted to submit comments for this article but none of them submitted comments prior to the article deadline. 

“I think that most academics believe that the process of amending the constitution through the initiative is too easy, but some of these do not oppose the 2/3 vote requirement.  The standard position for moderate Republicans is that the initiative process should have tougher standards, but the 2/3 requirement is desirable,” Noll said, noting that he was answering the question as an economist who does some work in political science.      

“You are correct to note that there is a consensus among academics that the 2/3 rule is “backwards,” while conservatives (including conservative academics) oppose this change because it might lead to bigger government,” said Thad Kousser, an associate professor of political science who is spending the 2009-10 year at Stanford University working on California constitutional reform. 

“But I think it is important to note that us lefties don’t support shifting to a majority rule on the budget because it will lead to bigger government—in fact, most of us doubt that it will lead to much higher spending.  I think the major justification is that it allows budget deals to happen more quickly, and for the final deal to represent what the median voter wants.  It’s about representation and the lack of gridlock, rather than a preference for larger government,” Kousser said. 

At a budget forum hosted by the University of California Berkeley last year, Henry E. Brady, professor of public policy and Dean of the Goldman School of Public Policy at the University of California at Berkeley, says we have it backwards in California because the state constitution requires a 2/3 vote for budgets and taxes, which are every day business for the Legislature, but allows major constitutional changes such as Prop. 13 to be passed on a majority vote of the people (click here for a link to the budget forum). 

“Right now you can change the rules of the game, as Proposition 13 did, with only 50% plus one person.  Most political scientist say if you are going to change the rules of the game that should be hard, you should not make that too easy because that is going to mess things up often,” Brady said. 

“Most political scientists, including all that I know, say this is just backwards.  We got it backwards,” Brady said. 

Kousser agrees that California has the vote requirement backward, noting that “another way to make the argument the current system is backward is to compare it to the federal system, where the filibuster puts a supermajority hurdle in front of policy legislation but the budget resolution and reconciliation are passed on a simple majority vote, because it is so important that the nation has a spending plan.”

Brady said that the California Republican party represents vanishing demographics and Republican lawmakers can only survive by playing to their base and standing tough on taxes.  “I think they are doing the right thing from their perspective.  It is a short term strategy.  In the short term it is going to keep them in office for a while longer.  So they have every incentive to keep doing what they are doing,” Brady said. 

Brady said the solution is to repeal portions of Proposition 13, especially the 2/3 vote requirement for taxes and budget.  “Perhaps going to something like a 60% vote would at least make it possible to get decisions made and to move forward,” Brady said.  

First School:  Replace 2/3 Vote Requirement for Budget and Taxes With a Majority Vote         

“I have one change I want to do, I want to get rid of the 2/3 vote to raise taxes and pass a budget.  I think that it would reintroduce politics, not that it would give you nirvana…it would lead to some bad policies, but it would force both sides to actually grapple with the real issues which they don’t have to now,” said Ellwood.

Ellwood believes that getting rid of the 2/3 vote requirement would largely fix the partisan gridlock that paralyzes the state legislature every year over the budget and taxes. 

Ellwood said that if California gets rid of the 2/3 rule, the state would go back to rules had in 1977, prior to the passage of Prop. 13, when California was a big government state.  “Prior to Prop. 13 California was a very high tax, very high service state.  Its tax burden was third highest in the county.  Now California is a high tax burden, high service state.   Its state and local tax burden (measured as a percent of personal income) is somewhere between 15^th and 20^th among the states,” Ellwood said.  Click here for a CA Budget Project chart about how CA’s tax burden compares to other states. 

“If we went to a simple majority to raise taxes in all likelihood the Democrats would raise taxes to solve California’s budget problems.  They would over reach.  They would get thrown out of office and the Republicans would have their best chance of gaining a majority in the Legislature,” Ellwood said.   

“Now the Democrats can propose anything because they know that with the Republican veto nothing will pass.  And the Republicans know that they can get away with simply saying no,” Ellwood said, adding that “nothing gets done either way” and we are just stuck with gridlock. 

“The problem is, I’m not sure the voters want it,” Ellwood said, noting that Proposition 56, which proposed a 55% vote for a budget and taxes was handily defeated in the early 2000s. 

 “If you have a supermajority to raise revenues in an American state, your state and local revenue burden is 8% points lower than it would otherwise be,” Ellwood said, citing this as one of the conclusions reached in a 2003 study by Timothy Besley and Anne Case titled “Political Institutions and Policy Choices:  Evidence from the United States.”    

“For those of you who are conservatives you should love the 2/3 vote because it leads to smaller government.  It might lead to inefficiencies but it is effective and that is the problem.  People are acting rationally.  We have to figure out a way of breaking out of this or live with the consequences that we have now,” Ellwood said.

Eliminating 2/3 Vote Would Empower Governor

“Eliminating the 2/3 vote requirement mainly empowers the Governor (by bringing back the veto as something that matters—it does not matter now because by the time the budget passes the legislature has a veto-proof majority,” said Professor Noll.

“California’s normal state of affairs is to have a Democratic legislature and a Republican Governor.  Under a simple majority, the most likely result is that a budget bill is passed on time, then vetoed, then a failed veto override, and then the gridlock we know and love,” Noll continued. 

“At present the Democrats in the Legislature probably could make a deal with the Governor that he would not veto and that would not get Republican votes in the Legislature, but I would not rely on this as a normal state of affairs,” Noll said.        

Second School of Thought:  Broader Series of Reforms Needed to Restore California Governance

Ellwood said a second school of thought exists that believes California’s governance problems cannot be solved by solving one issue and that a multitude of things must be addressed including the lowering of the 2/3 vote requirement, term limit reform, initiative process reform, pay as you go budgeting, and redistricting reform, among others. 

Professor Bruce Cain said he is a member of the second school but would “qualify this by saying that all of these things that are easy to do (e.g. pay-go, majority vote on budget) are less important than the things that are politically harder to do (e.g. initiative reform, term limits reform).  

“First, changing the budget vote to a majority is better than doing nothing but it would be far, far better to change the tax vote to a simple majority as well,” Cain says. 

Cain said the state needs to fix the fiscal problems and adopt measures to restore legislative competence.  Specifically, he says the six most important things to do are: 1) ballot box budgeting reform which only allows statutory fiscal measures to be passed by initiative and allow the legislature to amend the measures after a time, 2) take existing fiscal policy measures out of the constitution, 3) make all budget decisions that violate the pay-go automatic referendas, 4) end the statewide 2/3 vote provisions on local expenditures, and make every local jurisdiction responsible for adopting its own taxing rules, 5) provide for 12 year term limits to be served in either house, and 6) mandate serious oversight activity by the legislature.   

“I agree that I’m in the second school.  I think the larger series of comprehensive changes that you list me as supporting are important to address the range of problems in California today.  I also think that pushing multiple changes at once—especially paired changed in an area that attempts to strike an ideological balance—is important both for the political prospects of reform and for their policy consequences,” Kousser said.  Kousser recently wrote a paper that pitches a change that could help conservatives, eliminating majority party control over the suspense file, that could be paired with eliminating the 2/3 rule, with both united by the principal of majority rule.   

At budget forum held at UC Berkeley last year titled “What Ails California?, Kousser suggested a series of reforms that include initiative reform, term limit reform, and changing the 2/3 vote requirement to a simple majority or 55% vote. 

Kousser said California should end “ballot box budgeting” in the initiative process by requiring initiatives to identify a funding source.  He said Arizona does this and that 75% of Californians support this idea, according to a recent Field Poll. 

Kousser said term limits needs to be changed so that legislative leaders in charge of the budget in boom years will have to face the consequences in the bust years.  He suggested that term limits be set at 12 years overall, which could be served in the Senate, Assembly or combination of both houses. 

Lastly, the state’s 2/3 vote requirement to pass a budget should be reduced to a simple majority or 55% vote to reduce gridlock. 

“The only revision that I’d suggest is that I don’t see many academics pushing for redistricting reform, because I think the literature is very clear that redistrictings are not what have made districts so much safer in recent decades, and that states with commissions do not have more competitive elections,” Kousser said. 

USC Professor Roger Noll, said political scientists on the right “also love the initiative because the ideological distribution of people who vote is right-skewed compared to the distribution of the total population and the Democratic majority in the state legislature (whose districts are based on population and not just voter turnout).”

“I believe that the initiative process is the fundamental problem, partly because it creates inflexible budgets and partly because it creates bad institutions.  The problems that Thad listed are all products of initiatives,” Noll said.

“I also believe that the recent reforms of the primary process will help some, but they are not a cure.  The 2/3 vote requirement would not be such a hurdle if the parties were less polarized,” Noll said.

“More fundamentally, the initiative has created inflexibility in both revenues and expenditures beyond the 2/3 vote requirement.  These also typically require a 2/3 vote to overcome.  These 2/3 vote requirements also could be eliminated, but that amounts to either repealing these initiatives or letting the Legislature override constitutional amendments by a simple majority, both of which do not seem plausible to me,” Noll said.

Alternative View:  California is Too Large and Too Diverse to Be Governable

“Although I am not of this persuasion, another view is that California is too large and too diverse to be governable.  The mix of taxes and policies that make the Bay Area happy will never be acceptable in the Central Valley, and vice versa,” Noll said.

“In addition, unless one wants to have a huge Legislature, Legislative districts are too large, which leads to a greater emphasis on name recognition and causes campaign finance to be more important—meaning that Legislators will be excessively responsive to organized interests in their districts.  To these people, the only real solution is to divide the state,” Noll said.

State spending has dropped for every major program area (i.e. K-12 education, higher education, health and human services, and corrections) since the 2007-08 budget year.   

The Governor’s January and May budget proposals proposed to reduce state General Fund spending by roughly another $3 billion from 2009-10 by proposing $83.4 billion in state spending for 2010-11.  In May, the Assembly Budget Committee proposed $86 billion in state General Fund expenditures for the 2010-11 budget year, while the Senate Budget Committee proposed $93.1 billion in expenditures.    

Now into our seventh week of yet another state budget stalemate, the California State budget is at another crossroads.  On the one hand, the state can follow Governor Arnold Schwarzenegger’s lead, and the wishes of the California Republican lawmakers, and continue the trend of the past three years.  The three state budgets passed since 2007-08 have significantly ratcheted down state spending on major programs areas such as education, higher education, and health and human services, despite the increasing needs of a growing state population.

Democrats, on the other hand, prefer additional spending on these same state programs.  Kersten Communications (KC) has produced a summary spreadsheet that helps put this year’s budget stalemate into a historical perspective.  To view the spreadsheet click here.

Here is a guide to the four tabs included in the spreadsheet:

Tab #1 Summary Chart of State General Fund Spending by Expenditure Area for 1976-77 to 2010-11:  This chart summarizes actual and real general fund expenditures (real meaning in inflation adjusted 2008-09 dollars), actual and real K-12 education expenditures, actual and real higher education expenditures, actual and real higher education expenditures, actual and real health and human service expenditures, and actual and real corrections expenditures.  The chart also includes general fund per capita expenditures, real general fund per capita expenditures, state population growth, and the state consumer price index that was used to calculate the real figures. 

Tab #2  Summary Graph of State General Fund Spending by Expenditure Area for 1976-77 to 2010-11:  This graph charts state spending since 1976-77 for the following program areas:  K-12 education, higher education, health and human services, and corrections.

Tab #3   Graph of Inflation-Adjusted State Spending by Program Area for 1976-77 to 2010-11:  This graph charts real spending since 1976-77 for the following program areas: K-12 education, higher education, health and human services, and corrections. 

Tab #4  Graph of Real General Fund Spending Per Capita for 1976-77 to 2010-11:  This graph shows that real general fund spending per capita, as proposed by the Governor in his January and May Revise, approaches levels the state has not seen since the recession of 1993-94.   

Here are some factoids illustrated by the data:

–Notwithstanding the deep recession of the early 1980s, real state general fund spending increased steadily throughout the 1970s, 1980s, and 1990s—increasing from $40 billion in 1976-77 to $106 billion in 2006-07 (note: in inflation adjusted 2008-09 dollars).  Since 2006-07, real state general fund expenditures have decreased from $106 billion in 2006-07 to $85 billion in 2009-10, and could potentially go to below $80 billion in 2010-11.

