December 4, 2009
Pursuant to Elections Code Section 9005, we have
reviewed the proposed constitutional initiative related primarily to
state authority over local government resources (A.G. File No. 09‑0063,
Amdt. #1-NS) and below is our revised analysis of the initiative's
Local governments receive resources from various
sources, including funding from state tax revenues that are then given
to local governments, as well as from locally imposed taxes and fees.
State transportation resources are derived from
several major sources including excise taxes and sales taxes on gasoline
and diesel fuels that are deposited into various state transportation
accounts. In general, as described below, the revenues from these taxes
are required to be used for specified transportation purposes, including
distribution to local governments. Current law generally allows these
funds to be loaned temporarily on a cash flow basis between the state's
various transportation accounts in order to pay monthly obligations,
such as Caltrans' payroll and payments to construction contractors.
While fuel tax revenues generally can be used only for transportation
purposes, the California Constitution allows, under certain
circumstances, for these revenues to be loaned for up to three years to
the state's General Fund for non-transportation purposes.
State Excise Tax on Gasoline and Diesel Fuel
The state currently charges an excise tax of 18
cents per gallon of gasoline and diesel fuel sold in California,
commonly known as the "gas tax." In 2008-09, this tax generated roughly
$3 billion in revenues. The Constitution requires that revenues from the
gas tax be used only for transportation purposes, mainly to fund highway
and road repairs or improvements. Current law requires that these
revenues be deposited into the state's Highway Users Tax Account (HUTA)
and be allocated by formulas. Specifically, two-thirds of gas tax
revenues in the HUTA are allocated to the state, mainly for Caltrans to
maintain and repair the state's highways. The other one-third of the
revenues is given to cities and counties for local street and road
maintenance and improvement. The Legislature currently can amend this
allocation through passage of a bill signed by the Governor.
State Sales Tax on Gasoline and Diesel Fuel
The state currently charges a sales tax on the
purchase of gasoline and diesel fuel. State law requires that almost all
of these sales tax revenues be used for transportation purposes. These
purposes include local street and road improvements, projects that
expand capacity on the state's highway and transit systems, planning,
and transit and rail operations. A portion of the sales tax on gasoline
and diesel fuel is deposited into the Public Transportation Account
(PTA) for the specific purposes discussed below, with the rest of the
revenues deposited into the General Fund.
PTA Funding. Current law requires
that funds in the PTA be used only for transportation planning and mass
transportation purposes. Funds in the PTA are statutorily allocated by
formula to local transit operators and the state for mass transportation
purposes. The Legislature currently can amend this formula through the
passage of a bill signed by the Governor—subject to certain limitations
as interpreted by the courts.
Proposition 42 (2002) Transfer. The
Constitution requires that the gasoline sales tax revenues deposited
into the General Fund be transferred to the Transportation Investment
Fund (TIF). These funds have been counted as tax revenues for purposes
of calculating the minimum amount of K-14 education funding required
under Proposition 98. Over the past five years, these revenues have
averaged roughly $1.4 billion per year. Under certain conditions, the
Constitution allows this transfer to be suspended. Suspended amounts,
however, must be repaid with interest within three years. The
Legislature currently can change the allocation of TIF resources through
the passage of a bill signed by the Governor.
Other Local Government Revenues
The Constitution establishes a 1 percent maximum
property tax rate on real property and directs counties to collect these
tax revenues and allocate them to local governments according to law.
While the Legislature may modify property tax allocation laws, the
Legislature generally may not do so if it would decrease the total
countywide share of property taxes allocated to cities, counties, and
special districts. An exception to this provision is known as a
"Proposition 1A (2004) suspension," after the measure that established
Proposition 1A (2004) Suspension.
No more than twice in ten years, during a severe state fiscal hardship,
the Legislature may modify property tax allocation laws to decrease for
one year the percentage of property taxes allocated to cities, counties,
and special districts. The Legislature must repay each local
government's reduced property taxes, with interest, within three years.
In 2009, the Legislature enacted a Proposition 1A (2004) suspension,
shifting 8 percent of every city, county, and special district's 2008-09
property taxes to educational agencies—a total of $1.9 billion in
shifted revenue. The state must repay each local government by June 30,
The Constitution and other statutes authorize
city and county redevelopment agencies to create "project areas" in
blighted, urban areas. After a redevelopment agency creates a project
area, it receives all the growth in property tax revenues (called "tax
increment") generated in the area. Other local agencies serving the
project area continue to receive the amount of property taxes they
received before the agency created the project area.
