While many of this year’s 14 ballot measures have heavily funded support or opposition, Proposition 2: Budget Stabilization Account Cap Increase and Gann Limit Changes Amendment, has received no funding in support or opposition, so you may not have heard of it.
Nevertheless, this is an important proposition worthy of your attention.
The proposition was placed on the ballot by a vote of the state Legislature. A two-thirds vote by both the State Assembly and Senate is required to place a measure on the ballot. The vote was along party lines with 75% of the Assembly and 73% of the Senate voting in favor.
To understand Proposition 2, we must examine the current law, which is somewhat complicated.
In 2014, another state measure (coincidentally also called Proposition 2) amended the state constitution to provide for the Budget Stabilization Account (“BSA”) and the Public School System Stabilization Account (“PSSSA”). The idea was to transfer a certain percentage of general fund revenue to these accounts, which could only be drawn down in a state emergency.
The BSA is essentially the state’s rainy day fund, which would be used to avoid tax increases during recessionary periods.
The state controller annually transfers 1.5% of estimated general fund revenues to the BSA each fiscal year. Currently, the BSA balance may not exceed 10% of general fund tax collections. Proposition 2 would increase that limit to 20%.
Moreover, the California Department of Finance calculates the amount of capital gains taxes collected in excess of 8% of total income tax collections and instructs the state controller to remit half of those proceeds to the BSA with the other half designated to repay certain state obligations. Proposition 2 would change the 8% threshold under certain circumstances.
Making expenditures from the BSA requires joint action by both the governor and the Legislature. Typically, the governor first declares a financial emergency and then the Legislature passes a bill to transfer funds from the BSA to the General Fund for specific appropriations to deal with the crisis.
Proposition 2 makes it easier for the governor to declare an emergency when submitting the state’s annual budget to the Legislature for approval. It also allows BSA funds to be spent on paying down California’s $20 billion federal unemployment insurance debt.
Since the passage of 2014’s Proposition 2, the governor has only declared an emergency twice. The first was in 2020 during the pandemic. The second was when Gov. Gavin Newsom declared an emergency to address a multi-billion-dollar deficit.
The fundamental reasoning behind this arrangement is that California tax revenue is highly volatile and is heavily reliant on substantial capital gains taxes. When the stock market slows, or the nation goes into a recession, California tax collections decline precipitously. The BSA rainy day fund was established to smooth out the tax revenue during economic downturns.
Proposition 2 makes changes to the process in order to facilitate transfers to and from the BSA to more closely coincide with prevailing economic conditions. But in order to do so, sponsors found it necessary to modify certain spending limits.
In 1979, California voters passed Proposition 4, also known as the Gann Spending Limit, named after its sponsor, Howard Jarvis’ associate, Paul Gann. The Gann provisions limit the total amount of annual state appropriations. The limitation is based on the prior year’s limit, adjusted for changes in the cost of living and population. When calculating the limit, deposits into the BSA are considered, thereby reducing the amount of other spending.
Proposition 2 would defer the timing of when BSA funds are considered when calculating the Gann limitation. While the mechanics are complex, the Gann limitation would be applied to BSA disbursements rather than to deposits to the BSA. This defers the impact of the Gann limitations, but matches the period in which the limitations apply to when the funds are actually spent by the state.
Proposition 2 might result in a temporary higher spending limit as it is phased in. This is why the Howard Jarvis Taxpayers’ Association opposes this proposition.
Voting on Proposition 2 is not straightforward. I favor the enhanced ability to facilitate a timely disbursement of funds during fiscal emergencies and I think that applying the Gann limitation to BSA expenditures (rather than deposits) makes sense from an accounting perspective.
However, phasing in the new rules and increasing the capital gains component of the BSA contribution is potentially a hidden tax increase. I am inclined to vote in favor of Proposition 2, but I fully understand why someone would sensibly vote against it.
Jim de Bree is a Valencia resident.