–California’s population has increased by 68% since 1976-77—jumping from 22 million people in 1976-77 to 37 million in 2009-10.  Over the same period, real general fund expenditures have increased by 110%–increasing from $40.58 billion in 1976-77 to $85.39 billion in 2009-10 (note: in inflation adjusted 2008-09 dollars).

–Real general fund expenditures per capita have dropped from $2,852 in 2006-07 to $2,219 in 2009-10—a 22% decrease. 

–Actual K-12 education expenditures have dropped from $42.47 billion in 2007-08 to $34.55 billion in 2009-10—a 18.6% decrease.

– Actual health and human services expenditures have dropped from $29.34 billion in 2007-08 to $25 billion in 2009-10—a 14.6% decrease. 

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The 122-page report, titled “System Failure: California’s Loophole-Ridden Commercial Property Tax,” was co-written by Lenny Goldberg, executive director of CTRA, and David Kersten of Kersten Communications, with the primary research done by Kersten Communications.  To view the report click here. 

The first part of the report, “Who Pays the Property Tax?” provides county-by-county data on the shifting property tax burden between residential and non-residential property since the passage of Prop. 13.  This part of the report is based in part on newly-discovered county survey data reported over many years to the Board of Equalization (BOE) which to our knowledge has never before been examined and utilized, and in part on data provided by county assessors. 

The data is consistent throughout the state:  in virtually every county in the state, the share of the property tax borne by residential property has increased since the passage of Proposition 13 in 1978, while the share of the property tax borne by non-residential property has decreased.  Some examples:  in Contra Costa County, the residential share of the property tax went from 48% to 73%.  In Santa Clara County, the residential share went from 50% to 64%, despite massive industrial/commercial growth.  In Los Angeles County, it went from 53% to 69%.  In Orange County, it went from 59% to 72%, states the report.   

The California Taxpayers Association (Cal-Tax) and other business groups immediately assailed the report as “meaningless” and “deeply flawed.”  “The report is so full of holes that it should have been printed on swiss cheese,” states Cal-Tax in statement issued on the report. 

Cal-Tax contends it is “incredible sophistry” to contend that Prop. 13 has shifted the tax burden to residential property because Prop. 13 limits property taxes to 1%, plus a maximum of 2% a year—concluding that “property owners would be paying vastly higher taxes if Prop. 13 did not exist.”  It is true that Prop. 13 significantly restricts the taxes that residential property taxpayers pay, but at the same time, restricts the taxes that commercial/industrial taxpayers pay to a greater degree, which is the main contention of the report.

Cal-Tax contends that the shift in the overall property tax burden has “nothing to do with the effectiveness of Prop. 13.”  This is a ridiculous claim because Prop. 13 created the property tax system that has been in place since the measure passed in 1978.     

Cal-Tax also criticized the report for including “residential-income property” (i.e. apartment buildings, investment properties) in its definition of “residential property.”         

The second part of the report, “More Loophole than Tax,” examines the way “change of ownership” is applied to commercial property and summarizes the loopholes in the current system.  This section provides specific examples of major properties where 100% of a property’s ownership has changed hands without being reassessed. 

Prop. 13 requires both residential and commercial properties to be reassessed upon a “change in ownership.”  But loopholes in Prop. 13’s implementing statutes allow commercial properties to routinely change hands without being reassessed—costing state and local governments hundreds of millions of dollars in tax revenues every year (potentially more than $1 billion).  

In particular, the report found that California’s commercial property tax system is “inconsistently applied in many counties.”  “We believe that there are many properties, particularly the banks and other commercial properties, which should have been reassessed but have not been, and found that some counties have assessed these properties while others have not,” states the report. 

The property transfers examined are predominantly those of private equity buyouts, corporate purchases of companies, and bank mergers which have avoided reassessment. 

For example, Hilton Hotels and its family of hotel chains (incl. Doubletree, Embassy Suites, and Hampton Inn) was bought by the Blackstone Group in October 2007 but many of their California-based hotel properties have not been reassessed.  Jiffy Lube was bought by Shell Oil in 2002, but very few of the Jiffy Lube service centers have been reassessed.  JP Morgan Chase bought Washington Mutual (WaMu) in 2008 for $1.9 billion, but many of WaMu’s assets have not been reassessed to date. 

“Our legal analysis suggests why this inconsistency occurs:  the law is a mess and impossible to enforce.  We examined records and cases from the Board of Equalization which demonstrate incredible complexity used to avoid taxes, complexity which should have nothing to do with the assessors’ job, which is to determine property valuation,” states the report. 

The report concludes that the results of Part 2 of the report can be interpreted in two ways:  

–One, counties should right now be reassessing many properties, in order to avoid basic cuts in services and programs. There appears to be many millions of dollars in tax revenue which is going uncollected. 

–Second, the law should be changed at least to make sure that obvious changes of ownership, such as private equity buyouts and corporate takeovers, trigger a reassessment. 

“A great deal more research on assessment inequities among similar properties needs to be done.  The inconsistencies we have found make clear that the system is failing,” concludes the report.

Cal-Tax contends that most assessors are doing a good job and points to routine surveys of assessment practices by the BOE which shows that assessment values hover at between 99 percent and 100 percent of correct values.  These surveys look at a very small number of properties and do not review changes of ownership that the BOE may have missed initially.  In fact, some of these surveys have found that some counties have failed to reassess major properties despite notification by the BOE (i.e. Riverside, Imperial County).   

Assemblymember Tom Ammiano (D-San Francisco) has introduced a bill, AB 2492, that would close the most egregious loopholes in the system by requiring reassessment if 100% of a property changes ownership and increasing penalties on violators.  This bill passed the Assembly Revenue and Taxation Committee on May 10 and is currently awaiting action in the Assembly Appropriations Committee.      

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I.  Measures Qualified for November 2010 Ballot

A.  Marijuana Legalization: This initiative measure, titled “The Regulate, Control and Tax Cannabis Act of 2010,” would allow persons 21 years old or older to possess, cultivate, or transport marijuana for personal use.  This measure would permit local governments to regulate and tax commercial production and sale of marijuana to people 21 years old or older and prohibit persons from possessing marijuana on school grounds, using it in public, smoking it while minors are present, or providing it to anyone under 21 years old. The measure also maintains current prohibitions against driving while impaired.  To view text click here.   

Fiscal Impact: Summary of fiscal impact on state and local governments by Legislative Analyst (LAO) and Department of Finance (DOF): Savings of up to several tens of millions of dollars annually to state and local governments on the costs of incarcerating and supervising certain marijuana offenders. Unknown but potentially major tax, fee, and benefit assessment revenues to state and local government related to the production and sale of marijuana products.

Proponents:  Marijuana industry and others. Visit: http://www.taxcannabis.org/  

Opponents:  Coalition for a Drug-Free California, California Narcotics Officers Association, California Bus Association, Mothers Against Drunk Driving, California Police Chiefs Association.

B.  Water Bond:  This measure was placed on the ballot as a result of a deal between Governor Schwarzenegger and state lawmakers.  The measure is titled “The Safe, Clean, and Reliable Drinking Water Supply Act of 2010” and is an $11.14 billion general obligation bond proposal that would provide funding for California’s aging water infrastructure and for projects and programs to address the ecosystem and water supply issues in California. The measure is comprised of seven categories, including drought relief, water supply reliability, Delta sustainability, statewide water system operational improvement, conservation and watershed protection, groundwater protection and water quality, and water recycling and water conservation. (Source:  California Department of Water Resources).  To view the text of this measure click here.

Fiscal Impact:  $11.14 billion in general obligation bonds to be paid back from future General Fund revenues.   

Proponents:  Association of California Water Agencies, California Chamber of Commerce, California Cotton Growers Association, California Groundwater Coalition, California Farm Bureau, Kern County Water Agency, Contra Costa Water District, Metropolitan Water District of Southern California, State Building and Construction Trade Council of California, Wateruse Association, Westlands Water District.  Click here for a full list of supporters or visit: http://www.waterforca.com/       

Opponents: California Rural Legal Assistance Foundation, California School Employees Association, Environmental Justice Coalition for Water, Friends of the River, Planning and Conservation League, Restore the Delta, Service Employees International Union, Sierra Club California, Yolo County Board of Supervisors (partial list).  Visit: http://nowaterbond.com/

C.  Redistricting of Congressional Districts:  This measure would remove elected representatives from the process of establishing congressional districts and transfers that authority to the recently-authorized 14-member redistricting commission.  Proposition 11, which was passed by California voters in 2008, set up a new redistricting process but did not include Congressional seats.  To view the text of this measure click here.    

Fiscal Impact:  The LAO and DOF project that this measure would not significantly impact state redistricting costs. 

Proponents:  Visit: http://www.votersfirstact.org/

Opponents:  Opponents have filed a competing initiative, titled the “California Financial Accountability in Redistricting Act,” that would repeal Proposition 11.  The measure was drafted by former Fair Political Practices Commission chairman Daniel Lowenstein and is backed by Democratic Rep. Howard Berman and his brother Michael, a Democratic consultant.  Campaign strategists say the goal of the competing measure is to defeat this ballot measure by confusing voters.  Assemblymember Karen Bass, former Speaker of the Assembly, and at least fourteen Democratic members of California’s delegation to the U.S. Congress, including Nancy Pelosi, cumulatively gave $160,000 to this competing initiative effort in February 2010.  Business mogul Haim Saban loaned $2 million to the competing initiative campaign to overturn Prop. 11 in mid-April which makes it very likely that this competing measure will qualify.  Saban’s donation has made some observers wonder because in 2008 he gave $200,000 to the campaign to pass Prop. 11.

II.  Measures Pending Signature Verification at Secretary of State’s Office

A.  Majority Vote for State Budget: The measure, titled “Passing the Budget on Time Act of 2010,” would change the legislative vote requirement to pass the state budget from a two-thirds vote to a simple majority.  The measure retains the state’s two-thirds vote requirement to increase state taxes.  The measure also provide that if the Legislature fails to pass a budget bill by June 15, all members of the Legislature will permanently forfeit any reimbursement for salary and expenses for every day until the day the Legislature passes a budget bill.  To view the text of the measure click here. 

Fiscal Impact:  LAO and DOF find that the fiscal impact would depend on the composition and actions of future legislatures.  The measure would result in a minor reduction in state costs related to the compensation of legislators in years when the budget is passed after June 15. 

Proponents:  Supporters include the California Faculty Association, AFSCME, the California Federation of Teachers, the California Professional Firefighters, and the California School Employees Association and various others.  Visit:  http://www.endbudgetgridlock.com

Opponents: Small Business Action Committee, others unknown at this time.

B.  Repeal of Corporate Tax Breaks:  “The Repeal Corporate Tax Loopholes Act” repeals the corporate tax breaks enacted by the Legislature as part of the 2008 and 2009 budget deals.  Specifically, the measure repeals legislation that allows businesses to shift net operating losses (NOLs) to prior tax years and extends the period permitted to shift operating losses to future tax years.  The measure repeals legislation allowing corporations to share tax credits with affiliated corporations.  It also repeals legislation that would allow multistate businesses to use a sales-based income calculation, as opposed to a combination of property, payroll, and sales.  To view the text of the measure click here. 

Fiscal Impact:  The LAO and DOF estimate that the measure would result in a state revenue increases from business taxes of about $1.7 billion when fully phased in, beginning in 2011-12. 

Proponents:  The California Teachers Association sponsored the signature drive but the measure is expected to be supported by a number of other advocacy groups. 

Opponents:  A large business coalition including the California Chamber of Commerce, California Taxpayers Association, Silicon Valley Leadership Group, and California Building Industry Association, among others.  Visit: http://stopthejobstax.org/  

C.  Modification of Term Limits:  The “California Term Limits Initiative” would reduce the total amount of time a person may serve in the state legislature from 14 to 12 years, but allows legislators to serve at total of 12 years either in the Assembly or the Senate, or any combination of both houses not exceeding 12 years.   The measure would only apply to legislators elected after the measure is passed.  To view the text of the measure click here.

