DPH—Modifying Proposition 99: Options for Legislative Consideration

Background. In November 1988, the voters enacted Proposition 99, the Tobacco Tax and Health Protection Act of 1988, which established a surtax of 25 cents per pack on cigarettes and other tobacco products. In addition to payment of certain tax collection costs, Proposition 99 revenues are allocated to six separate accounts established by the measure as follows: (1) the Health Education Account (20 percent of revenues), (2) Hospital Services Account (35 percent), (3) Physician Services Account (10 percent), (4) Research Account (5 percent), (5) Public Resources Account (5 percent), and (6) Unallocated Account (25 percent). Under the terms of the initiative measure, the funds in the Proposition 99 accounts may only be used for the purposes described in the measure and can only be used to supplement existing levels of services.

Problems With Proposition 99. As we discussed in our Analysis of the 2005–06 Budget Bill (page C–129), the revenues collected under Proposition 99 have declined substantially since 1988, both in real terms due to inflation and due to a decrease in smoking. In inflation–adjusted dollars, the revenues available have dropped by 66 percent since 1989–90, and now amount to about $308 million for Proposition 99 programs. Pending federal legislation that would increase federal taxes on tobacco products by 61 cents as soon as April 2009 would further reduce consumption of tobacco products, resulting in a reduction in Proposition 99 revenues of about $20 million.

Dozens of different types of programs and services are still supported from the Proposition 99 special fund and its subaccounts. In effect, there are too few dollars to support so many programs from a funding source that is projected to continue to decline slowly in the future in nominal dollars and even more significantly in real terms.

We also concluded in our Analysis of the 2005–06 Budget Bill that Proposition 99 contains a number of provisions that limit the Legislature’s flexibility in the expenditures of these revenues. In recent years, due to recurring state fiscal problems, the Legislature has taken some steps to prioritize the use of Proposition 99 funding and to achieve state General Fund savings. Some additional steps along these lines are possible under existing terms of the measure. However, the total savings that could be achieved by these actions are limited by various restrictions written into the language of Proposition 99. These restrictions include the requirements for six separate accounts with distinct funding purposes, remaining limits (some have been lifted) on the use of Proposition 99 funds as a match to draw down additional federal resources, and prohibitions on the use of funding to pay for existing General Fund–supported programs.

Options to Unlock Proposition 99 Funding. In our recently published Overview of the 2009–10 Governor’s Budget, we proposed that the Legislature address a very difficult budget shortfall in part by adopting an expanded package of ballot measures to increase state tax revenues, provide greater budgetary flexibility, and generate additional state savings. As the Legislature considers some specific proposals along these lines to unlock spending now earmarked for after–school and social services programs, it could also seek voter approval of changes to Proposition 99 that would give the Legislature greater flexibility in how it allocates these funds and permit the state to achieve significant General Fund savings. Specifically, the Legislature could seek approval for the following changes:

• Enable Proposition 99 to Provide Additional General Fund Relief. Current law requires all Proposition 99 funds to be used to supplement current services, thereby restricting funds from being used to supplant existing funding sources. Given the state’s severe fiscal problems, this non–supplantation provision could be modified to allow Proposition 99 funds to be reprioritized to fund existing programs that are currently supported by the General Fund, and that the Legislature considers to be a high priority.
• Consolidate Six Accounts Into Two. The Legislature may wish to pursue consolidation of the six subaccounts into two—one that would fund tobacco control programs and the other that would fund health services programs in general. This option could preserve a specific level of funding for tobacco control programs, which evidence indicates have helped to reduce smoking by Californians, and allow the remainder of the funding to be used for a broad range of health programs. Under this approach, the separate health–related subaccounts would be abolished and folded into the main Health Services Account, and the Public Resources, Research, and Unallocated accounts would be eliminated. Under our concept, the new Tobacco Control account could be used to fund all tobacco–control related activities, including tobacco–related research currently funded through the Research account.
• Allow All Accounts to Draw Down Federal Funds. Provisions that restrict certain Proposition 99 accounts from drawing down federal funds reduce the state’s ability to leverage state dollars. Removing these provisions and allowing all Proposition 99 funds to draw down federal funds would maximize the state’s ability to leverage state dollars. (We note that the Legislature has already enacted legislation that allows the state to leverage federal funds in the Hospital Services, Physician Services, and Public Resources accounts.)

