ANALYSIS BY THE LEGISLATIVE ANALYST

Proposition 56

BACKGROUND

The state budget bill provides the annual funding for most state government programs. Before the budget bill is sent to the Governor for approval, it must be passed by a two-thirds vote (67 percent) of each house of the Legislature. The State Constitution requires legislative passage of the budget bill by June 15 of each year. (It does not, however, provide a deadline for the Legislature and Governor to come to final agreement on the budget bill.)

The State Constitution also requires a two-thirds vote of each house of the Legislature for the passage of bills that increase taxes. These types of bills take effect immediately. Other types of bills, including bills reducing taxes or spending, can be passed with a majority (over 50 percent) vote and take effect on January 1 of the following year.

The budget typically includes money set aside for unexpected events, such as revenue shortfalls or emergencies. These funds are placed into a reserve or "rainy day" fund. Currently, the Legislature and Governor can choose each year how much money to put into this fund.

PROPOSAL

This measure amends both the state's Constitution and statutes to change the state budget process. Figure 1 summarizes the main provisions of the proposition.

Votes on State Budget-Related Taxes and Spending. This measure reduces from two-thirds to 55 percent the number of votes required to pass the budget bill and other bills, including tax increase measures, related to the budget bill. These budget-related bills would take effect immediately upon passage.

Reserve Requirements. This measure establishes minimum requirements for putting money into and taking money out of the state reserve fund. Under the measure, funds would be added to the reserve in any year in which state revenues exceeded what was needed for "current service levels." (This term refers to the amount needed to fund existing state programs, adjusted each year for population changes and inflation. Annual revenues above this amount could be considered "excess revenues.") Specifically, the measure requires the Legislature to put in the reserve at least 25 percent of any excess revenues, until the reserve reaches 5 percent of prior-year spending (currently a reserve amount of almost $4 billion). The measure does not restrict the use of the remaining excess revenues. Reserve funds could only be spent in cases of an emergency or in years in which spending on current service levels exceeded available revenues.

Consequences of Late Budget. This measure prohibits the Legislature and the Governor from collecting their salaries and expenses when the budget is late. Lost salaries and expenses could not be paid back later. In addition, the measure requires the Legislature to stay in session until the budget is approved.

Other Provisions. The measure also includes the following provisions:

• Ballot Pamphlet Budget Summary. The measure requires the State Controller to prepare a budget summary to be included in the ballot pamphlet provided to voters at every statewide election. This summary would include directions to an Internet Web site that includes voting records of legislators on budget-related bills.
• Punishment of Legislators. The measure prohibits a legislator from punishing or threatening to punish another legislator for a vote related to the budget.

FISCAL EFFECTS

The measure would have the following fiscal impacts on state government.

Votes on State Budget-Related Taxes and Spending. This proposition, by reducing the number of votes needed to pass budget-related bills, would make it easier for the Legislature to agree on these measures. The extent of any impacts of this change would depend on a number of factors, such as the state's financial circumstances, the composition of the Legislature, and its future actions. For example, since fewer legislators would need to agree to a state budget, the budget's content and level of spending could change in some years from what it otherwise would have been.

Similarly, the reduced number of required votes would make it easier in some years to approve tax increases related to the budget. In such cases, the measure would result in higher tax revenues (and state spending) than otherwise would have occurred. This potential revenue impact could be significant. For instance, given the state's roughly $70 billion budget, even a small percentage increase in taxes could result in a significant amount of additional revenues.

Reserve Requirements. Under this measure, the Legislature would be required to put revenues into the reserve in certain years. (The funds placed into the reserve would have been available for additional spending or revenue reductions.) As a result, there would be a higher reserve level in some years than otherwise would have occurred. In addition, a higher reserve level could lead to less fluctuation in state spending. For example, a higher reserve could result in lower spending in high revenue growth years and help sustain current service levels in low revenue years. The impact of the reserve requirements would depend on the level of state revenues and legislative decisions regarding current service levels.

Consequences of Late Budget. The loss of salary and expenses requirement for the Governor and Legislature would reduce costs in any year in which there is a late budget. In such cases, the measure would save the state about $50,000 per day in salaries and expenses until approval of the budget.

Ballot Pamphlet Budget Summary. The requirement for the State Controller to produce budget-related information would result in minor costs to the state.

Other Factors. By changing the budget process, this measure could have other fiscal impacts. For example, to the extent the measure makes it easier to address budget problems, it could have some positive effect on the state's credit rating. If so, this would result in some state savings from lower interest costs.

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