2014 California Propositions #1 and #2

October 14th, 2014

Had the pleasure of  attending our annual presentation by the League of Women Voters (LWV) of San Mateo on September 23 as they walked us through the 7 Props on this  year’s ballot.  Herewith are my thoughts and decisions on Props 1 & 2 .  Props 45-48 will be on a separate page in the next couple of days:

Prop 1 – Water Bond – YES (reluctantly)

I agree with the opposition that there is still too much pork, not enough for groundwater management and a lot of unanswered questions about Delta restoration, protection and management. It does not guarantee that the money will be used for the least intrusive , unsexy repairs.

The opposition is especially opposed to the proposed Twin Tunnels plan ($25M) which would place tunnels under the Delta. BDCP is not promising additional water to project supporters, but only reliability of supply.  The LWV has asked a lot of hard  (agricultural, fishing recreation impacts during construction, seismic activity, maintenance plan, endpoint storage, Delta species impacts,  fish screens, who gets how much water, mitigation v restoration, snowpack) whose answers are here .

On the other hand. The drought is now, the dams & canals have not had a serious look in almost 50 years.  The current prop is pared down to $7.9 B as opposed to the $11.4 which failed in 2006. There is bi-partisan support. This is a comprehensive bill that includes a multi-faceted, diversified approach that includes groundwater cleanup, remediation & recapture; conservation efforts; watershed restoration; wastewater treatment; alternative approaches in addition to some storage (predominantly dams) building and repair.

Like all other controversial components, Twin Tunnels will be in litigation with state & environmental bodies for years to come and new info and approaches will come to light in the intervening years.

I believe that we must start taking steps now, however imperfect they may be.

Prop 2 – State Budget Stabilization – NO 

This is not an easy prop to understand but here are the components.

The proposition, proposed by our legislators & governor, requires California to set aside 1.5% of General Fund revenues each year for the state’s budget stabilization fund until the fund reaches a full 10% of general fund spending. Unlike the current reserve funding requirement, which can be waived annually by the governor, under Prop 2 suspending deposits or making a withdrawal from the fund would require that the governor declare a state of fiscal emergency. Currently there is NO formula for what goes into the reserves. Though there currently is a target maximum reserve of $8B, the new formula would temporarily up the max to $11B but subsequently would have no maximum as the balance would be incrementally increasing as population and inflation grows due to the 1.5% additions.

For the next fifteen years, half of that 1.5% will be used to pay off long-term debt so California is balancing its need to save with its need to pay down growing liabilities, currently $300B of which $220 B is for unfunded retirement benes (so not all is currently payable) and $65B in deferred maintenance.

Prop 2, especially the school district reserves component,  is viewed favorably by credit agencies and means that California will be able to secure the best loan rates.

The Fly in the Ointment- School District Reserves

Prop 2 calls for deposits to be made to a newly created separate reserve account for education from excess capital gains revenues in years where revenues exceed 8% of all general fund revenue — a way of harnessing that revenue’s volatility. From 2004 to 2014, the state exceeded that threshold seven times. The spread has ranged from 10.7% of general fund revenue to as low as 3.5%.

Currently local school districts are required to keep reserves of 1-5% of their annual budgets though many richer districts keep larger ones.  UNDER CERTAIN CIRCUMSTANCES, districts could be limited to a maximum reserve of 10%, depending on the size of the district though the limits could be changed by the legislature (i.e. would not require ballot measure). An open question at the end of  LWV presentation was which districts would be limited to the 10% cap and how would that be determined.

Right now the state is still in debt to the education fund. The excess capital gains deposits (from the Prop) would be applied to this ed fund debt so there will be none in the new separate reserve account until old debts are paid off, so, sounds good but schools won’t see the cap gain deposits it for a while.

“For years, the Legislature has required that districts keep minimum reserves to stave off fiscal crises. Relaxed during the recession, next year it will be restored to between 1 % of their budgets for Los Angeles Unified to 5% for small districts, with the average being 3 percent. But it has never imposed a maximum reserve, leaving it to each district to determine what’s appropriate. The new maximums, in years in which the cap is activated, would range from 3-10% of district budgets, with 6% for most districts.

The cap on reserves would be tied to voter passage in November of Gov. Brown’s revised plan for a state rainy day fund, and even then only in years when the state actually puts money into a new reserve for Prop. 98. The rationale for the cap is that in revenue-healthy years, when the state puts aside money into its reserve for education, districts also wouldn’t need to accumulate big reserves of their own, and so should spend down anything above the maximum allowed. Districts that can justify reserves above the maximum will be able to get a waiver from county offices of education under AB 1463, said Todd Jerue, chief operating officer of the California Department of Finance. He testified  that some districts currently have reserves of 30- 50%.” June 16, 2014, John Fensterwald, EdSource

So… no changes in district % caps until the debts to the district are paid off but the districts can then challenge the caps. Employee unions, including CTA, actually support the caps perhaps so that money will be freed up for pay raises rather than held in reserves.  EdSource estimates that it would be at least 7 years until excess cap gains will be funneled into reserves.

