Wednesday, July 25, 2007

Fiscal implications of Jarvis II, part 2

The Rodda Project: The battle against Proposition 9 (1980)

The background to Senator Rodda's paper

The attempt to follow up the success of Proposition 13 ran into a snag with Proposition 9. Ballot initiatives in California are not required to meet any particular standards of clarity or specificity. The drafters of Proposition 9 neglected to contain any language relating to its effective date. Some suggested that its adoption by the voters in the June 1980 primary election would cut personal income taxes in half for the entire calendar year, retroactively effective back to January. With the state budget due to take effect on July 1, the state could conceivably find its revenue base cut out from under it with only weeks to drastically overhaul that state spending plan.

The Legislature contained a number of so-called “Proposition 13 babies,” freshman assemblymen and senators elected in the wake of the passage of Proposition 13 in 1978. Several of them were eager to ride the tax-cutting bandwagon further. Other conservative legislators, some of whom had opposed Proposition 13 as too extreme, sought to outflank their junior colleagues and atone for their tardiness in embracing the tax-revolt movement. They seized on the ambiguities in Proposition 9 as opportunities to soft-pedal the impact of the initiative and make it appear less draconian. Legislative measures were introduced to stipulate the effective date of the proposition, if enacted by the voters, and to specify the initiative's impact on personal income tax brackets. These bills would have the effect of mitigating the initial impact of Proposition 9, postponing its biggest shockwave till the next year.

Senator Rodda's initial analysis of Proposition 9, Fiscal Implications of Jarvis II, was published on January 15, 1980. It was snatched up as a vital resource by the opponents of Proposition 9. However, Rodda's paper was criticized by the initiative's proponents because it did not address the mitigating legislation being sponsored by Proposition 9 supporters. Rodda recognized this as a legitimate point and hastened to address it. Only three months after his first analysis, the Senator released a 34-page supplement. That supplement provides the content of this article.


Supplement to January 15 Paper on Fiscal Implications of Jarvis II or Proposition #9 as Viewed from the Perspective of a Practical Politician

Part I: Possible Responses to Proposition #9: Three Scenarios

Part II: Impact of Campbell Legislation to Repeal Retroactive Implementation

Part III: Impact of Imbrecht Legislation to Apply 1978 Tax Brackets to Indexing of Personal Income Tax and to Repeal Retroactive Implementation of Proposition #9

Calculations and Interpretation by Senator Albert S. Rodda


The material in this Supplementary Paper is designed to clarify the issues which relate to Proposition #9 and to indicate the impact upon state financing of changes in current law and different estimates of the magnitude of the state's revenues and one-time surplus. Three Scenarios are discussed and projections for Fiscal Years 1980-81 and 1981-82 are made. Totally accurate projections, of course, are impossible; however, if the assumptions are realistic, such forecasts have the ability to indicate the general direction in which trends are developing. That is what these calculations are designed to accomplish: to provide the reader with more than a vague apprehension of the fiscal future for the State of California if it must function after its major source of General Fund Revenues, the Personal Income Tax, is significantly reduced in 1980-81 and succeeding years by Proposition #9. The Personal Income Tax now provides about 35% of the state's General Fund Revenues; Proposition #9 will reduce the future level of support from that source, since the state will receive only 47% of the amount it now receives from the Personal Income Tax. If predictions are accurate, the Personal Income Tax will provide, therefore, only about 19% of the state's General Fund Revenues after Proposition #9 and the fiscal impact upon the state will be very significant. Of particular importance to California will be the fiscal impact upon school funding. The first negative effect will be experienced in the loss of state funding for school facility construction and maintenance because of the transfer of the Tideland Oil Revenues to the General Fund. A second implication will be an almost certain reduction in the level of state funds for allocation to local government in the form of Proposition #13 “bail-out” money, approximately 74% of which is paid to the schools, Kindergarten through the Community Colleges. A third implication will be the possibility of a significant reduction in the state's General Fund apportionment to the School Fund and in State Budget expenditures to finance categorical aid programs.

The standard dictionary definition of the verb “mitigate” is: “To make less harsh, severe, or painful.”

The proponents of Proposition #9, including Mr. Jarvis, are seeking to “mitigate” or make less “painful” the fiscal impact of Proposition #9. The mitigation is to be achieved by raising the Personal Income Tax rates for tax year 1980, and thereafter, above the level provided by Proposition #9.

Under “Minimum Mitigation,” the tax increase will be zero.

Under “Moderate Mitigation,” the tax increase will equal $1.4 billion for Fiscal Year 1980-81.

Under “Maximum Mitigation,” the tax increase will equal $2.0 billion in Fiscal Year 1980-81 and about $600 million each year thereafter.

