2009-10 Budget Analysis Series: Health

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:

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.

Figure 8

Proposition 99 Funding Shift Option
Could Reduce General Fund Costs in Budget Year

(In Millions)

Expenditure Category


Rationale for Reduction

County health programs/ Emergency Medical Services Appropriation (formerly California Healthcare for
Indigents and Rural Health Services)


Eliminates reimbursement for care of indigents (indigent care is a county responsibility under 1991 realignment).

Expanded access to primary care


Eliminates funding for clinic grant program that serves indigents (indigent care is a county responsibility under 1991 realignment).

Department of Education Tobacco Use Prevention and Education Program


Eliminates funding for school-based programs, which have not been proven effective at reducing smoking. Preserves limited funding for administration and implementation of pilot projects.

California Tobacco Control Program: Competitive grants


Reduces grants to non-profit and community-based organizations by half.

California Tobacco Control Program: TEROC/Evaluation and Surveillance


Reduces evaluation and surveillance activities by one-fourth.

Public resources programs


Eliminates Proposition 99 funding for a variety of resources programs. Parks operations funding loss could be offset with park fees.

University of California Tobacco-Related
Disease Research Program


Preserves funding for California-specific and policy-related research and eliminates funding for general medical research.




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:

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