December, 2003
Proposition 58
The California BalancedBudget Act
Background
California’s Budget Situation
California has experienced major budget difficulties inrecent years. After a period of high growth in revenues and expenditures in thelate 1990s, state tax revenues plunged in 2001 and the budget fell badly out ofbalance. Although policymakers reduced program spending and increased revenuesto deal with part of the shortfalls, the state has also carried over largedeficits and engaged in a significant amount of borrowing. The state budgetfaces another major shortfall in 2004-05 and it has a variety of otherobligations—such as deferrals and loans from special funds—that areoutstanding at this time.
Constitutional Provisions Relating to Budgeting and Debt
There are several budget- and debt-related provisions inCalifornia’s Constitution that are affected by this proposition.
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Balanced Budget Requirement. The Constitution requires the Governor to submit by January 10 of each year a state budget proposal for the upcoming fiscal year (beginning on July 1) which is balanced—meaning that estimated revenues must meet or exceed proposed expenditures. While this balanced budget requirement applies to the Governor’s January budget submission, it does not apply to the budget ultimately passed by the Legislature or signed by the Governor.
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Mid-Year Budget Adjustments. The Legislature has met in special session during the past three years to consider mid-year proposals to address budget shortfalls. However, there is no formal process in the Constitution to require that mid-year corrective actions be taken when the budget falls out of balance.
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Reserve Requirement. Reserve funds are typically used to cushion against unexpected budget shortfalls. The Constitution requires that the Legislature establish a prudent state reserve fund. It does not, however, specify the size of the reserve, or the conditions under which funds are placed into the reserve.
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Debt-Related Provisions. The Constitution generally requires voter approval for debt backed by the state’s general taxing authority. Over the years, courts have ruled that certain types of borrowing (including short-term borrowing to cover cash shortfalls and some bonds repaid from specific revenue sources) can occur without voter approval. The Constitution also requires that bonds submitted to the voters for approval be for a “single object or work” as specified in the respective bond act. For example, in past years, voters have been asked to authorize bonds for such single objects as education facilities, water projects, or prison construction.
Proposal
This proposition amends the Constitution, making changesrelated to (1) the enactment and maintenance of a balanced state budget, (2) theestablishment of specific reserve requirements, and (3) a restriction on futuredeficit-related borrowing. The provisions are discussed in more detail below.
Balanced Budget Provisions
This proposition requires that the state adopt a balancedbudget and provides for mid-year adjustments in the event that the budget fallsout of balance.
BalancedBudget. In addition to the existingrequirement that the Governor propose a balanced budget, this measurerequires that the state enact a budget that is balanced. Specifically,estimated revenues would have to meet or exceed estimated expenditures in eachyear.
Mid-YearAdjustments. Under this measure, if the Governor determines that thestate is facing substantial revenue shortfalls or spending deficiencies, theGovernor may declare a fiscal emergency. He or she would then be required topropose legislation to address the problem, and call the Legislature intospecial session for that purpose. If the Legislature fails to pass and send tothe Governor legislation to address the budget problem within 45 days, it wouldbe prohibited from (1) acting on any other bills or (2)adjourning in jointrecess until such legislation is passed.
Reserve Requirement
The proposal requires that a special reserve—called theBudget Stabilization Account (BSA)—be established in the state’s GeneralFund.
AnnualTransfers. A portion of estimated annual General Fund revenues would betransferred by the State Controller into the account no later than September 30of each fiscal year. The specific transfers are 1percent (about $850million)in 2006-07, 2percent (about $1.8billion) in 2007-08, and3percent (about $2.9billion) in 2008-09 and thereafter. Thesetransfers would continue until the balance in the account reaches $8billionor 5percent of General Fund revenues, whichever is greater. The annualtransfer requirement would be in effect whenever the balance falls below the $8billion or 5 percent target. (Given the current level of General Fundrevenues—approximately $75billion—the required reserve level wouldlikely be $8 billion for at least the next decade.)
Suspensionof Transfers. The annual transfers could be suspended or reduced for afiscal year by an executive order issued by the Governor no later than June 1 ofthe preceding fiscal year.
Allocationof Funds. Each year, 50percent of the annual transfers into theBSA would be allocated to a subaccount that is dedicated to repayment of thedeficit-recovery bond authorized by Proposition57. These transfers wouldbe made until they reach a cumulative total of $5billion. Funds from thissubaccount would be automatically spent for debt service on that bond. Theremaining funds in the BSA would be available for transfer to the General Fund.
SpendingFrom the Account.Funds in the BSA could be transferred from this account to the General Fundthrough a majority vote of the Legislature and approval of the Governor.Spending of these monies from the General Fund could be made for variouspurposes—including to cover budget shortfalls—generally with a two-thirdsvote of the Legislature (same as current law).
RelatedProvisions in Proposition 56. Proposition 56 on this ballot alsocontains new, but different, requirements related to a state reserve fund.
Prohibition Against Future Deficit Borrowing
Subsequent to the issuance of the bonds authorized inProposition57, this proposal would prohibit most future borrowingto cover budget deficits. This restriction applies to general obligation bonds,revenue bonds, and certain other forms of long-term borrowing. The restrictiondoes not apply to certain other types of borrowing, such as (1)short-term borrowing to cover cash shortfalls in the General Fund (includingrevenue anticipation notes or revenue anticipation warrants currently used bythe state), or (2) borrowing between state funds.
Other Provisions
This measure also states that:
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With regard to the bond authorized by Proposition57, the “single object or work” for which the Legislature may create debt includes—for that measure only—the one-time funding of the accumulated state budget deficit and other obligations, as determined by the Director of Finance.
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Its provisions take effect only if Proposition57 on this ballot is also approved by the voters.
Fiscal Effects
This measure could have a variety of fiscal effects,depending on future budget circ*mstances and future actions taken by Governorsand Legislatures. Possible fiscal effects include:
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Balanced Budget and Debt Provisions. In recent years, as well as during difficult budget periods in the past, the Governor and Legislature have at times allowed accumulated budget deficits to carry over from one year to the next. This meant that spending reductions and/or revenue increases were less than what they otherwise would have been in those years. The provisions of this measure requiring a balanced budget and restricting borrowing would limit the state’s future use of this option. As a result, the state would in some cases have to take more immediate actions to correct budgetary shortfalls.
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Reserve Requirement. The $8 billion reserve target established by this proposition is much larger than the amounts included in past budget plans. This larger reserve could be used to smooth state spending over the course of an economic cycle. That is, spending could be less during economic expansions (as a portion of the annual revenues are transferred into the reserve), and more during downturns (as the funds available in the reserve are used to “cushion” spending reductions that would otherwise be necessary).
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Other Possible Impacts. The proposition could have a variety of other impacts on state finances. For example, to the extent that the measure resulted in more balanced budgets and less borrowing over time, the state would benefit financially from higher credit ratings and lower debt-service costs.
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