Part I: Potential Responses to Proposition #9: Three Scenarios

Those who are interested in the fiscal implications of Proposition #9 upon the state and local government, including the schools, should realize that there are several ways of interpreting the effect of Proposition #9. In my original paper, dated January IS, 1980, and the two supplementary analyses which followed, three different sets of assumptions were used. As a consequence, the first-year impact, Fiscal Year 1980-81, is calculated as producing three different outcomes with respect to the state's revenue loss. I have classified them, therefore, on the basis of their net effect on the State Budget for that year as producing:
  1. Minimum Mitigation (Scenario I)
  2. Moderate Mitigation (Scenario II)
  3. Maximum Mitigation (Scenario III)
When the fiscal implications resulting from the three sets of assumptions and fiscal data are projected into the second year, the results or effects are very similar and indicate that the impact of Proposition #9 will significantly impair the ability of the state to fund its fiscal obligations to state, local government, and the schools. Unfortunately, the proponents of Proposition #9 are ignoring Fiscal Year 1981-82, and thereafter, and are claiming that the opponents are employing scare tactics in their opposition to Proposition #9, and that the fiscal effects will be less serious than claimed. They then present an analysis or interpretation of the effect of Proposition #9 for Fiscal Year 1980-81 which is predicated upon assumptions reflected in either Scenario II, labelled Moderate Mitigation, or Scenario III, labelled Maximum Mitigation. In each instance, they assume that current law relating to the Personal Income Tax will be changed prior to the election on June 3rd and that the state's surplus will be considerably larger than was estimated in the early part of the year.

In my Jarvis II paper, written in January, 1980, I made no specific dollar calculations with reference to the effect of Proposition #9 after taking into consideration those variables relating to General Fund Revenue projections, increases in the Tideland Oil Revenues, or the magnitude of the Year-End Surplus. I merely stated that the state was confronted with a potential deficit for Fiscal Year 1980-81 of approximately a billion dollars, had a one-time surplus in June 1980 of $1.8 billion and would lose $4.9 billion in revenue during Fiscal Year 1980-81 if Proposition #9 were approved. I also commented that the Tideland Oil Revenues would be employed to offset future revenue losses from Proposition #9. If the available data had been used to estimate the first-year revenue loss, the conclusion would have been that the net Short-Fall or deficit would amount to approximately $4.5 billion: current revenues of $19.3 billion, plus the one-time surplus of $1.8 billion, minus the $4.9 billion Proposition #9 effect, equals a total revenue, ongoing and one-time, of $16.2 billion. If this is subtracted from the January 10, 1980, Budget of $20.7 billion and the Tideland Oil Revenues in the amount of $400 million are transferred to the General Fund, the Short-Fall will amount to $4.5 billion if $400 million is added to the state's Federal Revenue balance and these funds are maintained as a state Prudent Reserve in the amount of $550 million.

Since the analysis reflects the January 1980 state revenue estimates and surplus, it is no longer meaningful. A more current and responsible analysis produces what I classify as Scenario I, or Minimum Mitigation of the first-year effect of Proposition #9, and it is predicated upon certain assumptions with respect to the implementation of Proposition #9 and a moderate estimate of the increase in the state1s revenues and magnitude of the one-time surplus.

Scenario I — Minimum Mitigation

Assumptions: Current law remains unchanged and Proposition #9 is interpreted as becoming effective on January 1, 1980, and full indexing remains in effect as provided under existing law. The one-time surplus is estimated at $1.8 billion and the unanticipated state revenue increase is calculated to be $600 million, reflecting a 3% error in the January estimate. The Tideland Oil Revenues are estimated to be $500 million and that sum is transferred to the General Fund. The state1s current Federal Revenue Sharing money is calculated to be $150 million and a total of $400 million is added to that balance in order to create a responsible Prudent Reserve of $550 million. If the State Budget is reduced by the $400 million identified in the Duffy Report as a reserve for “economic uncertainties,” the Budget in 1980-81 will be $20.4 billion; however, a minimum of $400 million must be added to that amount to reflect the Tideland Oil Revenues to be allocated under the provisions of SB 1426 for the capital outlay needs of public education, Kindergarten through the University, and for the establishment of an Energy and Resources fund. When these proposed state expenditures are taken into consideration, the state's expenditures subject to reduction in 1980-81, after Proposition #9, will amount to $20.7 billion.

The first-year effect, utilizing these assumptions, is that the state's next year net deficit, or Revenue Short-fall, will amount to $3.8 billion after, of course, establishment of a Prudent Reserve of $550 million.

1980-81 Revenues = $16.9 billion, and Revenue Short-fall = $3.8 billion. When projected into 1981-82, Revenues = $18.8 billion, and the Revenue Short-fall = $4.0 billion, assuming a 13% revenue increase and a Budget increase of 10% over 1980.

Two other calculations, which are predicated upon different assumptions, I classify as Moderate Mitigation and Maximum Mitigation.

Scenario II — Moderate Mitigation

Assumptions: The Campbell legislation to change current law in order to make Proposition #9 effective in June, 1980, and to establish Personal Income Tax rates equal to 71% of the 1978 rates for the 1980 Tax Year, is enacted into law. It is further assumed that the state's revenues exceed the original estimate in the amount of $600 million, that the Tideland Oil Revenues are approximately $500 million, and that the federal Revenue Sharing Reserve is $150 million. The first-year effect, utilizing those assumptions, is that the state's net deficit will amount to $2.4 billion. This calculation is based upon the assumption that the state's expenditure reduction of $400 million through deletion of the appropriation identified in the Duffy Report as a reserve for “economic uncertainties” is offset by the planned $400 million expenditure for the capital outlay needs of public education and for the establishment of an Energy and Resources fund.

