Over the years, in order to balance the budget and to provide the schools with the level of funding required under Proposition 98, the state has made decisions that have affected local government revenues and costs. During this period, the voters have approved some ballot measures that allow the state more authority to shift certain revenues and, conversely, have approved other ballot measures that changed the Constitution to restrict the state’s authority to do so.

Proposition 22, a lengthy and complex measure, would limit the state’s authority to borrow or shift revenues as discussed below.

STATE FUEL TAX REVENUES

General background on fuel taxes

Historically, fuel tax revenues in California have consisted of four major components: a sales tax on gasoline (percentage of dollar total), an excise tax on gasoline (per gallon), a sales tax on diesel fuel, and an excise tax on diesel fuel. The following funds are at issue in Proposition 22:

• Highway Users Tax Account (HUTA) = excise tax on gasoline and excise tax on diesel
• Public Transportation Account (PTA) = sales tax on diesel
• Transportation Investment Fund (TIF) = sales tax on gasoline
  Note: The TIF doesn’t exist as of July 1, 2010. See Gas Tax Swap.

Fuel tax revenues/debt service

Prop 22 would prohibit the use of fuel tax revenues to pay debt service on state transportation bonds that have already been approved, and would require statewide voter approval to use those revenues to pay debt service on bonds passed after November, 2010. It would limit such spending to no more than 25 percent of the state’s share of fuel taxes in any given period. The measure would allow local governments to use up to 25 percent of their share of fuel tax revenues for debt service on their own local transportation bonds, but would not require the local governments to get voter approval to do so.

Fuel tax revenues/distribution

Prop 22 would delete a full section of the Constitution that expressly allows the state to borrow fuel tax revenues for use in the General Fund in times of emergency and repay what it borrows within 30 days of passing a budget or within three fiscal years.

Proposition 22 would declare HUTA, PTA, TIF and all local transportation funds to be trust funds.

Proposition 22 would change the current PTA allocation formula from 25 percent state/75 percent local to 50 percent state/50 percent local. In return, it would prohibit the state from borrowing from the fund. If the state wanted to change the 50/50 formula, the California Transportation Commission would have to hold several public hearings on the matter before the Legislature could vote for the change.

Proposition 22 would prohibit the state from borrowing from TIF. However, since gasoline sales tax revenues funded TIF, and the Gas Tax Swap eliminated the gasoline sales tax, this measure would allocate any successor or alternate tax to TIF.

Related fuel tax measures and legislation

In 2002, voters approved Proposition 42, which added provisions to the state Constitution to ensure that fuel taxes were to be used only for various transportation purposes UNLESS the governor declared that the General Fund would face a shortfall and the fuel tax revenues were needed to balance the budget. Four years later, voters tweaked the provisions of Proposition 42 by passing Prop.1A, which required the state to repay the borrowed fuel tax funds.

Two bills were signed into law in March, 2010 that collectively are known as the “Gas Tax Swap.” One bill eliminated the sales tax on motor vehicle fuel (from which TIF was funded) and simultaneously raised the state excise motor vehicle fuel tax, effective July 1, 2010. The other bill raised the sales tax rate on diesel fuel and simultaneously lowered the state excise tax on diesel fuel effective July 1, 2011. These bills enable the state to shift the cost of debt service on outstanding transportation bonds from the General Fund to various transportation funds. Relieving the General Fund of these interest obligations results in approximately $1.1 billion in General Fund savings over the next 10 years.

Proposition 22 contains provisions that may conflict with the Gas Tax Swap, but it is unclear whether the measure would undo the Gas Tax Swap. If Proposition 22 passes, local transportation interests could battle the state over how to interpret or implement its fuel tax provisions.

The Gas Tax Swap conflicts with Proposition 26, also on the November, 2010 ballot, because the authorizing legislation was only majority-approved, while Proposition 26 would require a two-thirds vote for any such legislation. If Proposition 26 passes, the Gas Tax Swap would be automatically repealed unless it is reintroduced and passed by the Legislature with a two-thirds vote.

THE STATE’S AUTHORITY TO TEMPORARILY SHIFT PROPERTY TAXES

Under Proposition 1A, passed by the voters in 2004, the state was allowed to shift a share of city, county and special district property tax revenues to schools, if the governor declared a “severe state fiscal hardship” and the Legislature approved the temporary transfer with a two-thirds vote. The borrowing would have to be repaid with interest within three years.

Proposition 22 would eliminate the state’s ability to temporarily shift property taxes from local governments to educational agencies, and would eliminate the state’s ability to reallocate property tax revenues among local governments within a county in order to reimburse local governments for new or increased program costs created by the state.

REDEVELOPMENT AGENCIES

Under the California Redevelopment Act, local governments are permitted to form redevelopment agencies for the purpose of making improvements to blighted urban areas. Redevelopment agencies accumulate their funds by freezing the property tax base within a project, with any additional taxes resulting from an increase in property values (“property tax increment”) going to the redevelopment agency. Local agencies that receive property tax funds, such as schools and fire and police departments, continue to receive the same share of property taxes that they received before the redevelopment plan took effect.

In 2009, the state Legislature passed a law creating “Supplemental Educational Revenue Augmentation Funds” (SERAF) which requires a significant portion of redevelopment agency funds to be deposited into SERAF, which then distributes the monies to school districts, thus reducing the state’s school funding obligations under Prop. 98. The California Redevelopment Association sued, claiming that SERAF violates provisions of the state and federal constitutions (CRA v. Genest, 34-2009-80000359-CU-WM-GDS). SERAF was upheld by the court in May, 2010, and the case is now on appeal.

Proposition 22 would prohibit the state from requiring redevelopment agencies to transfer any of their property-tax increment funds to the schools or any other state agency.

VEHICLE LICENSE FEE (VLF) REVENUE

Just over half of VLF revenues are distributed to local governments. At one point, the Legislature was considering a mandate which would require counties to take over certain parole services and be reimbursed for that out of their share of VLF funds. Proposition 22 specifies that the state may not use a local government’s share of VLF revenues as reimbursement for a state mandate. Under the measure, the state would have to reimburse local governments for new mandates using other resources.

LAWSUIT OVER BALLOT TITLE AND SUMMARY

The League of California Cities sued to change the Legislative Analyst’s fiscal impact summary, arguing that the fiscal analysis did not accurately represent the proposition's impact on local finances.  The court changed the original “Comparable increases in transportation and redevelopment resources” to “Comparable increases in funding for state and local transportation programs and local redevelopment.”