Fiscal Impact:  The LAO and DOF project that there would be no fiscal impact on state and local governments.  

Proponents:  The measure is sponsored by the Los Angeles County Federation of Labor and the Los Angeles Chamber of Commerce.  The groups have formed “Californians for a Fresh Start” and Maria Elena Durazo, the executive secretary-treasurer of the Los Angeles County Federation of Labor AFL-CIO, is reported to be leading the ballot proposition effort. 

Opponents:  Unknown.

D.  Protection of Local Revenues from Raids by State:  A coalition of local government, transportation, business, public safety, labor, and public transit groups have submitted 1.1 million signatures to qualify the “Local Taxpayer, Public Safety and Transportation Protection Act of 2010.”  The measure would prohibit the state from borrowing or diverting local revenues including local property tax revenues and other local tax revenues (i.e. parcel, sales), gasoline taxes that are dedicated to transit or transportation, funds dedicated for public transit, and redevelopment funds.  To view the full text of the measure click here.    

Fiscal Impact:  The LAO and DOF say the measure would place significant constraints on state authority over city, county, special district, and redevelopment funds.  The measure would result in higher and more stable local resources, potentially affecting billions of dollars in some years, and a commensurate reduction in state resources that would result in major decreases in state spending and/or increases in state revenues. 

Proponents:  The measure is backed by a long list groups including the League of California Cities, California Redevelopment Association, California Special Districts Association, and California Transit Association.  Visit: http://www.savelocalservices.com/   

Opponents:  Unknown.  

E.  Vehicle Surcharge to Fund State Parks:  The “State Parks and Wildlife Conservation Trust Fund Act” would establish an $18 annual state vehicle license surcharge on the state’s vehicle license fee and grants free admission to all state parks for surcharged vehicles.  The measure would require surcharge revenue to be used solely to operate, maintain and repair the state park system, and to protect wildlife and natural resources.  It would exempt commercial vehicles, trailers, and trailer coaches from the surcharge.  To view the text of the measure click here.    

Fiscal Impact:  The LAO and DOF estimate increased state revenues of about $500 million annually from the imposition of the surcharge on the VLF and potential savings of up to $200 million annually to the extent that the VLF surcharge revenues are used to reduce support from the General Fund and other special funds for parks and wildlife conservation program.  They estimate a reduction of about $50 million annually in state and local revenues from state park day-use fees. 

Proponents:  Early supporters of the proposed ballot measure include the California State Parks Foundation, the Nature Conservancy, and the Save the Redwoods League. 

Opponents:  Unknown. 

F.  Increases Legislative Vote Requirement From A Majority to a 2/3 Vote for Fees:  This measure would increase the legislative vote requirement from a majority vote to a two-thirds vote for state levies and charges, with limited exceptions, and for certain taxes currently subject to a majority vote.  The measure would also amend the Constitution to require voters to approve, either by a two-thirds or a majority vote, specified local levies and charges, with limited exceptions.  The measure is very similar to Proposition 37 which was defeated by California voters on the November 7, 2000, ballot with 52% of the electorate voting against it.  To read the text of the measure click here.   

Fiscal Impact:  The LAO and DOF find that the measure would lead to a major decrease in state and local revenues and spending depending upon future actions of the Legislature, local governing bodies and local voters. 

Proponents:  The California Chamber of Commerce is the lead force behind the “Stop Hidden Taxes” Initiative.  Other notable supporters include the California Taxpayers Association, the Howard Jarvis Taxpayers Association, Americans for Tax Reform, Chevron, Aera Energy LLC, and the Wine Institute.  Visit: www.nomorehiddentaxes.com  

Opponents:  The California Tax Reform Association, others unknown at this time.

G.  Suspension of AB 32 Greenhouse Gas Regulation Legislation:  This measure would suspend state law relating to AB 32 (2006), which requires reducing greenhouse gas emissions that cause global warming, until California’s unemployment rate drops to 5.5% or less for four consecutive quarters.  The measure would require the state to abandon implementation of this comprehensive greenhouse-gas-reduction program which includes increased renewable energy, and cleaner fuel requirements, and mandatory emission reporting and fee requirements for major polluters such as power plants and oil refineries, until the suspension is lifted.  To view the text of the measure click here.

Fiscal Impact:  The LAO and DOF estimate a potential positive short-term impact on state and local government revenues from the suspension of regulatory activity, with uncertain longer-run impacts.  The analysis notes potential foregone state revenues from the auctioning of emission allowances by state government, by suspending the future implementation of cap-and-trade regulations.

Proponents:  Assemblymember Dan Logue (R) is a key sponsor.  The measure is also supported by the California Republican Party, the Howard Jarvis Taxpayers Association, and a number of major industry groups and companies, including the oil industry.  Click here for a list of donors to the campaign.  Visit:    http://www.suspendab32.org/   

Opponents:  Governor Arnold Schwarzenegger, the Natural Resources Defense Council, the Environmental Defense Fund, the Green Tech Action Fund.

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The following KC analysis shows that both candidates’ tax plans would provide very marginal economic benefits to the State of California at best and only really serve to benefit the wealthy and ultra rich.  Most of the tax cuts proposed in each plan would accrue to the state’s wealthiest taxpayers—the top 1% of the state’s earners. 

Perhaps most intriguing is that both candidates would reap significant savings, likely to be in the millions of dollars range, potentially tens of millions of dollars, in their own tax bills from their proposed reductions in the state capital gains tax.  More specifics would be known if Whitman and Poizner release their tax returns.      

Whitman proposes to eliminate the state’s capital gains tax, Poizner proposes to cut it by 50%.  Candidate financial disclosure (Form 700s) filed by both Whitman and Poizner show that both candidates are heavily invested in stocks, private-equity firms, and other investment vehicles that generate income, dividends and other capital gains that are largely taxed through the state’s capital gains tax.  Click here to view Whitman’s Form 700 filing and click here to view Poizner’s Form 700 filing.

Democratic candidate Jerry Brown has not outlined a tax package that he would enact if elected Governor but has stated that he would only support tax increases if they are approved by a vote of the California people.         

This report seeks to summarize and critique both Whitman’s and Poizner’s tax cut proposals and provide a revenue impact analysis for each proposal.  

Summary of Meg Whitman’s “Job-Creating Tax Cuts”

Republican frontrunner Meg Whitman has proposed a package of tax cuts primarily consisting of an elimination of the state capital gains tax, which is estimated to cost the state roughly $11 billion annually (note: capital gains fluctuate with the economy). 

Whitman has also proposed a package of more targeted “job-creating tax cuts” which includes a sales tax exemption or tax credit for manufacturing equipment ($1-2 billion), an increase in the state research and development tax credit ($60 million), a $10,000 tax credit for new home purchases ($100-200 million plus), and a hiring tax credit for green technology job creation ($50 to $100 million estimated) (see full summary chart below, click on chart for clear printable version). 

In total, Whitman’s tax package is estimated to cost $12.4 billion to $13.6 billion a year when fully implemented, according to conservative estimates by Kersten Communications. 

“With California facing a $20 billion budget deficit, we have to be strategic and effective in the tax relief we provide.  While making cuts in marginal tax rates is a very important goal, at this moment we simply cannot afford a big, across-the-board tax cut that would irresponsibly grow the state’s already over-sized debt level and drop our bond rating to junk status,” Whitman states in her policy agenda titled “Meg 2010: Building A New California.”  “I have a road map to help create 2 million private-sector jobs by the beginning of 2015,” Whitman wrote in an April 15, 2010 Desert Sun Op-Ed in support of her tax package.       

 Summary of Steve Poizner’s Tax Cut Proposal

 Poizner proposes a 10% across-the-board reduction in marginal rates for the state personal income tax (PIT), sales and use tax (SUT), and corporation tax (CT), and a 50% reduction in the state’s capital gains tax. 

An analysis by Kersten Communications based on Department of Finance data finds that Poizner’s 10% across-the-board tax reduction would cost $8.2 billion annually and the 50% capital gains tax cut would cost $5.5 billion—for a total of $13.7 billion a year in reduced state tax revenues (see chart below, click on chart for clearer printable window).

“Commissioner Poizner will cut rates in every major category of taxation, fueling job creation and jumpstarting economic growth for all Californians,” Poizner states on his website.  “Economic growth due to the Poizner Jobs Plan, combined with hiring, debt, and spending freezes, closes the $20.7 gap,” Poizner states. 

Specifically, Poizner says his plan closes the state’s $20.7 billion budget gap with “$7.4 billion in added revenues from economic growth and $13.5 billion in reduced spending.”  The tax cuts are keyed as a $3.8 billion revenue gain, presumably from their job-creating benefits, and not as a $13.7 billion revenue loss.

“Based on a careful study of state tax cuts over a fifteen year period, Poizner’s proposed 10% cuts in personal income tax rates, the state sales tax rate, and the corporation tax rate are estimated to grow state revenues by an inflation-adjusted 1.77% in the first year and 4.94% in the second year after the cuts are enacted into law,” states Poizner’s website.

“If implemented immediately, Steve’s proposed tax cuts should generate approximately $3.77 billion in General Fund revenues through the end of the 2010-11 fiscal year.  We posit that the revenue enhancement effects of the proposed tax cuts may even be more robust than the estimates provided, given the 50% reduction in capital gains taxes,” Poizner states.  

Reducing California’s Capital Gains Tax Primarily Benefits the Wealthy and Super-Rich and Very Few Middle Income Taxpayers, But Not Low-Income Taxpayers

Whitman proposes to eliminate the state’s capital gains tax, while Poizner proposes to cut it by 50%.  Research indicates that capital gains tax cuts overwhelmingly benefit the wealthy, primarily the top 1% of taxpayers, and do not have a measurable impact on creating jobs and economic growth.  

California’s current treatment of capital gains and dividends was enacted into law in 1987 as part of a tax package passed by the Legislature and signed into law by Governor Deukmejian (R) to conform to President Ronald Reagan’s 1986 federal tax reform package.

Under current state law, California taxes capital gains through the state’s personal income tax, which means that capital gains—from the sale of a home, stocks, or other investment vehicles—is taxed according to California’s marginal income tax rates.  California’s top income tax rate is 9.3%. 

“In all the years since we conformed with the Reagan treatment of capital gains as ordinary income (Tax Reform Act of 1986), tax treatment of capital gains in California has been essentially a “non-issue” among those who do tax legislation in California,” according to Martin Helmke, former chief consultant to the California Senate Revenue and Taxation Committee. 

Helmke said several bills have been introduced since 1986 to reduce the state’s capital gains tax but none of the bills went further than the Revenue and Taxation Committee in either house.   

In 2003, George W. Bush’s 2003 tax act lowered the top tax rate on corporate stock dividends from 35% to 15%, and reduced the top capital gains tax rate from 20 percent to 15% for gains realized after May 5, 2003, according to Citizens for Tax Justice (CTJ).

Contrary to Whitman’s and Poizner’s assertions that reducing the capital gains tax will increase revenues, and jobs information released by the Internal Revenue Service shows that the Bush tax cuts on capital gains and dividends reduced federal tax revenues by $91.7 billion in 2005, according to Citizens for Tax Justice. 

A 2006 study by the Congressional Budget Office (CBO), titled “A Dynamic Analysis of Permanent Extension of the President’s Tax Relief” (which includes Bush’s income tax cuts and other tax changes), found that under the best possible scenario, making the Bush tax cuts permanent would increase the economy “over the long run” by 0.7%.  Since the “long run” is not defined, economists have suggested that 20 years be used, which would make the best case scenario GDP growth equal to 0.04%.  Previous CBO estimates identified the tax cuts as costing the equivalent of 1.4% of the GDP in revenue—meaning the tax cuts would still cost the equivalent of 1.27% of the GDP, according a report titled “Treasury Dynamic Scoring Analysis Refutes Claims by Supporters of the Tax Cuts,” by the Center on Budget and Policy Priorities.