Fiscal Year 1980-81 Revenues = $18.3 billion, and the Revenue Short-fall = $2.4 billion. When projected into 1981-82, Revenues = $18.8 billion, and the Revenue Short-fall = $4.0 billion, assuming a 13% revenue increase and a 1980 Budget increase of 10%, and a decline in Personal Income Tax income in 1981-82 of approximately 53.5%.

Scenario III — Maximum Mitigation

Assumptions: The Imbrecht legislation is enacted into law and changes the effective date of Proposition #9 to January 1980, as provided in the Campbell legislation, and applies in 1980-81 the full indexing of the Personal Income Tax to the 1978 tax brackets and has the effect, therefore, of increasing the tax payments for this year and the future over the payments which would be made if the current indexing brackets remained in effect. The effect of these two changes in law will be to cause a significant one-year reduction of the state's revenue loss for fiscal Year 1980-81 from Proposition #9, which otherwise would occur in the magnitude of approximately $2.0 billion, and a modest ongoing reduction in the amount of $500 million. In addition, it is assumed that the state's unanticipated revenue increase for next year will be $700 million, that the State Budget contains a $400 million one-time reserve for “economic uncertainties” and that the Tideland Oil Revenues will increase by $400 million. If the Budget is reduced by the $400 million, the reserve for “economic uncertainties,” it will be $20.14 billion, but that will be offset by the $400 million to be allocated under SB 1426 for the capital outlay needs in public education and the establishment of an Energy and Resources fund. If all of the revenue sources are utilized except $400 million, which are added to the federal Revenue Sharing balance of $150 million in order to establish a Prudent Reserve of $550 million, the revenue loss because of Proposition #9 will be significantly reduced.

The first-year effect of Proposition #9, based upon these assumptions, is calculated to be in the amount of a Short-fall in 1980-81 of $1.8 billion, assuming a Prudent Reserve of $550 million is established.

Fiscal Year 1980-81 Revenues = $18.9 billion, and the Revenue Short-fall = $1.8 billion after the elimination from the Budget of the reserve for “economic uncertainties” and an augmentation by an equivalent amount, $400 million, for public education capital outlay needs and the establishment of an Energy and Resources fund. It is, also, assumed that $400 million is allocated from the state's revenues for the creation of a Prudent Reserve of $550 million, of which $150 million is federal Revenue Sharing money. When projected into 1981-82, Revenues = $19.3 billion, and the Revenue Short-fall = $3.5 billion, assuming a 13% increase in the state's revenues and a 1981-82 Budget increase of 10% over the previous year.


Scenario II — Moderate Mitigation seems to be most likely to occur. If that proves correct, the state's estimated Revenue Short-Fall for 1980-81 will be $2.5 billion, assuming a Prudent Reserve, and $4.0 billion in 1981-82.

The two-year average Revenue Short-Fall will be approximately 15% of what could have been budgeted had Proposition #9 not been approved, or approximately 12% in 1980-81 and 18% in 1981-82. It is interesting to note that in Fiscal Year 1979-80, the current year, the state's General Fund expenditures are $18.7 billion. Assuming that Moderate Mitigation occurs, state expenditures will be $18.2 billion in 1980-81, and in 1981-82 they will be $18.8 billion.

In Fiscal Year 1981-82, the state will have a Budget approximately equal to that in Fiscal Year 1979-80, the current year, after two years of unusual inflation.


An alternative analysis predicated upon a projection of the state's revenues for 1980-81, after reduction of the revenue loss from Proposition #9, at a rate of increase equal to 11%1, produces very similar fiscal results with respect to fiscal Year 1981-82 State Revenues and the Budget Short-fall for that year. In the alternative analysis, the assumption is made that the retroactive implementation of Proposition #9 to January 1, 1980, is repealed and that there is no change in the current tax brackets for indexing the Personal Income Tax.

After the revenue calculation which reflects these assumptions is made and the $600 million in Tideland Oil Revenues are added to the state's revenues, the resultant total can be regarded as the General fund Revenues available for expenditure in 1981-82.

Under both the Minimum Mitigation and the Moderate Mitigation Scenarios, given these assumptions, the Revenues = $18.9 billion, and the Budget Short-fall = $3.9 billion.

Under the Maximum Mitigation Scenario, the assumption of which is that the Imbrecht legislation is enacted, the Revenues = $19.5 billion, and the Budget Short-fall = $3.3 billion.

Part II: Impact of Campbell Legislation to Make Proposition #9 effective in June, 1980, rather than in January, 1980

Evidently, Howard Jarvis is apprehensive about the first-year revenue loss estimated to result from voter approval of Proposition #9. That estimated loss is $4.9 billion, or approximately 25% of the state's projected revenues for Fiscal Year 1980-81. Because of his apprehension and because he claims that he did not intend the amendment to become effective as of January 1, 1980, which is a mandate of existing tax law2, Mr. Jarvis is supporting a bill, SB 1464, authored by Senator William Campbell, which will (1) make the amendment effective on June 4th upon its certification of voter approval by the Secretary of State, and (2) provide a 1980 Calendar Year tax rate of approximately 71% of the 1978 tax rate, rather than the 50% required by the specific language in the Jarvis Initiative.