Budgetary Implications of This Option. We have proposed that a statewide ballot on budgetary ballot measures be submitted to voters in April. If the voters approved a measure enacting changes to Proposition 99, this decision could potentially come in time to permit the Legislature to modify the 2009–10 budget plan to conform to these changes. Under our approach, the restrictions on more than $200 million in Proposition 99 funds would be lifted and the Legislature would have additional flexibility to allocate these funds. Based on our review of these programs, we find that the state could achieve about $100 million in General Fund savings by redirecting some of these funds from current proposed uses to other health programs currently funded with General Fund dollars. The remaining funds would continue to be used for targeted tobacco control and health–related activities. In Figure 8, we summarize some programs currently funded under Proposition 99 that we believe could be considered for reductions or elimination in order to achieve this level of benefit to the General Fund.

There are several key aspects to such a strategy that the Legislature may wish to consider. The newly established Health Services Account would, under our approach, provide greater spending flexibility than the various health–related accounts it would replace. This means that the Legislature could devote these Proposition 99 funds to programs that it may deem a priority, such as HFP, while at the same time offsetting General Fund costs on such programs. If Proposition 99 special fund dollars were allocated to HFP, for example, the program could leverage federal matching funds on a two–to–one ratio.

In general, our proposal reduces support from Proposition 99 for health programs for indigents that are a county responsibility and prioritizes funding for the support of health programs that are an ongoing state responsibility. A 1991 state–local realignment provided counties with additional state tax revenues in trade for their assuming certain responsibilities, including indigent care. (We note that some of the specific reductions for health programs we have proposed could be restored in the future using funding from the more flexible Proposition 99 Health Services Account if the state’s financial condition improved.)

In abolishing the Public Resource Account and redirecting its proceeds to other purposes, the Legislature may wish to backfill a small share of the Public Resources Account spending—probably a couple million dollars—from the General Fund to ensure the continuity of high–priority programs. This would reduce the net savings from this budget option. However, additional funding used for support of state parks could be offset with increases in park fees to allow General Fund savings.

Overall, our proposal, while focusing on short–term General Fund relief in the budget year, would remove constraints in order to allow the Legislature more flexibility to allocate state revenues to the highest–priority tobacco control and health programs over the longer term.

Priorities Should Be Established for Use of Tobacco Control Funding. As discussed above, we propose consolidating all tobacco control–related activities now funded under Proposition 99, including research activities, into a single Tobacco Control Account. In order to help address the state’s General Fund problems in the budget year, this option would reduce the $105.3 million in funds now earmarked for these purposes to $63 million. We suggest that Legislature adopt the following approach for the allocation of funding for these efforts:

• Flexibility Important. Tobacco control funding should be flexible, with funding allocated to the combination of smoking cessation activities, prevention programs, media communication campaigns, research and evaluation, and administration that best allow the state to achieve its tobacco control goals.
• Look for Opportunities to Achieve State Savings. Explicit consideration should be given to programs that would be most likely to save money for the state, such as reducing its Medicaid program costs (the program is known as Medi–Cal in California). The Center for Disease Control estimates 14 percent of state Medicaid costs nationally are attributable to smoking. In addition, according to data from the 2007 California Health Interview Survey, a comparatively high rate of Medi–Cal recipients (17.6 percent) are smokers compared to persons not in Medi–Cal (12.6 percent).
• Focus Research on Determining What Works to Reduce Smoking. Tobacco–related research funded by the state should focus on applied science that can be used to evaluate and improve state tobacco control policy and program implementation.
• Use Evidence–Based Approach. Tobacco control strategies that have already been proven effective should be prioritized over other strategies. Funding for school–based programs, for example, should be limited to pilot programs until they can be implemented effectively, given a 2005–06 evaluation of school–based tobacco control programs that found no association between program implementation and smoking behavior.