 An analysis by CTJ found that “the 67 million tax filers who reported adjusted gross incomes of less than $30,000—half of all filers—received virtually none of the benefits of the capital gains and dividends tax breaks.  In contrast, the 0.6 percent of all filers with reported incomes above $500,000 received 73.4% of the total tax reductions, saving an average of $81,204 each,” states CTJ report.

“Most amazing, the 13,776 tax filers with adjusted gross incomes in excess of $10 million—a mere 0.01 percent of all filers—received 28.2 percent of the total tax savings.  Their average tax break was $1.87 million each,” states the CTJ report (see CTJ summary chart below).  

“I have no doubt that for many who favor eliminating or sharply reducing California’s income tax on capital gains, the real motivation is that they simply favor lower taxes on the rich—even if that means higher taxes on everyone else,” stated Robert S. McIntyre, executive director of CTJ, in his testimony before the California Commission on the 21^st Century Economy.

Two Additional Reasons Why Reducing or Eliminating the State Capital Gains Tax is a Bad Idea

Reducing or Eliminating California Capital Gains Tax Would Create A New Tax Shelter for the Super Rich:  “Lots of income that is called “capital gains” is really ordinary income that has been converted into capital gains to minimize federal taxes,” stated McIntyre.  Private-equity managers report a significant amount of income as capital gains to take advantage of the lower marginal federal tax rate.  Reducing or eliminating the state capital gains tax would only exacerbate this problem.  In 2007, almost 40% of the income reported by the top 1% of California taxpayers was capital gains.  “For this small, wealthy group, income taxes paid on capital gains represented 44% of their total 2007 California income taxes paid,” McIntyre stated.

Reducing or Eliminating California Capital Gains Tax Would Not Stimulate Economic Growth or Investment in California:  Whitman and Poizner argue that reducing the state’s capital gains tax would result in significant economic growth in California.  “Careful research by non-partisan analysts shows that there is no connection between lower capital gains taxes and higher economic growth, in either the short run or the long run,” McIntyre states.  In 2002, the CBO released a report titled “Economic Stimulus: Evaluating Proposed Changes in Tax Policy,” which found that “capital gains tax cuts would provide little fiscal stimulus,” since most of the benefits of such cuts would accrue to high income households which are much more likely to save than spend.”  “Indeed, the CBO determined that, of the range of approaches examined, capital gains tax cuts were among the least effective,” according to McIntyre. 

Research by Len Burman, the director of the joint Brookings Institution-Urban Institute Tax Policy Center, shows that over the last 50 years real GDP growth has not varied in response to changes in the capital gains tax rates, even when the possible lag between the rate cut and subsequent economic activity is accounted for.  “The relationship between rates and growth is not statistically significant,” according to McIntye. 

A capital gains tax cut would also not encourage additional investment in California, as opposed to companies in other states or nations, because California-based investors would receive the same tax treatment if they invest in-state, out-of-state, or abroad.  Investors will continue to seek out the highest rate of return on their investment, without regard to location, just as they would in the absence of a state tax break for capital gains, McIntyre concludes.

Critique of Select Whitman “Job-Creating” Tax Cuts

Sales Tax Exemption or Tax Credit for Manufacturing Equipment Will Not Create New Jobs, Only Serve to Significantly Increase State Budget Deficit ($1-2 billion/yr. revenue loss):  This is perhaps the most justified on policy grounds of all of the tax cut proposal, although the state can ill-afford this tax cut at this time given the $20 billion budget deficit.  A sales tax exemption is preferred to a credit given the administrative nightmare of the now expired manufacturers’ investment tax credit (MIC) for both taxpayers and tax administrators.  The MIC was enacted in 1994 with a promise by proponents that it would create 390,000 new jobs by 2004.  The MIC expired at the end of 2003 because it failed to meet even a minimum threshold of 100,000 new manufacturing jobs that it needed to create to stay in effect.  The truth of the matter is that  U.S. manufacturing jobs are going overseas due to market conditions, not state and federal tax rates.  A marginal tax break of 6% of the value of purchases of equipment used in manufacturing will do extremely little, if anything, to stem the flow of U.S. manufacturing jobs overseas.   

Elimination of $800 Minimum Franchise Tax (MFT) for New Corporations Is Unnecessary, Not Fiscally Prudent ($60 million revenue loss):  Whitman proposes to eliminate the $800 limited liability company (LLC) filing fee that new corporations pay to incorporate as an LLC.  Under current law, the MFT is already waived for a C Corporation’s first two years of existence.  Many LLCs currently pay no additional taxes because they are set up as holding companies or take all of their profit in the form of executive compensation and therefore pay no corporation tax.  The $800 tax, which has been in place since the 1987 federal tax reform conformity legislation, is a nominal and fair amount for the privilege of conducting business as an LLC in California.

Tax Credit for Water-Conservation Technology Would Not Increase Development of Such Technology, Only Serve to Widen State Budget Gap (Unknown Revenue Impact, Estimated at $10-20 million/year minimum):  Investors will invest in water conservation technology if it makes economic sense to do so.  While Whitman has not specified the amount of the tax credit, enacting a state tax credit of say 6% would only marginally reduce the costs of producing such technology and would not have a measurable or significant impact on the development of additional water-conservation technology in California.  The escalating prices of water, especially in Southern California, has created a growing market for this technology.  It does not make sense for the state, at significant cost of lost revenues, to reward entrepreneurs for developing products for which there is a thriving market.  The economic benefits of selling such devices is reward enough.

Increasing State Research & Development (R&D) Tax Credit from 15% to 20% of Qualified Expenses Further Expands an Already Generous Tax Credit at Great Cost to the State ($60 million/yr.):  California already has the most generous research and development credit in the country.  It is so generous, relative to the amount of corporation tax, that many companies already zero out their entire tax liability.  Adding more to that makes no economic sense.   The September 2009 budget agreement permitted the sharing of these credits among affiliates, which means much more income can now be sheltered than ever before through use of the R&D tax credit.  The state corporation tax is ¼ the federal rate, which is why state R&D tax credits are usually so much lower than the 20% federal rate.  If California’s corporation tax rate was anywhere near as high as the federal rate, presumably there would be an argument for raising it, but, as noted, it is disproportionate to the corporate income which is sheltered by the credit.  There has been no evidence presented that the current R&D rate is somehow ineffective in increasing R&D in California.  In order to provide an additional credit, there should presumably be some evidence that this is necessary beyond the generous credit we already have in place.  Otherwise, increasing the credit at the margin merely deprives the state of tax revenues which would be better invest in such things as education, universities, community colleges, transportation, and for other purposes that enhance workforce development and R&D activity in California.    

Establishing Academic Enterprise Zones Near Universities Would Expand the State’s Already Inefficient and Wasteful Enterprise Zone (EZ) Program ($50 to $100 million/yr. annual revenue loss):  The state’s current $300 million EZ program, which provides tax benefits in targeted zones throughout the state, is fraught with waste, fraud, and abuse as well documented by the California Budget Project and others (see California’s Enterprise Zones Miss the Mark).  Unfortunately, all reform attempts have failed in the Legislature thus far.  Expanding a current program that is widely regarded as wasteful, inefficient, and loophole-ridden, is not a smart idea.  Companies, largely specializing in R&D, are already congregated around the state’s premier university campuses.  Most of these firms already take advantage of the state’s generous R&D tax credit.  It makes no economic sense to reward these companies for locating in areas where it already makes economic sense for them to be located. 

Poizner’s Proposed 10% Across-the-Board Tax Cut Serves To Widen State’s $20 Billion Budget Deficit by $8.2 Billion, Misleading “Supply-Side Economics” Math Does Not Pencil Out

Poizner proposes a 10% across-the-board tax cut to the marginal tax rates for the personal income tax, the sales and use tax and the corporation tax at a cost of roughly $8.2 billion in state tax revenue.  Poizner argues that his overall “jobs-package”, which also includes the 50% reduction in the capital gains tax rate, regulatory reform, spending reductions, and a hiring freeze, among other things, would fully close the state’s $20.7 billion budget deficit. 

According to Poizner’s revenue estimates, his total tax package would result in a $3.8 billion revenue gain, as opposed to a $13.7 billion revenue loss as determined by an objective analysis by Kersten Communications—a difference of $17.5 billion or 85% of the state’s current budget deficit.  Assessing the true economic impact of Poizner’s tax cut proposal is key to determining if his deficit cutting proposal pencils out using real math (click here see summary chart of Poizer’s Budget Plan).

It has already been shown that Poizner’s proposed 50% reduction in the state’s capital gains tax would lead to a $5.5 billion state revenue loss without creating any significant economic growth in California. 

The Congressional Budget Office’s (CBO) 2005 study, titled “Analyzing the Economic and Budgetary Effects of a 10% Cut in Income Tax Rates,” analyzed the dynamic effects on economic growth of a hypothetical 10% income tax cut at the federal level and concluded that under various scenarios there would be minimal offsets to the loss of revenue.  “The budgetary impact of the economic changes was estimated to offset between 1% and 22% of the revenue loss from the tax cut over the first five years,” states the report. 

Thus, only under the most optimistic assumptions, a 10% reduction in the state personal income tax could lead to as much as a 25% revenue offset over the first five years—or a $1.2 billion annual offset over the first five years. 

The 10% reduction in the state sales and use tax (SUT) is likely to generate greater revenues than the reduction in the PIT, given the regressive nature of the SUT, and is more likely to be spent by lower-income and moderate income taxpayers. 

But even if it is assumed that 50% of the SUT and corporation tax (CT) cut is returned to the state in offsetting tax revenues—for a total offset of $1.75 billion, even under these overly optimistic assumptions, the cost of Poizner’s total $13.7 billion tax package could be offset by just over $3 billion.  That still leaves a $10.7 billion revenue gap from Poizner’s tax reduction package that is unaccounted for in Poizner’s calculations.

The Poizner campaign needs to explain how his “jobs plan” accounts for this $10.7 billion revenue discrepancy?            

Conclusion

Despite a $20 billion plus looming state budget deficit, both Meg Whitman and Steve Poizner have proposed grandiose tax cut proposals—to the tune of an estimated $13 billion–that the state cannot afford. 

It has been shown that the vast majority of these benefits would accrue to the wealthy, and ultra-rich, which would serve to benefit their own personal fortunes and the fortunes’ of their current and former colleagues and business partners in Silicon Valley.  Specifically, Whitman and Poizner stand to reap millions of dollars in personal tax savings from their proposed reduction in the capital gains tax. 

The proposals would have very marginal impacts on economic development at best and little, if any, tax policy justification for the vast majority of the revenue costs.  Moreover, they would only serve to further increase the state’s ballooning $20 billion budget deficit. 

Voters should not be mislead by their elaborate campaign promises about erasing the state’s budget deficit by using phony revenue estimates, based on faulty supply-side economics.  The real revenue estimates underlying both proposals do not lie.  A $13 billion tax cut means roughly $13 billion less for essential state programs and services such as education, health care, public safety, transportation, and infrastructure.

The California Legislature enacted the modern day initiative process in 1911 as part of a package of reforms that were designed to protect the people of California from the unchecked power of a major corporation.  

Prop. 16, titled the “The Taxpayers Right to Vote Act,” uses the initiative process to solidify the monopoly power of one company at the expense of California citizens. 

Specifically, the measure requires local governments to obtain the approval of 2/3 of voters before providing electricity to new customers or expanding service to new territories if any public funds or bonds are involved.  The measure would make it very difficult for local communities to switch from PG&E and other investor-owned utilities (IOUs) to municipal-owned utilities (MUNIs) which have been proven to have cheaper rates. 

To date, PG&E has been the sole contributor to the Yes on Prop. 16 political action committee (PAC)—contributing a total of $19 million to support the measure as of March 9, 2010.  To view the filing for the Yes on Prop. 16 PAC click here. 

This brief seeks to summarize what is wrong with Prop. 16 and show how the Prop. 16 uses the initiative process to do the exact opposite of what it was designed to do. 

Prop. 16 Supporters State Their Case for the Measure, but Lawmakers Remain Unconvinced   

California lawmakers and energy experts blasted Prop. 16 at a legislative hearing held at the Capitol last month with many participants using harsh and colorful language to describe the measure.

