ANALYSIS BY THE LEGISLATIVE ANALYST

Proposition 53

BACKGROUND
The state has hundreds of billions of dollars invested in infrastructure. Figure 1 shows the major areas of state-owned infrastructure, which includes highways, universities, parks, office buildings, and prisons. In addition, the state provides funds for local infrastructure in the areas of K-12 schools, community colleges, local streets and roads, local parks, wastewater treatment, flood control, and jails.

The state needs to renovate and replace existing facilities in order that they can continue to serve their intended purposes. In addition, as the state's population continues to increase, the need for investment in new capital facilities will also grow. Over the next five years, California has an estimated $54 billion in identified state infrastructure needs.

Funding for State Infrastructure. Traditionally, the state has funded its infrastructure projects in the following ways:

• Dedicated Revenues. Some programs have dedicated revenues that must be used for specific purposes. Transportation-related infrastructure (highways and mass transportation) is currently the only major state infrastructure program that is funded by dedicated revenue sources (such as state gasoline taxes and federal funds). Over the past five years, the state has spent approximately $2.3 billion annually on transportation-related projects.
• Bond Financing. Other than transportation, most other state program areas have relied on long-term infrastructure financing through the sale of general obligation bonds and lease-revenue bonds. (The debt service on both types of bonds is typically paid from the state General Fund.) In recent years, the state has issued large amounts of bonds for K-12 schools, higher education, and protection of natural resources. Those capital programs funded through general obligation bonds must wait for a bond authorization to be placed on a ballot and approved by the voters. Those capital programs that use lease-revenue bonds require legislative approval of the bonds in legislation. The state has spent approximately $4.2 billion annually in bond proceeds over the past five years.
• Direct General Fund Appropriations. Some infrastructure programs use direct appropriations, also called "pay-as-you-go" financing, from the General Fund. However, these appropriations can vary significantly from year-to-year. For example, in the early 1990s there were no General Fund appropriations for infrastructure due to state budget difficulties. Over the past five years, the state has spent approximately $275 million annually using direct General Fund appropriations.

PROPOSAL
This measure would increase the amount of General Fund revenue committed to pay-as-you-go capital outlay projects for both state and local governments. Figure 2 summarizes the basic provisions of the proposition.

Scheduled Transfers. Beginning with the 2006-07 fiscal year, this measure would transfer 1 percent of General Fund revenue to the newly established California Twenty-First Century Infrastructure Investment Fund (Infrastructure Fund). The amount of the transfer would increase by 0.3 percent annually under specified conditions until reaching a maximum of 3 percent of General Fund revenues in 2013-14 (see Figure 3). The initial 2006-07 transfer and any incremental increases in subsequent years would only take place if General Fund revenues grew by at least 4 percent (after adjusting for inflation) when compared to the previous year. (Thus, assuming an inflation rate of 3 percent, it would take revenue growth of 7 percent to trigger these increases.) Transfer rates would remain the same in those years that the revenue growth target is not met. On the other hand, the scheduled transfers would be accelerated by a year when General Fund revenues increased by 8 percent or more (after adjusting for inflation) when compared to the previous year.

The measure requires the Legislature to allocate annually the moneys in the Infrastructure Fund for capital outlay purposes—50 percent for state-owned infrastructure and 50 percent for local government infrastructure. The measure requires the Legislature, in subsequent legislation, to set forth the approach and method to be used in the annual allocation of the Infrastructure Fund for local government infrastructure projects. The local funds could go for any capital outlay purpose except for K-12 school and community college projects, which presumably would continue to receive funding from state bond measures.

Revenue Triggers. Proposition 53 contains a variety of adjustments or "triggers" that would reduce or eliminate the transfer to the Infrastructure Fund when General Fund revenue performance is poor or less than estimated.

• Year-to-Year Changes. When revenues are estimated to decline from the prior year, there would be no General Fund transfer into the Infrastructure Fund. (In addition, the subsequent-year transfer would be reduced by half.)
• Revenue Declines Within the Year. When estimates of General Fund revenue for a given year decline significantly from earlier estimates, the scheduled annual transfer amount would be reduced (by either one-half or one-quarter, as specified).

Special Adjustments. The measure also contains the following special adjustments that could serve to limit the amount of an otherwise scheduled transfer to the Infrastructure Fund:

• Debt Service. This measure contains a special adjustment to cap the Infrastructure Fund transfer to the difference between 7.5 percent and the percentage of General Fund revenue devoted to prior-year debt payments on state bonds (known as the debt service ratio). For instance, if the state's debt service ratio were 6 percent, the Infrastructure Fund transfer would be capped at 1.5 percent (7.5 percent less 6 percent)—even if the transfer schedule called for a higher percentage.
• Proposition 98. The measure would reduce the transfer amount when the percentage growth in the K-14 public school funding guarantee (known as the Proposition 98 guarantee) exceeds the percentage growth in General Fund revenues. This adjustment would only occur when none of the other triggered reductions or adjustments are in effect that year. Proposition 53 would not directly affect the amount required to be spent under Proposition 98.

FISCAL EFFECTS
Proposition 53 would dedicate a specified amount of the state's General Fund to pay-as-you-go capital outlay projects. Since the measure does not change the overall level of General Fund revenues, the dedication of some resources for pay-as-you-go infrastructure would result in a commensurate reduction in resources for all other purposes. The amounts of future transfers to the Infrastructure Fund are difficult to estimate, as they would depend on a variety of fiscal and economic variables. If, however, the scheduled transfers shown in Figure 3 occurred, we estimate they would start at roughly $850 million in 2006-07 and grow to several billions of dollars in future years.

Given the various adjustments and triggers in the measure, it is likely that the actual transfer amounts would be considerably less than the scheduled transfers in many years. For instance, if past General Fund revenue trends generally held true for the future, it could take roughly twice the time for the transfers to reach the scheduled 3 percent maximum rate. In addition, there would be some years in which no transfer was made to the Infrastructure Fund and some years in which only a partial transfer was made.

Still, our review suggests that there would be transfers in most years. As described earlier, half of the transfer amount would be dedicated for state infrastructure projects and the other half for local projects.