It has been suggested that such action may be of questionable constitutionality; however, it has widespread political support despite the fact that it will increase the 1980 tax rates above the level to be established by Proposition #9, and there is reason to believe that it may become law and its constitutionality upheld.3

If the Campbell legislation is enacted and the tax rate for the Calendar Year 1980 is increased from 50% to approximately 71% of the 1978 rates, the potential $4.9 billion revenue loss in Fiscal Year 1980-81 from Proposition #9 will decline to an estimated $3.5 billion.

The important factor, of course, is that, although this will provide a reduction in the first-year estimated revenue loss because of Proposition #9 from $4.9 billion to $3.5 billion, it will not affect future years. In the years following, the state's revenue loss will be of a magnitude to reflect approximately a 53.5% reduction in the state's Personal Income Tax, a loss calculated in 1981-82 to be approximately $4.2 billion, which will increase in fiscal years thereafter.

The projected state resources for June of 1980 have increased slightly over the estimate which was made in January. The margin of error in the estimate has been calculated to be in the neighborhood of 2% to 4% of the January projection.4 I have concluded that an error in the amount of 3% is responsible and an error of that magnitude will result in revenue receipts of $600 million over the estimate.

Assuming that the Year-End Surplus is increased by that amount, the surplus money available to offset the revenue loss because of Proposition #9 will amount to $2.4 billion and not the $1.8 billion surplus as previously estimated. Furthermore, additional revenues in the amount of approximately $500 million above that anticipated in the Governor's Budget may be transferred to the General Fund as a result of the decontrol of heavy oil prices.5 Since the state normally maintains a Prudent Reserve as security against a decline in its revenues because of adverse economic conditions, it may be assumed that $400 million of the surplus will be used for that purpose and that it will be augmented by the state's Federal Revenue Sharing money, approximately $150 million, which would establish the reserve at a level of $550 million.6

On the basis of these assumptions, one can make some interesting projections about the magnitude of the revenue and expenditure reductions in Fiscal Years 1980-81 and 1981-82 which will result because of voter approval of Proposition #9.

The state's revenues for Fiscal Year 1980-81 were estimated in January to be $19.3 billion. If it is assumed that the state's General Fund Revenues are reduced by an estimated $3.5 billion, to reflect the first-year implementation of Proposition #9, presuming the Campbell legislation is enacted, the state's revenues will decline to the level of $15.8 billion. If the one-time or Year-End Surplus is added to that revenue estimate in the amount of $1.8 billion and if it is further augmented by $600 million from increased state revenues, the General Fund dollars available to fund the 1980-81 Budget will be in the amount of $18.3 billion. That will consist of the state's ongoing revenues after Proposition #9, the Tideland Oil Revenue increase, and all of the one-time surplus, with the exception of the Prudent Reserve in the amount of $550 million.7

The State Budget, however, assuming no augmentations are approved by the Legislature prior to voter approval of Proposition #9, will be in the amount of $20.75 billion. The Duffy Report identifies a $400 million reserve for “economic uncertainties” in the 1980-81 Budget, and if that is deleted, the Budget will be $20.33 billion. It is important to realize, however, that administration-sponsored legislation, SB 1426, to utilize a portion of the increase in Tideland Oil Revenues to establish an Energy and Resources Fund and to finance school construction and maintenance for all segments of education, Kindergarten through the University, will establish the level of support at an annual amount of about $400 million. This expenditure, of course, is not included in the Budget as introduced, and since it is planned to finance those needs with the Tideland Oil Revenue increase which will be transferred to the General Fund as an offset to the Proposition #9 revenue loss, the state will be deprived of the fiscal ability to proceed in the financing of these very urgent needs; it is reasonable, therefore, to include that amount, $400 million, as an ongoing state expenditure. It will offset the $400 million reduction in the Budget which was achieved through the elimination of the reserve for “economic uncertainties”; thus, the state's expenditure level appropriate for calculating the Proposition #9 Short-Fall should be established at the $20.7 billion level provided in the Budget when introduced in January.

If the voters approve Proposition #9, the Budget for 1980-81 will have to be reevaluated and placed upon the Governor's desk in an amount not to exceed the state's projected revenues of $18.3 billion; it will have to be reduced, therefore, in the amount of $2.4 billion, or approximately 12% of the original Budget expenditure.