Ed Bedwell, a senior director for PG&E, said PG&E introduced the measure to give voters the “right to decide” and believes that the higher 2/3 vote requirement is merited if public funds are at stake. 

Lawmakers questioned Bedwell about why PG&E seemed to be all alone in supporting the measure to which he replied “I don’t know that we’re all alone,” noting that SoCal Edison and SDG&E are also potential supporters. 

Marc Burgat, vice president of government relations for the California Chamber of Commerce, said the Chamber supports Prop. 16 because it would provide a “higher level of scrutiny” for the use of taxpayer money.

Michelle Pielsticker, vice president and general counsel for the California Taxpayers Association (Cal-Tax), said that Cal-Tax supports Prop. 16 because they welcome the right of taxpayers to decide about the use of such a large amount of taxpayer funds which could lead to higher taxes and fees. 

“I think this is a terrible initiative,” said Assemblymember Jared Huffman (D), who noted that the initiative creates a double standard by requiring a majority vote for PGE&E to annex new territory but requiring a 2/3 vote for a MUNI to annex a new territory.

Assemblymember Mark Leno (D) was highly critical of the measure and said he thought it was “astounding” that the California Chamber of Commerce would support a measure that would limit competition in electricity markets.   

John L. Geesman, former chair of the California Energy Commission, said he had never seen such an overstepping of corporate power and urged lawmakers to “do what you can to put this mongrel down.”

City and County Supervisor Ross Mirkarimi said he was amazed at the “brazen arrogance” of PG&E in submitting Prop. 16 and compared the company to the tobacco industry in the 1990s when they said “smoking is good for you.”

Summary of Arguments against Prop. 16

Opponents of Prop. 16 have raised numerous arguments against the measure.  The following is a summary of arguments against the measure: 

Prop. 16 Will Limit Competition in California’s Retail Electricity Market and Serve to Further Solidify PG&E’s Monopoly:  Requiring a 2/3 vote of the people to switch to a MUNI provider will make it very difficult for ratepayers to get out from under PG&E’s control of local electricity markets.  Such a vote requirement will make it much easier for PG&E to run successful opposition campaigns against such local measures—in effect allowing 1/3 of the population to veto a decision that is likely to be in the public’s interest.  The California Association of Realtors voted to oppose Prop. 16, noting that Prop. 16 “is aimed at stifling competition by privately owned utility companies and could result in higher utility bills for homeowners,” according to their website.  A Sacramento Bee editorial stated “in recent years PG&E has spent tens of millions of dollars to fend off efforts by ratepayers in San Joaquin, San Francisco, Marin and Yolo counties who’ve tried to form their own public utilities or annex themselves to public power agencies…the constitutional amendment makes it virtually impossible for any jurisdiction to escape the PG&E monopoly.”

Prop. 16 Will Serve To Lock In Higher PG&E Electricity Rates for Millions of Californians:  There is an overwhelming body of evidence which proves that PG&E’s electricity rates are higher than MUNIs.  Electricity rates are affected by season, usage, and area, but here is a summary of some data comparing PG&E rates to other California MUNIs: 

–Chart #1: Compares the average electricity prices of the state’s major investor owned utilities (IOUs) and municipal-owned utilities (MUNIs), including PG&E (IOU), Southern California Edison (IOU), San Diego Gas & Electric, Los Angeles Department of Water and Power (MUNI), and the Sacramento Municipal Utility District (MUNI).

–Chart #2: Compares the average residential electric bill (for 750 kWh) for PG&E (IOU), Southern California Edison (IOU), San Diego Gas & Electric, Los Angeles Department of Water and Power (MUNI), and the Sacramento Municipal Utility District (MUNI).

–Chart #3:  Compares the average retail electricity rates by class for 2008 ($/kWh) for PG&E versus the average of IOUs and MUNIs in California.

PG&E’s $35 million Plus Campaign to Pass Prop. 16 Will be Funded with Ratepayer Money, and Likely Lead to Higher Electricity Rates for Existing Customers:  “It ought to be illegal to take ratepayer money and use it against ratepayers,” said John L. Geesman, former chair of the California Energy Commission at the legislative hearing on Prop. 16.  Geesman noted that media reports have indicated that PG&E is prepared to spend $35 million or more to pass Prop. 16.  MUNI providers, on the other hand, are not allowed to use ratepayer money for political purposes.  PG&E has proposed an average 8.3% increase in residential rates for 2011, and a corresponding 3.3% to 5.4% increase for business customers, according to the Sacramento Bee.  The ballot argument opposing Prop. 16 states that PG&E’s proposed rates increase equates to a $5 billion rate increase for California customers.   

Prop. 16 Will Have a “Chilling” Effect on the California Economy:  Several contributors at the Prop. 16 hearing said the measure would have a “chilling effect” on the state’s economy by increasing retail electricity rates for residential, industrial, and commercial users, including small businesses and large corporations.  Paul Hauser, director of the Redding Electric Utility, said PG&E’s rate structure would require an additional $40 million to be paid in his county, which would come at a terrible time for ratepayers who are struggling with an 11% unemployment rate.  Michael Boccadoro, executive director of the Agricultural Energy Consumers Association, and Geesman also noted that Prop. 16 would have a “chilling effect” on California’s economy during these tough economic times. 

Prop. 16 Will Serve to Reduce the Use of Renewable Power and Is Bad for the Environment:  The Sierra Club has voted to oppose Prop. 16 because it requires a 2/3 supermajority vote before communities can purchase clean power or power from renewable resources.  Prop. 16 “is a dagger aimed directly at a movement to enable municipalities to offer renewable green power to their residents in competition with private utilities,” said Michael Hiltzik, a columnist for the Los Angeles Times.  PG&E provides less renewable power as a percentage of total sales than it did in 2002, while MUNI providers are well known for their development and use of renewable resources.  “It is unacceptable for a company that is falling behind in meeting state adopted goals for clean energy to impede the efforts of others who would attain those goals through innovative means,” wrote Senate Pro Tem Darrell Steinberg and seven other state Senators in a letter opposing Prop. 16.   

Prop. 16 Drafting Error May Require a 2/3 Vote of Electorate for Public Agencies to Provide Power to New Subdivisions or Businesses:  “Attorneys for the Northern California Power Agency say the way the initiative is drafted may prevent public agencies from providing power to a new subdivision, apartment building or business built within their own jurisdictions without first getting a 2/3 vote of approval from the public,” states the Sacramento Bee.  This drafting error was a major reason why the California Association of Realtors voted to oppose Prop. 16.   

History Shows that Prop. 16 Uses the Initiative Process for the Exact Opposite of What It Was Designed for

The California Legislature enacted the modern day initiative process in 1911 as part of a package of reforms that were designed to protect the people of California from the unchecked power of the Southern Pacific Railroad Company.

In the late 1800s, Southern Pacific created a political machine, dubbed the “Big Four,” which rivaled New York’s Tammany Hall.  The “Big Four” included Leland Stanford, California’s eighth Governor, and reigned strong for nearly 40 years until Republican Governor Hiram Johnson succeeded in beating back the Southern Pacific political machine in 1911—marking the dawning of the Progressive Era.  

Southern Pacific was organized right after the Civil War in 1865 but had established monopoly control of shipping goods in and out of California by 1870.  Southern Pacific had the power to isolate opponents by withholding goods and controlling shipping rates.  The company charged farmers exorbitant rates to ship goods, controlled party politics, and threatened those who dared to get in their way, including journalists, according to historian Spencer Olin.    

State lawmakers were given free train tickets from Sacramento to San Francisco and their hotel bills were sent directly to the railroad company.  The “Big Four” spent at least $3 million influencing legislation which was a fortune at the time. 

Author Frank Norris referred to Southern Pacific as the “Octopus”–a metaphor for the company’s vast network of corruption and unlimited influence.  “I saw the Octopus nominate and elect Governors, U.S. Senators, judges….,” wrote Thomas Storke, a long-time publisher of the Santa Barbara News-Press. 

Southern Pacific controlled both political parties through their Political Bureau.  “Southern Pacific maintained an expert political manager…to see that the right men were chosen…,” according to Norris.  Prior to the reforms of 1911, the parties elected their candidates through the convention process which made it easy for the machine to control which candidates were nominated.  The direct primary, enacted in 1911, discontinued the practice of parties electing candidates through conventions.   

“Scarcely a vote was cast in either house that did not show some aspect of Southern Pacific ownership, petty vengeance, or legislative blackmail,” remarked one Republican State Senator in 1907. 

By the turn of the century there was a general belief that Southern Pacific as well as other corporations had overreached their bounds—through political corruption and monopoly control of markets.  Reforms were discussed that sought to give power back to the people.  Southern Pacific was “the greatest single influence operating in California politics,” according to Spencer Olin.      

Both parties nominated progressives in 1911.  Republican Hiram Johnson beat his Democratic opponent rival Theodore Bell.  As Governor, Johnson quickly made good on his campaign promises—even mentioning Southern Pacific four times in his inaugural address. 

Johnson spearheaded the effort to pass a series of progressive reforms through the California Legislature.  Johnson asked the Legislature:  “How best can we arm the people to protect themselves hereafter?”  His answer was a package of major constitutional reforms that included the initiative, referendum, and recall processes that were passed by the California Legislature in 1911, according to historian Gladwin Hill. 

The constitutional amendments were supported by both Republicans and Democrats; the direct democracy legislation passed the Assembly on a vote of 106 to 1.  President Theodore Roosevelt described Johnson’s reforms as “the most comprehensive legislation ever passed at a single session of any American legislature.”

Conclusion

California’s initiative process was designed to serve as an added check to corporate greed and corruption by giving California voters a direct way to participate in the democratic process. 

On its face, Prop. 16 may appear to some voters to benefit them by setting a higher bar, namely requiring a new 2/3 vote requirement for the use of taxpayer funds, however, a closer examination of the measure reveals that Prop. 16 is not really about protecting taxpayers at all.      

PG&E, through Prop. 16, is trying to use the California initiative process to further solidify their monopoly of regional electricity markets and advance their own narrow corporate interests at the expense of all Californians.

Hopefully California voters will see through this veiled attempt to use the initiative process against the public interest. 

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California has received approximately $32.7 billion of the estimated $85 billion in ARRA benefits that will eventually be allocated to California, but only 54% of the money awarded has been spent.  The chart below shows California’s estimated allocation, the amounts awarded and expended, and the percentage of the state’s award that has been expended by spending category. (Note:  the remainder of California’s $85 billion in benefits will come in the form of tax benefits)

Nationwide, just over one quarter of the ARRA funds have been dispersed by federal agencies, including $92.8 billion of the $288 billion total for tax benefits, $73.3 billion of the $275 billion total for contracts, grants, and loans, and $102.8 billion of the $224 billion total for entitlements, according to the federal government.   

The funds are dispersed among 28 federal agencies, with each agency determining how to allocate their funds to states and local agencies and directly to schools, hospitals, contractors, or other organizations.  Recipients or sub-recipients are federally mandated by Section 1512 of the act to report jobs created or retained through a variety of different formulas.

The California Budget Project (CBP) has recently completed its own analysis of the impact and use of ARRA funds in California.  The CBP analysis is available by clicking here. 

Some California Departments Risk Losing ARRA Funds

The Joint Legislative Audit Committee held a hearing in January to examine the expenditure of stimulus dollars in California.  The State Auditor’s office found that the California Energy Commission (CEC) has been alarmingly slow in spending stimulus money, with the CEC only having contracted out $40 million of the $226 million in stimulus dollars awarded.  Furthermore, none of the money contracted to sub-recipients has been spent. 

“The Energy Commission continues its slow pace in implementing the necessary processes to obligate the Recovery Act funds, the state is at risk of either having the funds redirected by the U.S. Department of Energy or awarding them in a compressed period of time without first establishing an adequate system of internal controls, which increases the risk that Recovery Act funds will be misused,” stated State Auditor Elaine Howle in a letter to the Governor. 

