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HomeMy WebLinkAbout13 PROP 76 10-03-05 AGENDA REPORT Agenda Item Reviewed: City Manager -13- tútt Finance Director --WA- MEETING DATE: OCTOBER 3, 2005 TO: HONORABLE MAYOR AND MEMBERS OF CITY COUNCil FROM: WilLIAM A. HUSTON, CITY MANAGER PROPOSITION 76 SUBJECT: RECOMMENDATION Pleasure of the Council. BACKGROUND Mayor Bone asked that this item be agendized in order for the City Council to discuss what position it might want to take concerning Proposition 76. Proposition 76 is on the November 8, 2005 statewide ballot. This initiative is known as the "Live Within Our Means" measure. It is sponsored by Governor Schwarzenegger. Proposition 76 attempts to constrain the amount the State spends by an annual growth index. In good times, revenues that cannot be spent are placed in reserve for appropriation in down times. It requires the State to establish and maintain reserves and imposes spending controls. Annual General Fund and special expenditures may not exceed annual expenditure limits based on an average of revenue growth in the three prior years. Key elements of Proposition 76 include: . Authorizes the Governor to declare an emergency (natural disaster) which allows the expenditure limit to be exceeded; . Authorizes the Governor to reduce or eliminate excess General Fund expenditures; . Authorizes the Governor to declare a fiscal emergency and reduce General Fund and special fund appropriations if the legislature fails to act; . If budget is not adopted by July 1, previous fiscal year's budget is re-appropriated until budget is adopted; . Except for short-term loans that are repaid within the fiscal year in which the loan was made, prohibits transfer of funds from a special fund to the General Fund as a loan. Funds transferred prior to July 1,2006 must be repaid by July 1, 2021; Suspends a mandate if the Governor reduces payment for the mandate pursuant to his "fiscal emergency" powers. Does not suspend a mandate if the Governor reduces payment for the mandate pursuant to his "excess expenditure" powers. Does not suspend a mandate if the Legislature reduces payment for the mandate in response to a "fiscal emergency;" Reduces and eliminates Proposition 98 (Educational Revenue Augmentation Fund-ERAF) maintenance factor; Eliminates the authority to suspend the transfer of Proposition 42 (sales tax on gasoline for road projects) monies after 2006-07 fiscal year. Attached is a summary of Proposition 76 prepared by the Revenue and Taxation Policy Committee of the League of California Cities. FISCAL IMPACT Proposition 76 does not have any immediate fiscal impact on the City of Tustin. The level of fiscal responsibility it would impose on the State legislature could provide greater fiscal stability in future years. August 12,2005 L WOM OUTLINE~ REVENUE & TAXATION POLICY COMMITTEE Summary Prop 76 - the Live Within Our Means Act - is intended to do just that - force the state to live within its means. It attempts to do this by constraining the amount the state spends by an annual growth index. In good times, revenues that can't be spent are placed in reserve for appropriation in down times. This memorandum summarizes the measure and describes its impacts on cities. The Expenditure Limit ,¡ Annual State general fund and special expenditures may not exceed annual expenditure limit based on an average of revenue growth in the three prior years. ,¡ Expenditure limit may be exceeded if Governor declares natural disaster emergency (earthquake, flood, fire, etc.) ,¡ If spending is expected to exceed limit, Governor must propose a plan to the Legislature that reduces expenditures, or reduce expenditures by executive order. ,¡ If revenues fall below estimates, Governor must propose a plan to the Legislature to reduce expenditures and may, ifthe Legislature does not act within 45 days, reduce expenditures to realign with revenues. ,¡ If revenues exceed the expenditure limit, then the excess amount attributed to special funds is set aside in a reserve, dedicated for future use for purposes of the special fund (when revenues fall below allowable expenditures). ,¡ The excess revenue attributed to the general fund is allocated as follows: 0 25% to the Budget Stabilization Account (reserve created by Prop. 58); 0 50% to repay outstanding debt obligations to Prop 98 (maintenance factor), the Deficit Recovery Bonds, and the Transportation Investment Fund (Prop 42); 0 25% to a newly created School, Roads and Highways construction fund. Loans from Special Funds to General Fund ,¡ Eliminates the authority to suspend the transfer of Proposition 42 monies to local governments after 2006-07 fiscal year. ,¡ Except for short-term loans that are repaid within the fiscal year in which the loan was made, prohibits transfer of funds from a special fund to the General Fund as a loan. ,¡ Special funds loaned to the General Fund prior to July 1, 2006 must be repaid by July 1, 2021. August 12,2005 Mandates ,¡ Mandate suspended if Governor reduces reimbursement for mandate pursuant to his "fiscal emergency" powers. ,¡ Mandate not suspended if Governor reduces reimbursement for mandate pursuant to his "excess expenditure" powers but reimbursement is due in following fiscal year and must be funded or legislature must suspend the mandate. ,¡ Mandate not suspended if Legislature reduces reimbursement for mandate in response to a "fiscal emergency." Executive Powers Restores Governor's ability to directly reduce general fund state spending if (1) he declares a fiscal emergency (if revenues fall below estimates) and an agreement cannot be reached by the Legislature on how to address the emergency; or, (2) by executive order in some cases if spending is exceeding the limit. Future Revenue Increases ,¡ Prop 76 does not limit the ability of the state to increase revenues in the future. It could, however, limit the expenditure, and therefore the immediate impact of those revenues, in the initial years. ,¡ As the expenditure limit is modified in