This is the third in a series of blog posts highlighting key components of the CBP’s analysis of Proposition 2, which will appear on the November 4, 2014 statewide ballot.
A key feature of Proposition 2 is that it would set aside a small share of state revenues each year and direct these dollars to purposes specified in the state Constitution. As we explained in earlier posts, these revenues would be used to build the state’s existing rainy day fund — the Budget Stabilization Account (BSA) — and pay down “budgetary debt,” including unfunded liabilities for state employee pensions and retiree health care. (Another objective of Proposition 2 — to create a budget reserve for K-12 schools and community colleges — will be discussed in a forthcoming post.)
In California, the notion of setting aside revenues for specific purposes based on formulas spelled out in the state Constitution is nothing new. Under the current rules for the BSA — approved by voters through passage of Proposition 58 in 2004 — 3 percent of state revenues must be deposited into this decade-old reserve every year, unless the Governor suspends or reduces this transfer.
But the new rules proposed by Proposition 2 raise a fundamental question: How would the amount of revenues set aside each year differ from the amount that would be set aside under current law? With proponents arguing that Proposition 2 would strengthen the state’s budget reserve, some voters may believe that the measure would consistently “sock away” more dollars compared to the state’s current rules. Not so: Total annual revenue transfers under Proposition 2 — both to pay down state liabilities and add to the budget reserve — would not necessarily be larger than those required under current law.
This conclusion is based on various factors that we detail in our analysis. For example, Proposition 2 would require an annual transfer equal to 1.5 percent of state revenues — half of the 3 percent set-aside that’s currently on the books. But Proposition 2 also would require the state to set aside additional dollars when capital gains revenues — which can vary substantially from year to year — are estimated to be particularly strong. As a result, annual revenue set-asides under Proposition 2 could fluctuate significantly, sometimes exceeding the current 3 percent benchmark and sometimes falling below it.
Another factor: Under current law, the maximum BSA balance — $8 billion — could be reached in 2016-17, after which no additional deposits would be required as long as the balance remains at or above this level. In contrast, revenue set-asides under Proposition 2 would likely continue well beyond 2016-17.
What do the numbers look like in the near term, based on the best projections available? As shown in the table above, the amount of revenues set aside under Proposition 2 could be at least $1 billion lower in each of 2015-16 and 2016-17, compared to the state’s current policy. This means that if voters approve Proposition 2, an additional $1 billion or more could be available in each those years — compared to current law — to support a range of state priorities. In contrast, this situation could be reversed by 2017-18, with Proposition 2 potentially setting aside $2.2 billion more than would be required under the state’s current policy. This means that if voters give Proposition 2 the thumbs-up, state policymakers could be left with a couple of billion dollars less in 2017-18 — relative to current law — to support various state priorities.
In short, while Proposition 2 would significantly change the state’s debt payment and budget reserve policies, it would not necessarily set aside larger amounts of state revenues each year than would otherwise be required by current law.
— Scott Graves