State Auditor Howle has also noted that the California Department of Community Services and Development is at risk to lose $93 million in ARRA funding if important federal milestones are not met by September.  California was awarded $186 million under the Department of Energy’s Weatherization Program.

Despite being awarded the first installment of $93 million in June 2009, as of January 2010, none of these funds had been dispersed.  “Delays in program implementation make it unlikely that Community Services will attain the performance milestones,” states a report by the State Auditor’s Office, which notes that it seems unlikely that California will receive its remaining $93 million ARRA allocation. 

One significant milestone for meeting federal guidelines is that the state must weatherize 30 percent of 50,080 (15,024) homes in the state’s approval plan by September, according to the report.  To read the Audit by the Bureau of State Audits click here.  

Summary of ARRA Spending in California

KC Fiscal Focus has compiled a summary of federal stimulus money allocated to California.  The list of projects below is not intended to be comprehensive in nature and was produced from the best available information. 

$2.3 Billion for High Speed Rail – In January the Governor announced that California had received $2.3 billion of the $8 billion in ARRA funding that Congress allocated for high-speed intercity rail.

California received more funding than any other state.  The Governor credited the award to California being further along in planning than any other state receiving federal funding.  California’s high-speed rail system will stretch over 800 miles, from Sacramento to San Diego, and will be capable of travelling 200 plus miles per hour.  Construction of the project will likely start in 2011 and is estimated to create 160,000 jobs in construction and operations, according to the California High Speed Rail Authority.  Once completed it is estimated that California’s high-speed rail will create 450,000 jobs. 

California’s high-speed rail will operate without an operational subsidy.  The project’s planning and engineering phases have been ongoing for over 13 years.  In 2008, voters passed Proposition 1A, a $9.95 billion high-speed rail bond act.  To learn more click here.   

Governor Signs Race to the Top Application for $1 Billion in Potential Federal Education Funding – Last July, President Obama and Education Secretary Duncan announced the Race to the Top Initiative – a competitive national discretionary federal grant program for education.  At the time California was ineligible for the program.  Last August, Governor Schwarzenegger proposed reforms, which were introduced as SBX5 1, to make California eligible.  By January, the Legislature had passed a number of reforms that made California eligible for Race to the Top funds. 

In January, the Governor signed California’s Race to the Top application for $4.35 billion in total federal funding available under the race to the top initiative.  A successful application could be worth as much as $1 billion for California, according to the Governor’s Office.  For a list of chaptered legislation click here.  Recent reports indicate that California’s application for Phase #1 of the Race to the Top funding was rejected by federal officials but the state is still eligible to apply for Phase#2 of the funding.     

$2 Billion in Funding for Highways – Last September, the Governor announced that California has obligated $2 billion in federal funding to transportation projects in the state.  To view a list of 620 projects that have been fully obligated in California click here.

$800 Million for Affordable Housing Projects – In January, State Treasurer Bill Lockyer announced the final distribution of $800 million in stimulus funds for affordable housing projects across the state.  The funds are administered by the California Tax Credit Allocation Committee (CTCAC), chaired by Treasurer Lockyer.  The funds have been used to help build 9,600 affordable units and to create 24,000 jobs in 34 counties, according to the Treasurer’s Office.  

$700 Million for Water Quality Improvement Projects – Last October, the Governor announced that California had received $717 million for 160 water quality improvement projects across the state.  For a full list of water projects county-by-county click here. 

$535 Million Federal Loan for Construction of New Solar Energy Plant – Last September, the Department of Energy finalized a $535 million loan to Solyndra Inc, a solar panel manufacturing company based in Fremont, California. Construction of the new solar panel plant is estimated to create 3,000 jobs and eventually contribute to 1,000 employed directly or indirectly by the company.

$400 Million to Help Unemployed Californians – Last April, California received $415 million in federal ARRA funding to assist California’s unemployed.  The amount doubles the amount of Workforce Investment Act funds the federal government allocates to California annually. The funds are distributed by the Employment Development Department.  

$318 Million to Neighborhoods Hit by Foreclosures – In January, the Governor announced that $318 million had been awarded to California under the federal Neighborhood Stabilization Program (NSP).  The funds can be used to acquire land and property, demolish or rehabilitate abandoned properties, and offer down payment and closing cost assistance to low or middle income homebuyers.  For a list of non-profit and local government agency recipients click here.

$175 Million for Smart Grid Energy Projects - Last November, the Governor announced that California received $175 million from federal funds from the U.S. Department of Energy’s Smart Grid grant program. “I applaud President Obama for investing in a national smart energy grid that will help reduce electricity demand and increase accessibility to clean, renewable energy sources like wind and solar around the nation,” the Governor said.  For a full list of recipients statewide click here. 

$170 Million for Transit Operators – Last July, the U.S. Department of Transportation’s Federal Transit Administration approved $170 million in grant funding to 11 California transit operators.  For a full list of operators and entities that received grants click here.

$150 Million To Prevent Homelessness – Last July, California received $150 million for 70 communities through the federal Housing and Urban Development Department.  These funds must be used for short or medium term rental assistance, housing relocation, and stabilization services including housing services and credit repair, among other things, as designated by the federal government.

$75 Million for Clean Energy Training Program – Last July, the Governor announced the Clean Energy Workforce Program that would train or retrain 20,000 workers to build a capable workforce to meet California’s climate change goals, and to better prepare California’s workforce for the economy of the 21^st century.  The investment of $75 million marks the nation’s largest green training program.  

$71.6 Million for Federal Education Technology – Last August, State Superintendent of Public Instruction Jack O’Connell announced the California received $71.6 million from the Department of Education to integrate technology into instructional development.

$68 Million for Weatherization of Homes for Low-Income Families – Last October, the Governor announced that California had been awarded $68 million through the U.S. Department of Energy for California’s low-income Recovery Act weatherization program.  Families that are 75 percent below the state median income are eligible.  The funds will help nearly 50,000 families decrease their energy bill annually on average by $350, according to the Governor’s office.  For a full list of recipients click here.

$51 Million for Clean Water Projects – The State Water Resources Control Board has announced $83 million in funding for clean water projects of which $51 million came from ARRA funding.  The funds are in the form of grants and zero interest and low-interest loans, according to the Board.  For a list of recipients click here.

$50 Million for Emergency Preparedness – Last September, California received $50 million for emergency preparedness from the ARRA.  Grants were made directly to local entities by the Department of Homeland Security, according to the Governor’s office.  For a full list of local government recipients click here.

$34 Million for Transit Grants – Last September, California received $34 million in ARRA transit grants.  These funds are federally designated to promote public transportation in rural areas.  The grants are distributed through Caltrans to 77 rural transit agencies for 141 projects statewide.

$31.1 Million for Coastal Restoration Projects – Last June, the U.S. Department of Commerce Secretary Cynthia Bryant announced $167 million in restoration projects in 22 states and two territories.  California received $31.1 million for nine projects.  For a full list of projects statewide click here.

$26.5 Million in Clean-Air Grants for Southern California – Last October the Governor announced that Southern California had been awarded $26.5 million in clean air grants.  These grants will be used to retrofit diesel engine vehicles, in the Southern California air basin, which includes Los Angeles, Orange, San Bernardino, and Riverside counties.  

$25 Million to “Green” State Buildings – Last October, the Governor announced $25 million to retrofit state buildings to make them more energy efficient.  The Department of General Services will administer the funding, which was awarded by the California Energy Commission.  In 2004, Governor Schwarzenegger issued California’s Green Building Initiative.  The initiative requires the state to reduce grid-based energy use by 20 percent by 2015, according to the Governor’s office. 

$17.8 Million for Data Centers and Telecommunications Industry – In January the California Recovery Task Force announced that California companies were awarded 17.8 million to improve efficiency in data processing, data storage, and telecommunications, according to the Governor’s office.  For a full list of ARRA recipients click here.

$15.5 Million to Clean Contaminated Tank Sites – Last July, the State Water Resources Control Board received $15.6 million for the Environmental Protection Agency to clean up petroleum contamination from leaking underground storage tanks at abandoned or orphaned properties.  There are approximately 150 orphaned properties in California, most of which were former gas stations, according to the Board.

$11 Million for Jobs in Growing Industries – In January the California Recovery Task Force announced that California had received $10.7 million in federal economic stimulus to provide 2,100 Californians with training in skills in a wide variety of industries.  Full a full list of recipients click here.

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Proposition 13: Technical, Non-Controversial Property-Tax Exclusion for Seismic Retrofitting

Summary:  This measure was placed on the ballot with unanimous support of the California Legislature with the passage of SCA 4 (Ashburn, 2008).  The measure revises the 15-year property tax exclusion for seismic safety improvements made to unreinforced masonry buildings.  To view the language of the measure click here.

The author states, “The purpose of SCA 4, and its companion bill SB 111, is to ensure equal treatment of property owners who incorporate seismic safety improvements when they remodel an existing building regardless of the type of building.  Currently, two types of property owners who install seismic safety technologies are treated differently for property tax purposes.  One receives an exclusion from reassessment, and the other, the owner of an unreinforced masonry structure, receives only a 15-year exclusion from reassessment. This is problematic, particularly since the older unreinforced masonry buildings are in greatest need of retrofitting.  These proposals correct this flaw in the law.”

Fiscal Impact: The State Board of Equalization (BOE) would incur minor absorbable costs related to informing and advising local county assessors, the public, and staff of the law changes. This measure would have a negligible revenue impact. (Source: BOE)  

Proponents: California Assessor’s Association.

Opponents: None. 

PAC: No committees have been formed to support or oppose the ballot measure.

Proposition 14: The Top Two Candidates Open Primaries.

Summary: This measure was requested by Senator Abel Maldonado (R) as a condition of gaining his vote to break the 2009 impasse over the state budget. This measure proposes a constitutional amendment to voters that would create a “top two” primary system in California for elective state offices and for Congress.  Under this system voters in the primary election would receive a ballot that lists all candidates for a given office and would be free to vote for any candidate, regardless of the partisan affiliation of the voter or of the candidate.  The two candidates who receive the largest number of votes in the primary election would move on to the general election–even if one voter receives more than 50% of the vote in the primary election.  Under such a system, it would be possible that the two candidates who appear on the general election ballot could be members of the same political party.  Variations of the “top two” primary system are used in Washington and Louisiana.  To view the floor analysis for the measure click here.  To view the language of the measure click here.

Fiscal Impact: Unknown 

Proponent Argument:  Proponents assert that Proposition 14 will help reduce partisan gridlock by ensuring that more moderates are elected to the Legislature and Congress.  Proposition 14 would also give independent voters an equal voice in primary elections. “The best part of the open primary is that it would lessen the influence of the major parties, which are now under control of the special interests.” (Fresno Bee, 2/22/09.)

Opponent Argument: Opponents argue that Prop. 14 will increase the cost of elections and will not help moderates get elected.

Proponents: Senator Abel Maldonado, Governor Arnold Schwarzenegger, Steve Westly, and the California Chamber of Commerce are supporters of this measure, among others. The largest contributors to the Yes on 14, “Californians for an Open Primary,” are Hewlett-Packard $100,000, California Association of Health Underwriters PAC $100,000, and Blue Shield of California $50,000.  The political action committee (PAC) in support of Prop. 14 had just over $137,000 as of February 22, 2010.   

Opponents:  The chairs of both the California Republican Party and California Democratic Party, among others. The registered opposition PAC named “Protect the Democratic Primary – Say No To the Open Primary” has not electronically filed with the Secretary of State as of February 22, 2010.

Proposition 15: Political Reform Act of 1974: California Fair Elections Act of 2008.

Summary: This measure was placed on the ballot by the California Legislature on a party line vote in 2008 with the passage of AB 583 (Hancock).  The Governor signed the measure.  The measure would create a pilot project whereby candidates for Secretary of State will be eligible to receive public campaign funds for the 2014 and 2018 elections if they agree not to accept most private contributions and if they collect a specified number of $5 contributions.   To view the supporters’ website for the measure click here.  To view the floor analyses of the measure click here.  To view the language of the measure click here.  