Projection for 1981-82

In order to determine the impact of Proposition #9 on Fiscal Year 1981-82, an assumption may be made that the state's 1981-82 revenue base will reflect an increase of 13% over the previous fiscal year.8 This increase is equal to a three-year average percentage increase, 1978-79, 1979-80, and 1980-81, and the last year, however, 1980-81, is only an estimate of the increase over 1979-80. It might be argued that the percentage of increase should be estimated at a lower rate because of the fact that full indexing of the Personal Income Tax will be in effect and because Proposition #9 will result in an annual loss of 53.5% of the state's Personal Income Tax, which in 1980-81 was estimated to account for 35.7% of General Fund Revenues.9 The loss of revenues from those two changes in the Personal Income Tax will significantly affect the total revenues that the state can expect to receive, not only in 1980-81, but in 1981-82 and each fiscal year thereafter. That loss will reduce the state's revenue elasticity, or the tendency for revenues to increase at a rate greater than the increase in the state's Gross National Product. A 13% estimated increase in revenues, therefore, considering the impact of indexing and the 50% reduction in Personal Income Tax rates amounts to what I think is a responsible figure.

The assumption is made that the estimated 1980-81 state revenues in the amount of $19.3 billion are augmented by the $600 million increase in state revenues over the $19.3 billion estimate. As a consequence, the revenues are $19.9 billion and that amount is adjusted to reflect a 13% rate of increase for 1981-82.

Based upon those data, the state's total revenues in 1981-82 would, under the current tax rate or voter rejection of Proposition #9, amount to $22.5 billion. This may be increased by its augmentation of $600 million in Tideland Oil Revenues.10 The total revenues would be $23.1 billion and these revenues would constitute the only source of funding available to the state in Fiscal Year 1981-82 since there will be no “carry-over surplus,” all of it having been exhausted in Fiscal Year 1980-81 as an offset to Proposition 9.11

The 1981-82 Budget may be assumed to increase at a rate of 10% over that of 1980-81: $20.75 billion plus $2.07 billion. The amount, therefore, will equal $22.8 billion.

The Personal Income Tax currently is producing about 35.7% of the state's General Fund; therefore, assuming that Proposition #9 is approved, the loss in revenue from that source will amount to 53% of 35.7%, or 19% of the state's General Fund. Such a percentage of the state's tax base would amount to a $4.3 billion reduction in the revenues which would have been collected absent approval of Proposition #9. Deducting that revenue loss from the estimated $23.1 billion of the state's total revenue, the result is $23.1 billion minus $4.3 billion, or $18.8 billion, and that will be the General Fund revenue base for Fiscal Year 1981-82, or $100 million more than is being spent in Fiscal Year 1979-80, the current year. The Short-Fall will be $4.0 billion, or a Budget of $22.8 billion minus revenues of $18.8 billion.

Interestingly, the result is the same for the Minimum Mitigation Scenario if a 1981-82 projection is made, since the basic assumptions are the same and since the Campbell legislation is effective only in the first year and has no impact upon the second year, 1981-82, or succeeding year revenues.


The critical factors affecting the state's fiscal situation if Proposition #9 is approved are:
  1. There is no huge, $1.8 billion, one-time surplus remaining after Fiscal Year 1980-81, only a Prudent Reserve of $550 million, the maintenance of which is essential to sound fiscal management and the protection of the state's fiscal solvency.
  2. Since the State Budget must not exceed estimated revenue projections for any fiscal year, future revenues will determine the level of state expenditures, unless, of course, a one-time surplus develops, or if Proposition #4 mandates a spending level below revenues.
  3. Personal Income Tax Revenues, as a consequence of Proposition #9, will decline by approximately 53.4% and will contribute about 18.6% of the General Fund Revenues instead of the 35.7% as estimated in the Budget for 1980-81. This estimate is for Fiscal Year 1981-82.
The state has two basic options: (1) imposing the reduction in expenditures totally upon state allocations and subvention to schools and local government, particularly county health and welfare allocations; or (2) distributing the state's revenue loss in such a manner as to reduce total government expenditures in California—state, cities, counties, special education, and the schools.

To accomplish the above result, the state will have to enact a number of changes in current law:
  1. Modify the deflator mechanism in AB 8.
  2. Reduce the amount of school property taxes transferred to other segments of local government as provided in AB 8.
  3. Reduce the amount of tax relief allocated to local government because of the homeowner exemption, the business inventory buy-out, the Williamson Land Conservation Act and revenues raised by the cigarette tax and transferred to local government.
In any event, substantive changes in the present state response to Proposition #13 will result and government will experience a decline in its level of support.

The fiscal impact of Proposition #9, assuming (I) the Campbell legislation is enacted, (2) the state's revenues are $600 million above the January estimate of $19.3 billion, and (3) the Tideland Oil Revenue increase in the magnitude of about $500 million is transferred to the General Fund, is calculated as follows:
  1. Fiscal Year 1980-81 estimated Budget reduction of about 12%, or $2.4 billion if a Prudent Reserve of $550 million is maintained.
  2. Fiscal Year 1981-82 estimated Budget reduction of about 18% from the normal State Budget for that year, or approximately $4.0 billion.
  3. Two-year revenue loss of $6.4 billion, assuming a Prudent Reserve is maintained of $550 million.
State level of General Fund expenditures will be as follows:

1979-80 $18.7 billion

1980-81 $18.3 billion (assuming a Prudent Reserve of $550 million)

1981-82 $18.8 billion (assuming a Prudent Reserve of $550 million)

Obviously, drastic Budget reductions will have to be made over the two-year period.