subsequent years, which would include the new revenues in the calculation, the ability to spend the new revenues increases. Changes in Proposition 98 ,¡ Test 3: The annual K-14 school spending guarantee is calculated on the basis of one of three tests depending upon General Fund revenue growth. Proposition 76 eliminates "Test 3" which reduces the amount of the guarantee when General Fund revenues fall or grow slowly. ,¡ Maintenance Factor: Proposition 98 can be suspended by 2/3 vote of the Legislature. If Legislature suspends Proposition 98 or if Test 3 is activated, then a "maintenance factor" is calculated which is equal to the difference between the actual amount ofK-14 funding in that fiscal year and the long-term target funding. The current outstanding maintenance factor is $3.8 billion. Proposition 76 requires it to be paid out over 15 years. ,¡ Maintenance Factor Part II: Proposition 76 eliminates the "maintenance factor." This means that if the Legislature suspends Proposition 98 or ifthe Governor reduces Proposition 98 funding under his new "fiscal emergency" powers, these reductions would permanently lower the minimum guarantee. ,¡ The Base: Under Proposition 98 if more money is spent on K-14 education than is required by the minimum guarantee in a given year, the higher spending level becomes the "base" from which the next year's minimum funding guarantee is calculated. Under Proposition 76 spending above the guarantee would be counted 2 August 12, 2005 as one-time funding and would no longer raise future minimum guarantee amounts. ,¡ Settle-up obligation: If the minimum funding guarantee for a particular year changes after the budget's enactment and the changes result in a higher guarantee, the difference between the guarantee and the amount that was appropriated in the budget becomes the "settle-up" obligation. The existing settle-up obligation is over $1 billion. Under current law, this amount will be paid at roughly $150 million per year beginning in 2006-07. Proposition 76 would require the obligation to be fully paid within 15 years. For more details on Prop 76's impacts on Prop 98, please see the Legislative Analyst Office's Report attached to this summary. Key Issues for Cities What is a "special fund?" Special funds are included within the annual expenditure limit. Ifrevenues exceed what can be spent, the amount of the excess attributable to each special fund is held as a reserve in that special fund (see below for discussion of what circumstances could trigger this event). If revenues exceed what can be spent from the general fund, the excess revenues are allocated for five purposes outlined in the measure. City related general fund monies that could be impacted by expenditure limitations (and the broadening of the Governor's mid-year cut authorities) include: Library Grants -- $12.2 m, COPS -- $IOOm, mandates - unknown total impact to cities (cities and counties = $61.6 m est. for 05/06 for mandates funded by the state in the budget). Which revenues are "special fund" revenues has been the subject of considerable debate and discussion. Reputable sources differ. Some revenues received by cities and counties through state subvention are "special fund" revenues impacted by the spending limit and other revenues are "trust" revenues and will not be impacted by the spending limit. For cities this question has generally centered on the following funding sources: Proposition 42 (dedicated sales tax on gasoline, $126 million to cities in 05/06); Proposition 111 (Highway Users Tax, $54.8 million for cities in 04/05); and Proposition 172 (public safety sales tax, $134 million for cities in 04/05); VLF revenues ($164 million to cities in 04/05). Ifrevenues that exceed the expenditure limit are attributed to a special fund, then the amount deemed in "excess" is set aside in reserve and may be spent in a future year for the purposes of the special fund !!!ill:: when revenues fall short of the expenditure limit. This is intended to help "smooth out" the impact of sharp increases and declines in revenues over time. 3 August 12,2005 What does it mean to "proportionately attribute" funds? When revenues exceed the spending limit, the measure directs the excess to be "proportionately attributed" to the General Fund and each Special Fund. The phrase has been subject to two interpretations: (1) Identifying the funds that created the excess revenues and then allocating the amount of the excess to that particular fund; 1 or (2) Attribute any excess to the General Fund and to each Special Fund in same proportion as total revenues exceed the expenditure limit? The first interpretation is the position taken by the supporters of this measure (including the current Director of Finance, Tom Campbell) and is meant to create flexibility in the system, impacting only those funds that show great revenue "swings". Their intent is to build in a "smoothing out" mechanism for the specific funds that produce excess revenues year over year, and allow for some reserves to be available in those future years where those revenues decline. The second interpretation is the view of the Legislative Analyst's Office and others. Under this interpretation, a fund would be impacted, even though revenues from that fund had not exceeded the expenditure limit, ifrevenues received in another fund exceed what can be spent within the expenditure limit. In both instances, the excess revenues allocated to the different funds (which have exceeded the limit as defined separately by each) would be treated the same. The excess general fund revenues would be allocated according to a formula (see page one of this overview for details), and the excess special fund revenues would be set-aside in a reserve dedicated for use for that special fund. Proposition 42 The League of California Cities supports the measure's prohibition on future transfer of Proposition 42 monies after the 2006-07 fiscal year. The measure also requires repayment of previously deferred Proposition 42 monies over a period of 15 years with not less than 1/15 of the total amount due repaid in each year. (Note: current law does not require repayment). Mandates The League of California Cities supports the measure's requirement that previously deferred mandates (prior to 2005-06) be repaid over a period of 5 years. The 2005-06 budget requires repayment over a period of 15 years beginning in fiscal year 2006-07. I For example, if total excess revenues equal 3 billion dollars and $1 billion of that is attributable to the sales tax on gasoline (Prop 42), then I billion dollars is "proportionately attributed" to the Proposition 42 special fund and held in reserve. 