Fiscal Impact: According to the Senate Appropriations Committee: 1) Anticipated special fund revenue between $6 million and $7 million during each four-year election cycle, with all public campaign financing and administrative expenses paid for by that special fund revenue. 2) General Fund costs of approximately $480,000 in 2009-10 to include the provisions of this measure on the June 2010 primary election ballot.  The special fund revenue would be raised through a $700 fee every two years on lobbyists and lobbyist employers and a newly-created voluntary tax check-off that allows taxpayers to donate to the special fund on their income tax returns. 

Proponent Argument:  According to the author, “The current campaign finance system is widely decried across the political spectrum.  It requires elected officials and candidates to devote substantial amount of time to incessant fundraising diminishing the time which candidates have to communicate with voters.  The ever-increasing amounts spent in campaigning are a substantial hurdle that diminish the free speech rights and create a pressure that focuses campaigns on fundraising rather than emphasizing competition in the marketplace of ideas.  The increasing influence of money and special interests in campaigns is one of the biggest challenges facing our democratic system.  As legislators’ time spent on fundraising has increased, both the confidence in elected officials and voter participation has decreased.  Providing public funds for campaigns is a voluntary alternative form of financing which provides candidates with the means to run a competitive, issues-based campaign on a level playing field.  Experience in other states shows that Clean Money holds down spiraling campaign costs while increasing voter participation in the process.”

Opponent Argument:  NA

Proponents: There are three registered PACs in support of this measure: California Common Cause Fair Elections Committee, Californians for Fair Elections Sponsored by California Clean Money Action Fund, and the California Clean Money Action Fund.  Californians for Fair Elections Sponsored by California Clean Money Action Fund is the only PAC of the three that has filed, according to the Secretary of State.  The largest contributor is the California Nurses Association $100,000.

Other supporters of this measure include: League of Women Voters of California, Sierra Club, and a number of elected officials, among others.

Opponents:  There was no registered opposition PAC as of February 22, 2010.

Proposition 16: New Two-Thirds Vote Requirement for Local Public Electricity Providers, “Taxpayers Right to Vote Act.”

Initiative Constitutional Amendment: Qualified January 12, 2010.

Summary:  Requires local governments to obtain the approval of two-thirds of the voters before providing electricity to new customers or expanding such service to new territories if any public funds or bonds are involved. Requires same two-thirds vote to provide electricity through a community choice program if any public funds or bonds are involved. Requires the vote to be in the jurisdiction of the local government and any new territory to be served. Provides exceptions to the jurisdiction of the voting requirements for a limited number of identified projects (Source: California Secretary of State).

Fiscal Impact: Summary of impact on state and local governments by Legislative Analyst and Director of Finance: Unknown impact on state and local government costs and revenues, depending on future voter decisions, due to the measure’s potential effects on electricity rates and publicly owned utility operations.

Proponent Argument: The Taxpayers Right to Vote Initiative does one thing: It requires voter approval before local governments can spend public money or incur public debt to get into the electricity business. And like most other major local special tax and bond decisions in California, this would require two-thirds voter approval. Currently, local governments in California can take over private electric businesses without letting local voters have the final say in the decision. This measure establishes clear voter approval requirements before local governments can go into the retail electricity business (Source:  Yes on 16 Website).

Opposition Argument: PG&E sponsored this initiative to try to prevent local efforts to switch from private investor-owned utilities, such as PG&E, to public providers which may be a better deal for taxpayers.  The Sacramento Bee editorial board called the measure a “power grab” that would “protect the investor-owned utility from dissatisfied customers angry about bad service and high costs.”  “In recent years PG&E has spent tens of millions of dollars to fend off efforts by ratepayers in San Joaquin, San Francisco, Marin and Yolo counties who’ve tried to form their own public utilities or annex themselves to public power agencies…the constitutional amendment makes it virtually impossible for any jurisdiction to escape the PG&E monopoly,” states the Bee editorial which is available by clicking here.  To view the text of the measure click here. 

Proponents: Despite the “Yes on 16” PAC being billed as a coalition of taxpayers, environmentalists, renewable energy, and business and labor, PG&E was the only contributor to the PAC as of February 17, 2010. PG&E has contributed over $19 million to “Yes on 16” PAC to date.  PG&E is likely to spend $25 to $35 million on the campaign, according to the Oakland Tribune. The California Taxpayers Association and the California Chamber of Commerce are also in support of the measure.  

Opponents: The “No on 16” PAC is sponsored by the Utility Reform Network (TURN), a consumer watchdog and consumer rights group. The Sierra Club, City of Palo Alto, and SMUD all oppose this measure. In December Senator Darrell Steinberg along with eight of his colleagues sent an opposition letter to PG&E CEO Peter Darbee criticizing the measure. The letter ends by asking PG&E to “refrain from pursuing this initiative.” 

Proposition 17: Allows Auto Insurance Companies to Base Their Prices in Part on a Driver’s History of Insurance Coverage.

Summary: This initiative is sponsored by Mercury Insurance.  The measure changes current law to permit insurance companies to offer a discount to drivers who have continuously maintained their auto insurance coverage and establishes that lapses in coverage due to nonpayment of premiums may prevent a driver from qualifying for the discount.  (Source:  California Secretary of State)

Fiscal Impact: Summary fiscal impact on state and local governments by Legislative Analyst and Director of Finance: This measure would probably have no significant fiscal effect on state and local governments.

Proponent Argument:  Under current California insurance laws, drivers who have been insured with the same insurance company are eligible for a “continuous coverage” discount. But, an inconsistency in the law prohibits drivers from taking this continuous coverage discount with them if they switch insurers. Proposition 17 corrects that inconsistency and ensures that all drivers who continually maintain their automobile insurance are eligible for this discount even if they change insurance companies.  Proponents assert that the measure will provide more choice and more competition for California consumers by allowing them to shop around for the lowest auto insurance rates without being punished if they want to change insurers. (Source:  Yes on Proposition 17 Website)

Opponent Argument:  The Campaign for Consumer Rights has already challenged this measure in court.  The group, primarily sponsored by Consumer Watchdog.org, has criticized the measure for trying to “trick voters into paying higher auto insurance premiums.”  The groups says the measure would “surcharge” drivers who have had a lapse in car insurance coverage for virtually any reason during the past five years, including people such as soldiers who did not need insurance.  “The measure would gut a provision of the 1988 insurance reform measure Prop. 103, which prohibits companies from raising rates on people because they did not have auto insurance in the past,” states a press release by the Campaign for Consumer Rights.  To visit the website against the measure click here:  www.stopthesurcharge.org.  To view the text of the measure click here. 

In its analysis of Proposition 17, the Department of Insurance said, “If an insurer offers a continuous coverage discount for some drivers it will result in a surcharge for other drivers.  This is because automobile insurance discounts and surcharges must offset one another.”   

Proponents: Mercury General has contributed over $3.5 million to Californians for Fair Auto Insurance Rates and Mercury Insurance and affiliates, a PAC for Yes on Proposition 17.  The California Chamber of Commerce and a number of a number of taxpayer groups support this measure.    

Opponents:  The opposition PAC is funded by Campaign for Consumer Rights.  The PAC has just over $96,000 cash on hand.  USSA, an organization that offers military veterans and military families auto insurance, opposes Proposition 17.

Summary of November 2010 Ballot Measures

Changes California Law to Legalize Marijuana and Allow It to Be Regulated and Taxed, “Regulate, Control and Tax Cannabis Act of 2010.”

Status:  Signatures pending verification.

Summary: Allows persons 21 years old or older to possess, cultivate, or transport marijuana for personal use. Permits local governments to regulate and tax commercial production and sale of marijuana to people 21 years old or older. Prohibits persons from possessing marijuana on school grounds, using it in public, smoking it while minors are present, or providing it to anyone under 21 years old. Maintains current prohibitions against driving while impaired.

Fiscal Impact: Summary of fiscal impact on state and local governments by Legislative Analyst and Director of Finance: Savings of up to several tens of millions of dollars annually to state and local governments on the costs of incarcerating and supervising certain marijuana offenders. Unknown but potentially major tax, fee, and benefit assessment revenues to state and local government related to the production and sale of marijuana products.

Safe, Clean, and Reliable Drinking Water Supply Act of 2010

Summary: Governor Schwarzenegger and state lawmakers successfully crafted a plan to meet California’s growing water challenges. A comprehensive deal was agreed to, representing major steps towards ensuring a reliable water supply for future generations, as well as restoring the Sacramento-San Joaquin Delta and other ecologically sensitive areas. The plan is comprised of four policy bills and an $11.14 billion bond act.

The Safe, Clean, and Reliable Drinking Water Supply Act of 2010 is an $11.14 billion general obligation bond proposal that would provide funding for California’s aging water infrastructure and for projects and programs to address the ecosystem and water supply issues in California. The bond is comprised of seven categories, including drought relief, water supply reliability, Delta sustainability, statewide water system operational improvement, conservation and watershed protection, groundwater protection and water quality, and water recycling and water conservation. (Source:  California Department of Water Resources).  Recent polling indicates that this measure is in serious trouble.

Fiscal Impact: Provides for a $11.14 billion general obligation bond.

Accompanying Legislation

SBX7 1 (Simitian; D-Palo Alto): Creates a seven-member council to develop a comprehensive management plan for the Delta by 2012.

SBX7 6 (Steinberg; D-Sacramento): Requires water agencies to report water levels in underground basins or risk losing grants for non-compliance.

SBX7 7 (Steinberg): Contains conservation provisions, including a 20 percent reduction in per capita water use for urban water agencies statewide by 2020, with water agencies not meeting the targets being ineligible for state grants and loans. Not all water districts would have to meet the requirement. Farm water suppliers would have to submit efficiency plans.

SBX7 8 (Steinberg): Gives state water regulators more power to police illegal water diversions. Specific penalties are to be added later by the Legislature.

How the Bond Money Will Be Spent:  Summary of Water Bond Projects

Drought Relief – $455 million. This funding would be available for local and regional drought relief projects that reduce the impacts of drought conditions, including the impacts of reductions to Delta diversions. Projects will include water conservation and water use efficiency projects, water recycling, groundwater cleanup and other water supply reliability projects including local surface water storage projects that provide emergency water supplies and water supply reliability in drought conditions.

Delta Sustainability – $2.25 billion. This funding would provide funds for projects to assist in maintaining and restoring the Delta as an important ecosystem. These investments will help to reduce the seismic risk to water supplies derived from the Delta, protect drinking water quality and reduce conflict between water management and environmental protection.

Water Supply Reliability – $1.4 billion. This funding would provide funds for water supply projects in 12 regions throughout the state and would also be available for local and regional conveyance projects that support regional and interregional connectivity and water management.

Statewide Water System Operational Improvement – $3 billion. This funding would be dedicated to the development of additional water storage, which, when combined with other water management and flood system improvement investments being made, can increase reliability and offset the climate change impacts of reduced snow pack and higher flood flows. Eligible projects for this funding include surface storage projects identified in the CALFED Bay-Delta Record of Decision; groundwater storage projects and groundwater contamination prevention or remediation projects that provide water storage benefits; conjunctive use and reservoir reoperation projects; and local and regional surface storage projects that improve the operation of water systems in the state and provide public benefits.

The bond act provides that water suppliers who would benefit from new storage pay their share of the total costs of the project while the public benefits of new water storage can be paid for by the bond act.

Groundwater Protection and Water Quality – $1 billion. To protect public health, this funding would be available for projects to prevent or reduce the contamination of groundwater that serves as a source of drinking water. 

Water Recycling and Water Conservation – $1.25 billion. This funding would be available for water recycling and advanced treatment technology projects that recycle water or that remove salts and contaminants from water sources. Funds will also be available for urban and agricultural water conservation and water use efficiency plans, projects, and programs.

Conservation and Watershed Protection – $1.79 billion. This funding would be available, through a 50-50 cost share program, for ecosystem and watershed protection and restoration projects in 21 watersheds throughout the state, including coastal protection, wildlife refuge enhancement, fuel treatment and forest restoration, fish passage improvement and obsolete dam removal.