It is now recognized that the state's economy may experience a decline beginning in the third quarter, July to September. If this occurs, the state revenues may decline in Fiscal Year 1980-81. That could easily exhaust the Prudent Surplus. If the result were greater than the magnitude of the surplus $550 million, the effect in 1981-82 would be more serious than the 1981-82 revenue loss of $4.0 billion. It could rise to $4.5 to $4.8 billion, depending upon the magnitude of the economic slowdown; a 5% reduction in state revenues could produce a net $800 to $900 million revenue loss.

Furthermore, if inflation continues at a high rate into 1980-82, the 10% Budget increase may be inadequate. If it were increased by 2%, to 12%, the normal Budget would increase by about $500 million in 1981-82, which would increase the revenue deficiency that Proposition #9 would produce in that year.

Part III: Impact of Imbrecht Legislation re Indexing of Personal Income Tax and Implementation of Proposition on January 1, 1980

The Vice Chairman of the Assembly Ways and Means Committee, Assemblyman Gordon Duffy, has published a very scholarly paper on the impact of Proposition #9.

It presents a number of options for estimating the first- year effect of Proposition #9 if approved by the voters on June 3. This is an analysis of that impact based upon three assumptions which will most significantly reduce the first-year (1980-81) revenue loss resulting from Proposition #9.

The assumptions are:
  1. A very liberal estimate of the state's surplus at the end of Fiscal Year 1979-80.
  2. Enactment of legislation to repeal the retroactive provisions of current tax law which relate to the implementation of Proposition #9, SB 1464, Campbell, and AB 3020, Imbrecht.
  3. Enactment of AB 3020, Imbrecht, to implement Personal Income Tax indexing in Tax Year 1980, as required by the Bergeson Act, AB 276, 1979 Session, but at the tax brackets in effect for Tax Year 1978.
The total fiscal effect of a very liberal estimate of state revenues and a Personal Income Tax increase in Tax Year 1980, which are the essential elements of these assumptions, would be significantly to reduce the state's revenue loss from proposition #9 in Fiscal Year 1980-81. The effect will be substantively to mitigate, therefore, the negative impact of Proposition #9 during the first year of its implementation. In the second and succeeding years, however, the state's Revenue Short-Fall will become quite large and, unfortunately, the second-year, or 1981-82, impact of Proposition #9 is being ignored by the proponents of Proposition #9, and it was not addressed in the Assembly Ways and Means Committee Report.

The general consensus is that, predicated upon the above-mentioned assumptions, the first-year (1980-81) effect will be to reduce the projected state revenue loss, as a consequence of voter approval of Proposition #9, from an estimated amount of $4.9 billion, if the state's revenue increase and its one-time surplus are disregarded, to a level of $1.8 billion. Since the legislative change to reduce the Revenue Short-fall from Proposition #9 will be effective only for one year, fiscal Year 1980-81, and since the state's 1980-81 Year-End Surplus will be exhausted, the state will experience in Fiscal Year 1981-82 to a much greater degree the adverse fiscal effects of Proposition #9. As a consequence, the state's revenues for that year, 1981-82, and thereafter, will decline significantly from the level which normally would accrue to the General fund, and this could prove of critical importance to the state. The following calculations indicate the basis for that revenue projection.

If the state's estimated 1980-81 General Fund Revenues of $19.3 billion are increased by $700 million, the revenue increase which the Duffy Report indicates to have occurred over the original January 1980 projection, the state's General Fund Revenues will equal $20.0 billion. If a transfer of Tideland Oil Revenues to the General Fund in the amount of $500 million is made, the total revenues available to the state will attain a level of $20.5 billion for Fiscal Year 1980-81. If from that amount the $3.0 billion tax reduction which is estimated to result from Proposition #9 is deducted12, after enactment of the Imbrecht legislation, the state’s available revenues will amount to $17.5 billion. If that revenue base is augmented for 1980-81 by the addition to it of the estimated $1.8 billion, one-time Year-End Surplus for Fiscal Year 1979-80, the state will have a total revenue source to fund the State Budget in 1980-81 in the magnitude of $19.3 billion. If $400 million is added to the $150 million Federal Revenue Sharing Reserve, the state will have a Prudent Reserve of $550 million and a revenue source of $18.9 billion. State expenditures, as provided in the Budget as introduced on January 10, 1980, will amount to $20.7 billion, and if the assumption is made that that amount is reduced by $400 million, the amount budgeted for “economic uncertainties,” the Budget will amount to $20.3 billion. Since that reduction will be offset by the $400 million to be allocated from Tideland Oil Revenues for the creation of an Energy and Resources Fund and for public education capital outlay under the provisions of SB 1426, the Budget must be reduced by $1.8 billion, assuming the maintenance of the $550 million Prudent Reserve, and by $1.4 billion if only the $150 million in Federal Revenue Sharing is retained as a State Budget Reserve.

