Proposition 10 Early Childhood Development Programs

Proposition 10 was enacted by the voters of California in the November 1998 election. The initiative measure created the California Children and Families Commissions, now commonly known as the state and local First 5 Commissions, which rely upon revenues generated by state excise taxes on cigarettes and other tobacco products to fund early childhood development programs for children up to age five. The state commission (which receives 20 percent of revenues) and county commissions (which receive the remaining 80 percent) operate the First 5 programs.

Governor’s Proposal

In November 2008, our office presented the Legislature with a budget option to eliminate the state commission and reduce local funding by 50 percent, and redirect these funds to children’s health or childcare programs. The Governor’s budget essentially adopts this LAO option. It specifically proposes to redirect $275 million in Proposition 10 funds in 2009–10 to offset General Fund costs in CWS, Foster Care, and AAP, all programs administered by DSS. The Governor’s proposal assumes that the elimination of the state commission will occur gradually over the budget year, and estimates the savings from this proposal will increase to approximately $321 million in 2010–11.

We concur with the Governor’s savings estimates. We would also note that while these would generally be ongoing savings, the level of savings would likely decline over time because taxes on cigarettes and other tobacco products are a slowly declining revenue source. This proposal would require voter approval because it changes the allocation of funding originally provided under Proposition 10.

LAO Analysis: Prioritizing Use of State Funds Is Logical

Voters approved Proposition 10 during a healthier fiscal period for the state. Proposition 10 generally funds early childhood development, health, and education programs that were designed to be enhancements to previously existing core programs. With the state facing a $40 billion deficit, many core programs are now facing reductions or elimination. Rather than cutting more deeply into core programs, in our view it makes sense to reduce enhanced programs such as Proposition 10. Accordingly, we recommend asking the voters to prioritize the use of Proposition 10 revenues to provide support for core children’s programs and services. This recommendation is part of a broader package of proposed ballot measures—discussed in our January 2009 Overview of the Governor’s Budget—which would increase state revenues and offset General Fund costs in core programs.

We note that while the Governor’s proposal reduces local funding by 50 percent in 2009–10 and thereafter, it allows local commissions to retain their significant existing fund balances. Under our approach, and the Governor’s budget proposal, local commissions would be in a position to prioritize ongoing revenues to meet local needs and would retain their unexpended balances to smooth over this transition.

Issues for Legislative Consideration

There are two implementation issues for the Legislature to consider with regard to the Governor’s proposal to redirect Proposition 10 resources to children’s programs administered by DSS.

Oversight of Local Commissions. Each year, local commissions issue an annual report and conduct independent audits primarily related to the commissions’ financial practices and the manner in which funds were expended. Local commissions submit these audits and their annual report to the state commission for review and inclusion in the state commission’s annual statewide report on First 5 activities. If a local commission fails to submit its audits or annual report to the state commission, the state commission may withhold funds that would otherwise have been allocated to the local commission.

If the state commission were to be eliminated, a different entity would need to assume these oversight responsibilities over the local commissions. Existing entities, such as HHSA or the State Controller’s Office, may be able to take over these functions.

Redirection Priorities. The Governor’s budget proposes redirecting the Proposition 10 funds to support several children’s programs administered through DSS. While this is a workable approach, the Legislature could redirect Proposition 10 funds to other program areas, depending upon its priorities.