Proponents:  Association of California Water Agencies, California Chamber of Commerce, California Cotton Growers Association, California Groundwater Coalition, California Farm Bureau, Friant Water Authority, Kern County Water Agency, Contra Costa Water District, Metropolitan Water District of Southern California, State Building and Construction Trade Council of California, Wateruse Association, Westlands Water District.

Opponents: California Rural Legal Assistance Foundation, California School Employees Association, Environmental Justice Coalition for Water, Friends of the River, Planning and Conservation League, Restore the Delta, Service Employees International Union, Sierra Club California, Yolo County Board of Supervisors.

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Last month the Governor convened a special emergency session of the Legislature to address the state’s budget situation but the relative mildness of the state’s cash crunch situation this spring, as opposed to last year at this time, suggests that the real budget battle will begin later in the spring. 

Under Proposition 58, the Governor has the power to declare a fiscal emergency and call a special session of the Legislature to address the situation, which he did with the release of his budget last month. 

According to an analysis by the Assembly Budget Committee, “Under this Special Session the Governor may submit legislation to address the fiscal emergency and has done so with his proposed amendments to the 2009-10 Budget and his proposed 2010-11 Budget.  The Legislature is required to take action to address the problem within 45 days of the special session being called (by Monday February 22^nd).”

The Legislature is currently in the process of holding budget hearings on the various aspects of the Governor’s January budget proposal.  A chart developed by the Controller’s office shows that the Governor’s January budget proposal is far from balanced and projects the emergence of a $7 billion plus budget deficit by December 2010 if the Governor’s 2010-11 budget proposal is fully enacted.  

Controller Chiang and Legislative Analyst Taylor Advise Legislature to Act Soon To Avert July Cash Crisis  

California Controller John Chiang and Legislative Analyst Mac Taylor testified before the Assembly Budget Committee on February 3^rd to discuss Prop. 58 requirements and the state’s cash flow crisis.  To view a video of the hearing click here. 

“What do you need to do now?  You have an obligation to pass some bill,” Taylor said, noting that Prop. 58 does not specify a specific criteria for what action the Legislature has to take (i.e. close the full budget deficit). 

Taylor said the special session can still go on after February 22, but the Legislature cannot take action on other legislative items until they pass something. He said the only real deadline they have in late February is if they want to pass a proposal in time to place it on the June ballot. 

Taylor recommended that the Legislature enact a deficit reduction plan by sometime in March because budget solutions will take three months to implement to obtain the full amount of revenue savings in the 2010-11 budget year which begins in July.  

Absent corrective action, Chiang said the state will run below its responsible $2.5 billion cash cushion sometime in late February and will run out of cash by the end of March or early April.  According to documents provided by Chiang, the state’s cash reserves are estimated to decline from $3 billion at the beginning of this month to $1.2 billion at the beginning of March, dropping to a low point of minus $200 million by early April. (Click here to view a chart prepared by the Controller’s Office)

Beginning in early April, the state will begin collecting an estimated $6.6 billion in tax receipts and will have an estimated $6.6 billion in cash reserves by the end of May.  The state’s cash situation will deteriorate in June and the state will run out of cash by early July. 

“I encourage you to act promptly and quickly,” Chiang said, noting that the state will encounter virtually the same circumstances as last year, when the state narrowly avoided a “fiscal meltdown.” 

Chiang urged the Legislature to resolve as much of this year’s $6.6 billion budget problem as possible, noting that the solutions need to be both “credible” and “sustainable.”   He said the current year deficits have a compounding effect in the budget year. 

“If solutions are slow to emerge and if they are neither credible nor sustainable, California will once again be unable to timely meet all of its payment obligations and my office will be forced to seek costly emergency financing, or conserve cash by delaying payments or issuing IOUs,” Chiang wrote in a letter to legislators.

Chiang said “students, the blind, the aged, the disabled, and taxpayers suffer” by the state failing to make the tough decisions necessary to bring its budget into balance.   

Chiang said it will be very expensive for the state to borrow, through revenue anticipation notes (RANs), to cover these cash shortages because the state already has the “worst bond rating in the nation.”  “Refrain from borrowing…it only exasperates our problem immediately and downstream,” Chiang said, noting that the credit agencies already have California on negative credit watch. 

“We’re not sure if we can get a short term note,” Chiang said, noting that his cash flow projections already include borrowing from approximately 710 state funds.        

Taylor agreed with Chiang’s assessment of the impending fiscal crisis in July but said he thought it was a relatively mild cash problem at the end of March, beginning of April, due to the short time window and small dollar amount of the problem.  Taylor said he thought the Legislature or Controller would be able to cover this cash shortage without much difficulty by deferring some payments. 

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Recent reports by Senator Barbara Boxer’s office and the California Budget Project have called the Governor’s projections for what California is owed from the federal government into serious question by indicating that California is actually a net beneficiary of federal assistance—receiving about $1.50 for every dollar state taxpayers send to Washington, DC.

Thus far, the Governor has preferred to hide behind the budget trigger rather than address the true severity of the state’s fiscal situation.  As federal and state officials have pointed out, the federal government is not the cause of California’s budget problems and cannot be counted on to solve our budget problem.

“While the odds seem favorable for some federal relief sought by the administration, we believe that the likelihood of Washington agreeing to all of the Governor’s requests is almost non-existent,” states a recent report by the Legislative Analyst.

The focus on obtaining additional federal money is simply a distraction from the real issue at hand—the perpetual difficulty, becoming a near impossibility of obtaining the 2/3 vote necessary to balance the state’s budget in the Legislature.

The Governor’s proposed cuts are so severe—the elimination of the CalWORKS welfare program, healthy families program, and In-Home Support Services (IHSS) program, and an additional 5% reduction to state employee salaries, among others—that the Governor chose to distance himself from them by proposing a budget trigger that will allow him to blame the federal government for being forced to support these cuts.

The Governor also used the budget trigger to avoid having to propose the delay of $2 billion in corporate tax breaks that a handful of state Republican lawmakers demanded as a condition of supporting last year’s budget deal.  Republicans have not strayed from their hard line anti-tax rhetoric and will inevitably rally against the suspension of tax breaks that they themselves requested less than one-year ago, regardless of how wasteful and ill-advised the tax breaks are given the state’s current situation.

Governor’s Budget Trigger Based on Deeply Flawed and Dated Data

The justification for the Governor including the budget trigger in his January budget proposal is that California is owed billions of additional dollars from the federal government and the state needs to “reform” the state-federal relationship in order for the state to balance its budget.

“California is getting 78 cents back for every dollar it sends to Washington,” the Governor’s Office states.  The Governor’s figures come from a study by the Tax Foundation that uses 2005 data and a flawed methodology, according to Senator Boxer’s office and the California Budget Project.

According to a memo released by Senator Boxer’s Office, when the state’s recession began in 2008, Congress took action to bring additional economic assistance to the state which resulted in California receiving $1.02 for each dollar the state paid in federal taxes.  When the new Administration took office in 2009, Congress and the President immediately passed an economic recovery bill that provided direct and indirect aid to the states which included an estimated $85 billion to California over two years—which represents a little more than the state spends in one year.

“Due to the combined impact of increased assistance to the state and the decline in tax receipts from California because of the economic slowdown, we estimate that in fiscal year 2009 Californians will receive at least $1.45 in federal expenditures for each dollar they pay in federal taxes,” states the memo released by Sen. Boxer’s office.  The memo bases its estimates on data obtained from the Census Bureau and the Internal Revenue Service, among others, and was reviewed by external reviewers at the Public Policy Institute of California (PPIC) and the Center on Budget and Policy Priorities (CBPP).  To view the memo, click here.

The California Budget Project has also completed an analysis that “suggests that California actually receives $1.50 back for each dollar in taxes paid, a figure slightly higher than the Senator’s,” states a report by the CBP.

The Boxer memo and California Budget Project also note that the methodology the Tax Foundation Study used in its study is flawed because it only uses one year of data and overestimates the state’s deficit by including the federal deficit.

Summary of the $6.9 Billion the Governor Says the Federal Government Owes California

The Governor says “the federal government must readjust California’s federal reimbursement rates to ensure our state is treated fairly and not subsidizing other states’ programs.”  The Governor provides the following examples:

►”Flawed” federal reimbursement formulas ($1.8 billion): “California is currently disadvantaged compared to other states under the current Federal Medical Assistance Program (FMAP) formula for Medi-Cal Spending.   California’s relatively high-income wage earners distort the per-capita income methodology, masking the large number of low-income individuals in California.  This flawed formula results in California receiving the lowest possible rate of 50 percent.  California must receive a more equitable FMAP rate (57 percent) equal to the 10 largest states and reflective of the national average.

►Extension of federal stimulus funding ($2.1 billion): The American Reinvestment and Recovery Act (ARRA) of 2009 provided $87 billion in additional federal Medicaid funding for the states, including California, but this funding ends on December 31, 2010.  The Governor calls for the extension of this funding assistance as well as additional assistance for other state programs that have received ARRA funds such as CalWORKs, Child Welfare Services, Foster Care, Special Education and Child Support Services.

►Unfair Federal Mandates to be Paid by Federal Government ($3 billion): The Governor lists four “unfair” federal mandates for which he wants federal funding:

–Services paid for by Medi-Cal instead of Medicare and changes to the required level of state funding for prescription drug costs ($1 billion)

–California needs direct reimbursements from the federal government for special education spending to account for the service levels required by federal law ($1 billion or more)

–California needs full federal reimbursement for the State Criminal Alien Assistance program for housing illegal immigrants in the state’s jails ($879.7 million)

–California needs to receive money to update the federal funding formula for foster care ($86.9 million)

Overview of Governor’s “Budget Trigger”

“The budget identifies spending reductions and extension of revenue increases (listed below) that will go into effect in the event that the federal government fails to provide the $6.9 billion of additional funding proposed in the budget,”  according to the Governor’s budget proposal.

Here is a partial list of the trigger’s $4.6 billion in spending reductions:

►Eliminate the California Work Opportunity and Responsibility to Kids (CalWORKs) Program ($1.044 billion)

►Reduce Medi-Cal eligibility to the minimum allowed under current federal law and eliminate most remaining optional benefits ($532 million)

►Eliminate the state’s In-Home Supporter Services Program ($495 million)

►Eliminate the Healthy Families Program ($126 million)

►Eliminate funding for enrollment growth at the University of California and the California State University ($111.9 million)

►Fund existing mental health services with Proposition 63 funds ($847 million, needs voter approval)

Summary of trigger’s suspension of $2.4 billion in tax breaks:

►Extend suspension of a business’s ability to reduce taxable income by applying net operating losses (NOLs) from prior years to reduce current income ($1.2 billion)

►Extend reduction in the credit for each dependent under the personal income tax from $319 to $102 ($504 million)

►Delay the use of business credits by unitary groups of corporations and instead retain current law which requires subsidiaries to have their own tax liability to use research and development and other credits ($315 million)

►Delay the change to the single sales factor allocation method for apportioning multi-state corporate income and instead retain the current double weighted sales, property, and payroll formula ($300 million)

►Lower to 30 percent the first year phase-in of the ability of corporations to carry back losses two years to offset prior tax profits ($20 million)

Legislature Considers Mid-Year Solutions Prior to Late February Deadline

The Governor has also called the Legislature into an emergency special session to consider making $6.6 billion in reductions in the current budget year to help close the state’s $19.9 billion budget deficit projected for the current budget year and the 2010-11 budget.

“Given the re-emergence of a current year shortfall and the necessary time for budget solutions to achieve their full value, it is imperative that many of the solutions proposed in the budget be adopted immediately,” states the Governor’s budget.

State law gives the Legislature 45-days from when the emergency session was called, January 8, to come up with a proposal for making at least $6.6 billion in mid-year reductions.  The  Legislature’s first step is to hold committee hearings to review the Governor’s proposed spending reductions for the current budget year.

“The budget proposes solutions for action in the Special Session that will close $8.9 billion of the budget gap,” states the Governor’s budget.  The total amount of expenditure reductions proposed by the Governor for the current 2009-10 budget year is unclear because the Governor’s budget proposes $3 billion in cuts for 2009-10 and then additional cuts proposed under the trigger which would presumably go into effect once the federal funds are not realized.