To partially mitigate the fiscal effect of
redevelopment on other local agencies, state law requires most
redevelopment agencies to "pass through" a portion of their tax
increment to other agencies serving the project area. In addition to
these ongoing pass-through obligations, the state periodically has
required redevelopment agencies to make payments to schools. Current
law, for example, requires redevelopment agencies to contribute to
schools $1.7 billion in May 2010 and $350 million in May 2011. These
payments to schools offset a commensurate amount of required state
spending. Redevelopment agencies currently are challenging in court the
state's constitutional authority to require these payments.
Mandates and VLF
State-Reimbursable Mandates. The
Constitution generally requires the state to reimburse local governments
when the state "mandates" a new local program or higher level of
service. In general, the state reimburses local governments for mandates
through appropriations in the annual budget act.
Vehicle License Fee (VLF). State
law imposes a 1.15 percent VLF on the depreciated value of cars and
trucks. The Department of Motor Vehicles (DMV) collects the VLF at the
time of vehicle registration. The 1.15 percent rate includes a temporary
0.5 percent rate and a base 0.65 percent rate. The Constitution
identifies three broad uses for revenues from the base VLF rate:
offsetting DMV's collection costs, supporting the Local Revenue Fund
(used for certain county health and social service programs), and
distributing to cities and counties.
Using Base VLF Revenues to Offset State
Mandate Costs. The Legislature has broad authority to modify
base VLF allocation statutes, including shifting revenues to local
governments to offset their costs to implement a state mandate. In
1991-92, for example, the state (1) modified the VLF depreciation
schedule to generate higher revenues and (2) changed VLF allocation
statutes to distribute the new revenues to counties responsible for new
health and social services mandates. Because the increased VLF revenues
offset the counties' costs to implement the mandates, the state was not
required to appropriate mandate reimbursements to counties in the annual
Other Local Revenues
The Constitution authorizes local governments to
impose local taxes for local purposes. Over the years, local governments
have imposed a wide range of local taxes, including Bradley-Burns sales,
business license, utility users, and transaction and use taxes. The
Constitution generally does not authorize the state to use or reallocate
revenues raised under these taxes.
This measure amends the Constitution to constrain
the state's authority to redirect or make changes to state and local
resources and their allocation after October 21, 2009. Under the
measure, the State Controller would reimburse affected local governments
or accounts within 30 days if the state were found to have violated any
of its provisions. Funds for these reimbursements, including interest,
would be continuously appropriated from the state General Fund and do
not require legislative approval. Any statute enacted between October
21, 2009 and the effective date of this measure that would have been
prohibited under this measure would be repealed.
Prohibits Borrowing or Redirection of
Certain Transportation Resources. The measure prohibits gasoline
and diesel excise tax revenues, gasoline sales tax revenues, and funds
deposited into the PTA from being loaned temporarily, or permanently, to
the General Fund, or any other state fund. This eliminates the state's
ability to borrow transportation funds for non-transportation purposes.
The measure also eliminates Caltrans' ability to make temporary loans
between various transportation accounts to manage cash flow—such as to
pay staff and to fund the construction of projects.
Requires Gasoline Sales Tax to Be Deposited
Directly Into the TIF. The measure requires the revenues from
the sales tax on gasoline to be deposited directly into the TIF, instead
of first flowing through the General Fund. (It is not clear if this
change would affect calculations related to K-14 education described
above.) Unlike current law, this transfer could not be suspended.
Requires Public Process to Amend
Allocations. This measure requires the California Transportation
Commission to conduct public hearings and prepare a report before the
Legislature could enact changes to the allocation of either gas tax
revenues in the HUTA or gasoline sales tax revenues in the TIF.
Specifies Allocation of PTA Funds in
Constitution. The measure specifies in the Constitution the
portion of PTA funds that would be made available for various programs.
Under the measure, about one-half of all PTA funding would be given to
local transit agencies for operational support. These allocations could
not be changed without a vote of the people.