Educate Our State is very opposed to Prop 2

“Under separate legislation — a last-minute addition to a mid-summer budget trailer bill (SB 858) — school districts will be forced to spend down the majority of their reserves and carryover funds when the state manages to deposit anything to the school ‘rainy day fund.’ Astonishingly, for a state that didn’t pay over $10 billion that it owed to schools just three years ago (20% of its total obligation — and over 30% of what it owed to many of the poorest schools), it seems to feel schools should only be allowed three weeks of funding in the bank at the end of each school year. Even more astoundingly, for a governor whose signature educational initiative is his “Local Control Funding” plan, this decision to strip locally elected school boards of their fiduciary power was made without analysis by the Legislative Analyst’s Office, without committee discussion, and without public comment.” Jennifer Bestor

Schools, which managed to corral about 16% of their annual operating expenditure in the most recent available year, will have to rush to spend it down to just over 5% statewide …”Michael Hulsizer, chief deputy for government affairs for the Kern County Superintendent of Schools, said a 6 percent cap would “contradict the best practices of national organizations,” which recommend 15 to 17 % reserves in order to cover two months of district expenses. EdSourceopposes the restrictions on district reserves

Prop 2 does NOT directly change the long-term amount of state spending for schools and community colleges, 40% of general fund revenues each year. The state will continue to take on debt for the years that they cannot meet general fund requirements due to ed fund requirements.

What is positive for education is that the .75% being used to pay down debt includes substantial contributions to unfunded teacher retirement so that house will be in order. Again, agencies that extend credit to governments view this very favorably.

In Conclusion….

Like the 40% now in place for education under Prop 98, there will now be a FORMULA for contribution  to a general fund reserve in place for in adverse times rather than it becoming a political budget football year after year.  There will be a formula for paying down state debt. There will also be a method to determine state general fund reserve caps which greatly pleases creditors who can extend favorable bond rates BUT…

I understand, equally, the volatility of school district reserves and believe the proposed limits are too stingy; I’ve seen the contortions school principals go through each year never really knowing what their budget is because the state controls the purse strings and that is unconscionable. School districts are already impinged by April/December property tax revenues poorly timed to school needs and thus requiring large reserves to assure proper planning for new school years. I had originally supported Prop 2 with my nose plugged countering that school districts had about 7 years to change the reserves system. Upon learning more about the hastily added reserve at the end of the legislative session, with no substantive discussion, convinced me that the bill is not ready for prime time.

I will be writing Governor Brown and my legislators suggesting that they implement the rainy day fund on their own for now and start the general funds but come back to the voters with the bill without the school reserve decimation.

For my analysis of Props 45 & 46  , click here.




2 Responses to “2014 California Propositions #1 and #2”

  1. Hope Salzer on October 8, 2014 4:47 am

    Hi, __ (I don't know your name). I appreciate your attempt to understand this issue. I wanted you to know (so you can consider it in your thoughts on Prop 2) that I spoke to the President of my local School Board as well as my district's Asst Supt of Biz Svcs (whose response to my inquiry into his thoughts on Prop 2 was, "It's LUDICROUS!"). My local School Board members advocated strongly against the reserves cap with our local Assembly member (clearly unsuccessfully). Our School Board members learned that Districts may only petition their local County Board of Ed for an exemption to the reserves cap in 2 out of 3 years. He is VERY concerned about our school district's ability to save for long-term, one-time, high-ticket expense items like textbooks, technology upgrades (hardware, software, etc) and physical plant maintenance, which will require our District to save up (on a rotating basis) for these types of expenses over more than 3 years. Additionally, under LCFF (and its rosy projections), CA school districts will not return to their pre-recession levels of financial funding until 2020-21 (13 years later, with no adjustment for inflation). Prop 2's reduction of Prop 98 payments to schools will elongate that time line. Even though your analysis (or maybe it was a San Mateo League statement) says that Prop 2 will not (over the long run) reduce State payments to schools, in the short run, it will. Prop 2 effectively reduces current payments to schools bec/ it will take some of the Prop 98 allotment due to schools and put it into the reserve account rather than giving it to school districts to manage themselves. Also, instead of investing those State reserve monies to mitigate cuts to vital state programs during recessionary times, Prop 2 permits and directs the state comptroller to use the reserve fund as a state bank account, dipping into it to 'manage state cash flows' (meaning taking interest-free withdrawals from it when the state is low on cash rather than borrowing from private markets, 'deferring' payments owed, or issuing IOUs). Another troubling point is that, all of the state-held school reserves can be swept back into the State's Gen'l Fund when there is an economic downturn by the gov't declaring a fiscal emergency (as they did during the last recession)– it is not truly held in reserves for schools (even though it was saved by withholding Prop 98 money from schools). Summing it up, there are so many back doors and escape hatches in Prop 2 which release the State from their obligations to fund public education– which is already woefully underfunded in CA– it just amounts to another ploy to pretend Sacramento is 'saving' or 'protecting' schools when it is really picking schoolchildren's pockets (since public school students don't vote, nor write big campaign checks).

  2. Paxdonnaverde on October 13, 2014 5:53 am


    I absolutely agree with you that the reserves are not equitable and stated that in my last paragraph. My argument remains that the reserves portion of Prop 2 will not kick in for 7 years. Education has 7 years to prepare a new prop to protect the reserves. In the meantime we will have an actual formula for the state to both pay down debt and save meaningful general fund reserves. During that 7 years, concurrently, the excess capital gains taxes will be paying down education debt.

    I have decided that the advantages outweigh the risks. I will fully support any Proposition that would allow school districts larger reserves.


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