'In 1999-00, for example, General Fund revenues increased by 22.7%, while special fund revenues deelined by 0.4%. Growth in total revenues (17.8%) exceeded the average growth in the three prior years (11.8%). The percentage by which the growth in total revenues exceeded the average growth would be applied to the General Fund and to each special fund thereby limiting expenditures from the proceeds of Proposition 42 revenues because of the substantial increase in personal income taxes paid to the General Fund. It is hard to understand the effect of this interpretation. 4 August 12,2005 The impact of the Governor's restored ability to reduce general fund appropriations during the fiscal year if revenues fall below estimates on suspension of mandates is not clear. The measure suggests that should the Governor enact a mid-year cut to mandate reimbursements, the mandate would be suspended for the remainder of that fiscal year (unless reimbursement is restored). Reimbursement for the costs incurred prior to suspension of the mandate must be appropriated in the following fiscal year's budget in order to "fully fund" the mandate. Ifthe mandate is not fully funded in the following fiscal year's budget then the Legislature must suspend the mandate. New Budget Management Powers for Governor Up until 1983, California governors had a rarely used power to make mid-year spending adjustments in the event of revenue shortfalls. Prop. 76 restores the Governor's authority to reduce state spending during certain fiscal situations. It empowers the Governor (I) to declare a fiscal emergency based on the administration's revenue estimates and unilaterally reduce spending when an agreement cannot be reached by the Legislature on how to address the emergency; and (2) to reduce expenditures in some circumstances by executive order if spending exceeds the limit. Supporters of Prop 76 have called the proposed new powers for the Governor critical to help keep state spending in line. Opponents cite them as an unfair shift of power to the hands ofthe minority party (they can block a necessary 2/3 legislative vote), and a removal of legislative oversight in making budget decisions. As described above, the Governor may reduce expenditures in the event of a "fiscal emergency" (when revenues fall below estimates) or in the event state spending is on a trend to exceed the spending limit ("excess expenditures") power. The fiscal exposure to cities differs depending upon whether the Governor is exercising his "fiscal emergency" powers or his "excess expenditure" powers. In the event of a "fiscal emergency" cuts may be made to general fund expenditures but not special fund expenditures. The Governor may make cuts across the board or select some general fund programs for cuts and not others. Examples of general fund revenues received by cities that are exposed by this provision include mandate reimbursements, COPS, library grants. Some cities receive funding from the State general fund for programs and services provided to their residents. A funding cut to these programs or services does not mean that the statutory mandate to provide the programs and services will be eliminated. However there are greater potential fiscal impacts to counties as the funding for many state programs they are obligated to implement (e.g. health and social services) could be cut, and could force the counties to have to make up for funding shortfalls. In the event state spending is on a trend to exceed the spending limit ("excess expenditures"), then the cuts may be made to either the general fund or to special funds in order to bring spending within expenditure limit. 5 August 12,2005 Some are concerned that the Governor's authority to make spending cuts is a significant change in the governance of the State and alters our current system of checks and balances by shifting the balance of power over the budget to the Governor.3 Others are concerned that these powers do not allow for public input or oversight of key budget decisions -- that key budget decisions could be made without the input of the representatives elected to make those decisions. New Rule If Budget Not Adopted. The L WOM provides that if a new budget is not enacted by the beginning of the fiscal year (July 1), then the expenditure levels of the prior years' budget will remain in place until a budget deal is reached. This would result in the continued funding, at the prior year's level, of all programs that had been funded in the prior year. Under current law, some programs that are not funded by continuous appropriations (among other reasons) may not receive any funding until a budget agreement is passed. Locals have seen this in recent years with a delay in the allocation of Prop 111 (motor fuel tax) monies due to budget impasses. Critics ofLWOM have suggested that when this provision is combined with the existing 2/3 vote requirement for approving a budget, the minority party in the legislature could effectively prevent adoption of a budget because the previous one would remain in place. This could frustrate the will ofthe majority party and the Governor, in these cases. 3 For example, the League of Women Voters of California recommend "No" on Proposition 76: "Our system of checks and balances will be undermined by giving this and all future governors the power to make cuts unilaterally." (http://ca.1wv.org) 6