Projections for 1981-82

In making an estimate of the state's revenues for the next year, 1981-82, I utilized the estimated General Fund Revenues of $19.3 billion for Fiscal Year 1980-81 as a base and increased that amount by the addition of the unanticipated revenue increase of $700 million. The result is an ongoing revenue base of $20.0 billion for Fiscal Year 1980-81. By adjusting that amount for a 13% increase, which is 1% less than the average rate of increase for the last two years, the total revenues available to the state for General Fund expenditures for 1981-82 can be expected to attain a total of $22.6 billion, and if $600 mil1'ion from the Tideland Oil Revenues is added to that amount, the General Fund Revenues will be $23.2 billion.

That $23.2 billion in revenues available for 1981-82 must be reduced, however, if Proposition #9 is approved, since the Personal Income Tax rates will be established at 50% of the 1978 rates. That reduction can be estimated through a calculation of the personal Income Tax loss. In 1980-81, the Personal Income Tax Revenues produced approximately 35.7% of the General Fund income; if that percentage were to continue into 1981-82, the Personal Income Tax could be expected to generate $8.3 billion of the state's $23.2 billion in revenues for that year. Because of the effect of Proposition #9, however, that revenue estimate must be reduced and the reduction will be in the amount of $4.39 billion, or 53% of the Personal Income Tax which otherwise would be collected.13 If that amount is deducted from the estimated revenues of $23.2 billion, the General Fund income source will decline to $18.8 billion in Fiscal Year 1981-82. Since the Imbrecht legislation will increase state Personal Income Taxes because of its reversion to the 1978 tax brackets, an additional $400 million should be added to that amount for a total revenue base of $19.2 billion. In addition to this revenue, however, the state will possess as a carry-over the Prudent Reserve of $550 million established in the previous year, 1980-81.

For the purpose of further analysis, one may assume that the Budget for 1980-81, as introduced, is not increased by 13%, the percentage increase applied to the state's revenue, but by only 10%. That would constitute a very responsible level of increase and will produce an hypothetical level of state expenditures for the 1981-82 Budget Year equal to $22.8 billion. In addition, of course, there will be available the previous year's Prudent Reserve of $550 million, apart of which is the $150 million in Federal Revenue Sharing money.

Since expenditure reductions will have to be made, because the amount of the state's General Fund Revenues will determine the amount the state may spend, the Budget may not exceed $19.2 billion, which is $3.6 billion below the “normal” expenditure level.


In the 1979-80 Budget, the one now in effect, the expenditure level for General Fund purposes is $18.7 billion. On the basis of my estimate of the “Imbrecht effect,” or the Maximum Mitigation of the first-year revenue loss from Proposition #9, the estimated state expenditures which may be incurred in 1980-81 will be $18.9 billion. On the basis of the calculations which I have explained and which are also predicated on the “most favorable” assumption, the state may project an expenditure level for Fiscal Year 1981-82 of approximately $19.2 billion. In effect, after three years of severe inflation, the state may spend in 1981-82 approximately $500 million more than was budgeted in Fiscal Year 1979-80, the current year.

The deflator mechanism will be implemented, as provided in AB 8, in Fiscal Year 1980-81 since that must occur if the state's fiscal resources, both ongoing revenues and the Year-End Surplus, are estimated to be $100 million less than $20.5 billion. When that takes place and if no reductions in the state's Budget are implemented, and if the deflator mechanism is applied pursuant to current law, 50% of the reduction must be experienced by the schools for a total state revenue loss of approximately $900 million in 1980-81. An equal amount would also be withheld from state allocations to other segments of local government. As a consequence, the bail-out, which began in 1978 at $4.3 billion, would be reduced in 1980-81 from a level of $5.3 billion to considerably less, or about $3.9 billion, an amount below that provided in 1978-79 in SB 154.

The impact will be so dramatic that the deflator will have to be rewritten. Of course, those expenditures which relate exclusively to state services could be reduced and that action would mitigate the impact of the deflator mechanism upon the schools and other segments of local government; but even if that were done, the revenue loss to local government would still be substantive.

Furthermore, in the following year, 1981-82, the state's fiscal situation will be even more tenuous, and there is no question that very significant and controversial decisions will have to be made in the determination of the appropriate expenditure reductions, state and local. It will not be as simple a challenge as was that in 1978, when the state responded to the implications of Proposition #13 in SB 154.

1The Legislative Analyst's Budget Analysis for 1980-81 indicates that state revenues increased in 1979-80 over 1978-79 at a 16.8% rate. It is estimated, however, that the increase in 1980-81 revenues over 1979-80 will be at an 8.5% rate, the decline being largely the result of the impact of the 1978 one-time tax credit and full indexing of the Personal Income Tax upon Tax Years 1980 and 1981. Had the one-time 1978 tax credit and the full indexing effect been disregarded, the estimated revenue increase for 1980-81 would have been 12.3%. To assume a revenue increase in the magnitude of 11% is, therefore, a responsible compromise which, if it has a bias, has one favorable to Proposition #9.

2Revenue and Taxation Code, Div. 2, Part 10, Section 17034.

