February 11, 2005
Dear Attorney General Lockyer:
Pursuant to Elections Code Section 9005, we have reviewed
the proposed initiative (File No. SA2005RF0008). This proposed statutory measure
would repeal the Mental Health Services Act.
Proposition 63 Enacted. In November
2004, California voters approved Proposition 63, also known as the Mental
Health Services Act. The statute provides additional state funding for various
mental health programs identified in its provisions by establishing a personal
income tax (PIT) surcharge of 1 percent on amounts of taxable incomes in
excess of $1 million. The PIT surcharge is levied on all tax filers
effective January 1, 2005. Revenues generated by the new tax surcharge would be
deposited into a new special fund.
The Department of Mental Health (DMH), in coordination
with certain other state agencies, has the lead role in implementing most of the
programs specified in the act through contracts with counties. Each county is
directed by the act to draft and submit for state review and approval a
three-year plan for the delivery of mental health services within its
jurisdiction. The Franchise Tax Board (FTB) is the lead state agency responsible
for administration of the tax provisions. The act permits up to 5 percent of the funding
allocated annually from the Mental Health Services Fund to be used to offset
state costs for implementation of the measure. Up to an additional 5 percent
share of the allocations from the special fund is to be used annually for county
planning and other administrative activities to implement the act.
The act specifies that the revenues generated from the
tax surcharge must be used to expand mental health services and cannot be used
for other purposes. In addition, the state and counties are prohibited from
redirecting funds now used for mental health services to other purposes. The
state is specifically barred from reducing General Fund support, entitlements to
services, and formula distributions of funds now dedicated for mental health
services below the levels provided in 2003-04. The state is also prohibited from
changing mental health programs to increase the share of their cost borne by a
county or to increase the financial risk to a county for the provision of such
services unless the state provides adequate funding to fully compensate for the
additional costs or financial risk.
Implementation
of Act Has Started.
State agencies and the counties have begun implementing the
Mental Health Services Act. The DMH estimates that by April it will release an
initial round of about $13 million in funding generated under the new law for
grants to counties to prepare their three-year plans for the expansion of mental
health services. Allocations of larger sums of Mental Health Services Act
funding derived from the new income tax surcharge, which are to be used for the
actual expansion of mental health services, are expected to begin occurring this
fall. The state and counties are also discussing the implementation of the
Mental Health Services Act with private providers of mental health services. A
number of counties contract with such private providers for the delivery of
mental health services in their communities.
This initiative measure would repeal the Mental Health
Services Act in its entirety, effective upon its approval by voters. The measure
states that the repeal shall be applied retroactively. In addition, it specifies
that all funds disbursed to DMH or any other state or local entity are to be
returned to the state so that they can, in turn, be refunded to individual
taxpayers.
State
Revenue Decreases. The repeal of the PIT surcharge would reduce state
revenues by approximately $275 million in 2004‑05, $750 million
in 2005‑06, $800 million in 2006‑07, and increasing amounts
annually thereafter. These are the amounts that are projected to be generated by
the new tax surcharge.
Net
Decreases in State and County Expenditures. If this measure were
enacted, state and county spending would generally be reduced commensurately
with the reduction of state revenues discussed above. In other words, state and
local government spending levels for mental health programs would eventually be
about $800 million a year less than would otherwise have been the case under the
Mental Health Services Act. These reductions in spending would be ongoing, and
would include the elimination of millions of dollars annually in spending for
state and county administration of the Mental Health Services Act. The $800
million per year spending reduction would probably be partly offset by increased
expenditures for some state and local programs, such as prison or jail
operations, given that mental health services would not be expanded if the law
is repealed.
Onetime Taxpayer Refunds. This measure
would result in a onetime refund to taxpayers, potentially in the hundreds of
millions of dollars, of the new tax revenues collected under the Mental Health
Services Act. The amount of refunds would depend primarily upon when this
measure was placed before the voters for their approval, and the amount of
Mental Health Services Act funding that was collected and expended by the state
and counties before its repeal by this initiative.
The amount of these refunds would also depend upon how
and if existing state and federal constitutional provisions prohibiting the
impairment of private contracts, as well as certain other potential legal
issues, affected the obligation of the state and counties to return Mental
Health Services Act funds. The potential effect, if any, of these legal
constraints upon the amount of funding that would be subject to return to the
state and, subsequently, the taxpayers is unknown.
Given the relatively small number of taxpayers eligible
for refunds, the onetime state cost for the FTB to issue refund checks would
probably not exceed $1 million.
Reduction in Federal Funds. If this measure
is enacted, the state and the counties would not experience an increase in the
receipt of federal funds that might result from the expansion of mental health
services under the Mental Health Services Act.
Prohibition on Spending Reductions Ended. Depending
upon the state’s fiscal circumstances in the future, this initiative could
result in a reduction in General Fund expenditures for community mental health
programs below the level that would otherwise occur under the Mental Health
Services Act. As noted earlier, the law contains provisions that prohibit the
state from reducing General Fund support for mental health programs below the
2003‑04 level and that restrict certain other changes in mental health
programs. Repeal of these provisions means that the Legislature and Governor
would again have the authority to reduce state spending or modify the structure
of the programs in the future without regard to the current requirements of the
Mental Health Services Act.
State revenue
decreases of approximately $275 million in 2004‑05, $750 million
in 2005‑06, $800 million in 2006‑07, and increasing amounts
annually thereafter, with commensurate ongoing reductions in expenditures by
the state and counties for mental health programs. These reductions in
expenditures could be partly offset by increased costs for other state and
local programs.
Unknown onetime refund to taxpayers, potentially as
much as hundreds of millions of dollars, of tax revenues collected and
expended under the Mental Health Services Act prior to its repeal.