Other Local Government Revenues
Property Tax. The measure
eliminates the state's authority to shift property taxes from cities,
counties, and special districts to schools during a severe state fiscal
hardship. Under the measure, the state would continue to be responsible
for the repaying of local governments for the 2009 Proposition 1A (2004)
suspension, but could not shift property tax revenues to schools again.
Tax Increment. Under the measure,
the Legislature could not enact laws after October 21, 2009 that require
redevelopment agencies to shift funds to schools or other agencies
beyond any amounts required by statutes in existence on January 1, 2008.
The effect of the measure's provisions regarding the $2 billion 2009-10
and 2010-11 redevelopment shifts (enacted before October 21, 2009) is
not clear. While the measure does not contain provisions directly
repealing these payments, it declares these laws to be illegal under
existing constitutional provisions. It is possible that this declaration
could affect the outcome of the pending litigation regarding these
VLF. The measure eliminates the
Legislature's authority to reallocate VLF revenues to offset state
mandate costs. This provision would not affect the 1991-92 VLF changes
that reimburse local governments for health and social services costs.
Other Local Revenues. The measure
specifies that the Legislature may not reallocate, borrow, or use
revenues raised from locally imposed taxes.
This measure does not affect the total amount of
state and local government revenues. Instead, it relates primarily to
state authority over local government resources. While some elements of
this measure would be subject to future interpretation by the courts,
its overall effect is to constrain the state's ongoing authority to
redirect or make changes to state and local resources and their
allocation, beginning October 21, 2009. The measure would have
significant immediate and long-term fiscal impacts on state and local
governments, as described below.
Higher and More Stable Resources for Non-Education Local Governments
Long-Term Effect. Given the number
and magnitude of past state actions affecting local tax revenues and
resources, this measure's restrictions on state authority to enact such
measures in the future would have potentially major beneficial fiscal
effects on non-education local governments. For example, the state could
not enact measures that require redevelopment agencies to pass through
more revenues to schools. Similarly, the state could not suspend
payments to local transit agencies to pay state costs. In these cases,
this measure would result in non-education local government resources
being more stable—and higher—than otherwise would be the case. The
magnitude of increased local resources is unknown and would depend on
future actions by the state. Given past actions by the state, however,
this increase in local resources could be billions of dollars in some
years. These increased local resources could result in higher spending
on local programs or decreased local fees or taxes.
Near-Term Effect. Given past state
actions during times of state fiscal difficulty, it is possible that
this measure would invalidate some inconsistent state laws enacted
between October 21, 2009 and the
effective date of this measure. While the nature and terms of these
state laws is not known, any such repeal likely would result in higher
and/or more stable revenues to cities, counties, special districts, and
redevelopment agencies (non-educations local governments) than otherwise
would be the case. In addition, as noted above, the measure's fiscal
effect on pending litigation regarding $2 billion of redevelopment funds
is not clear.
Lower Resources for State Programs
In general, as we discuss below, the measure's
effect on state finances would be the opposite of its effect on local
finances. That is, this measure would
result in decreased resources being available for state programs
than otherwise would be the case.
Resources Available for State Budgetary
Purposes. Under the measure, the state could not: (1) use
redevelopment or other local funds to support education, (2) borrow
or redirect fuel or property tax revenues as part of a state budget
solution, or (3) reallocate VLF revenues to offset state mandate
reimbursement obligations. As a result, the state would need to
take alternative actions to balance the state budget in some years—such
as increasing taxes or decreasing spending on state programs. Given
current and previous actions by the state, we estimate that this
decrease in state fiscal authority could reduce state resources by
billions of dollars in some future years.
Transportation Project Resources.
By eliminating Caltrans' authority to make temporary cash loans between
the state's various transportation accounts, this measure would likely
result in slower spending on construction projects, particularly in the
near term. This is because Caltrans would need to accumulate a large
enough balance in each account (potentially, in total affecting several
hundred million dollars) to meet its monthly cash flow needs.
Summary of Fiscal Effects
The measure would have the following major fiscal
Significant constraints on state authority over
city, county, special district, and redevelopment agency funds. As a
result, higher and more stable local resources, potentially
affecting billions of dollars in some years. Commensurate reductions
in state resources, resulting in major decreases in state spending
and/or increases in state revenues.
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