3Legislative Counsel's Opinion, March 7, 1980, re the constitutionality of the provisions of SB 1464. If a bill authored by Assemblyman Imbrecht, AB 3020, is enacted, the tax savings from the retroactive implementation of Proposition #9 will be repealed and, also, the indexing of the Personal Income Tax, as provided in current law, will be repealed and the 1978 tax brackets made applicable in 1980. This will result in another tax increase for 1980-81 in the magnitude of $500 million in addition to the $1.4 billion which will result from the repeal of retroactivity. .The Imbrecht bill will, therefore, increase Personal Income Taxes in 1980 by $1.9 billion over what is current law in the event that Proposition #9 is approved.

4As of February 29, 1980, the revenues were 2-1/2% greater than estimated, the same percentage as that produced on January 31, 1980. Report on General Fund Disbursement issued by Kenneth Cory, State Controller.

5SB 1426, legislation sponsored by the administration, and now in the Assembly, will provide that a large percentage of this money will be used to finance Capital Outlay for the schools, K through the University, and the Energy and Resources Fund. If transferred to the General Fund, money for school construction and conservation and development of renewable energy sources will be practically unavailable.

6Federal Revenue Sharing money may not be regarded as on-going income since there is a strong likelihood that the program will be repealed by Congress in its attempt to balance the Federal Budget.

7The Reserve, as stated, will consist of a $400 million one- time allocation from the state's increased revenues and $150 million in Federal Revenue Sharing money.

8Legislative Analyst Analysis of the Budget Bill for Fiscal Year 1980-81, p. A-29, Table 15. Had the effect of the one-time tax credit increase and full indexing of the Personal Income Tax been excluded, the revenue increase would have averaged over the three-year period, 1978-79, 1979-80, and 1980-81, at 14.5%.

9This revenue reduction will occur even if the Imbrecht bill to change the tax brackets is enacted, since full indexing will begin in 1981-82.

10Tideland Oil Revenues are anticipated to reach a maximum level in 1982-83, between $600 and $700 million, and to decline thereafter. This is the most optimistic projection of the State Lands Commission.

11If in Fiscal Year 1980-81 the Prudent Reserve remains intact, it will be available to offset a Budget deficit which might result as a consequence of a serious slowdown in the economy and a decline in revenues.

12This reflects a reduction from the $4.9 billion revenue loss as a consequence of the enactment of the Imbrecht legislation to repeal the retroactive implementation of Proposition #9 and to initiate indexing of the Personal Income Tax in Tax Year 1980 based upon the 1978 tax brackets.

13This percentage reflects the fact that Proposition #9 will halve the tax rates, but cause a 53% to 54% loss of revenues to the state because of the fact that tax credits remain at current levels.

Friday, July 13, 2007

A Bush report card

A teacher rates the president

The current president of the United States is at a low ebb in the political polls. His popularity is now tied with Nixon's lowest rating. It can't be a happy time for the White House. With Republicans edging away from their enormously unpopular leader, where will Mr. Bush find support? He need only look at the letters published in The Bee. Although the newspaper has announced it gets very few letters in favor of the president or his policies, every so often a prime example comes in through the transom.

From the July 9, 2007, Letters to the Bee, there's a presidential report card provided by math teacher Walt Andrews:

Hey, chill, all you Bush critics

June was a good month for W and America if you look at what his presidential responsibilities are.

Lets see: He gets an A for national security, A for the economy, A for employment, A for the War on Terror against al-Qaida, A for terrorists captured, A for terrorist plots uncovered and foiled, B on refugees processed, B+ for the number of airline companies coming out of bankruptcy post 9/11, A+ for historic Dow/S&P highs post 9/11, A+ for the number of first-time homeowners, B- on immigration and, finally, C on picking cabinet members and staff.

Looks like to me he doesn't have anything to be ashamed of—he at least earned his pay last month. That can't be said for a number of the pundits, editorialists and Bee letter writers. Get a grip and a life; George will be gone in January '09 and then we will have plenty of time to pick on the next president and his team.

In the meantime, fly the flag every day, not just on July 4 and Memorial Day, pray for all our combatants, uniformed or not, and enjoy all the benefits and privileges that they and all those who went before them have earned with their blood and sweat.

—Walter Andrews, Folsom

Right after this letter was published, it was reported that al-Qaida had recovered its pre-9/11 strength and was exhibiting greater signs of activity than seen in many years. So much for George's A in the war against bin Laden's terrorist group. An interim report on progress in the war in Iraq could not be spun by the White House into anything better than incremental progress in eight of eighteen benchmarks, none of which was fully met. That A is looking really questionable.

What about that wonderful news concerning first-time homebuyers? That certainly sounds like cause for celebration. That rainbow, however, contains a lot of red. Foreclosure rates hit a 30-month high in May and the new June results show that foreclosures are still running 87% above a year ago, despite a small improvement relative to the previous month. Even if the president were really deserving of an A+ for first-time homebuyers, does it detract from his grade when we consider how many of those new homes end up in foreclosure? I think it does.

When you get right down to it, the bulk of the evidence leads up to an unavoidable conclusion: Walt Andrews, an adjunct professor of mathematics at American River College, is an easy grader.