February 2, 2012

Pursuant to Elections Code Section 9005, we have reviewed the proposed statutory initiative
(A.G. File No. 11‑0100) that would increase personal income tax rates and dedicate revenues for K-12 education, early care and education programs, and bond debt-service payments.


State’s Fiscal Situation. California’s General Fund, the state’s core account that supports a variety of programs (such as public schools, higher education, health, social services, and prisons) has experienced chronic shortfalls in recent years. During this period, policymakers have taken actions to reduce expenditures for a variety of public programs and temporarily raised certain taxes between 2009 and 2011. State General Fund shortfalls of several billion dollars per year are expected to continue over at least the next few years under current tax and expenditure policies.

Personal Income Tax. The state’s personal income tax (PIT) imposes rates ranging from 1 percent to 9.3 percent on the portions of a taxpayer’s income in several income brackets, with the 9.3 percent rate applying to income in excess of $48,029 for single filers and $96,058 for joint filers. The PIT revenue, which is deposited into the General Fund, totaled $49.5 billion in 2010‑11. An additional 1 percent tax applies to income over $1 million, with associated revenues dedicated to mental health services.

Proposition 98 Funding. In 1988, voters approved Proposition 98. Including later amendments, Proposition 98 establishes a guaranteed minimum annual funding level—commonly called the minimum guarantee—for K-14 education (consisting of schools and community colleges). The minimum guarantee is funded through a combination of state General Fund revenues and local property tax revenues. In 2011‑12, schools and community colleges received $48.7 billion in Proposition 98 funding. Of that amount, $43 billion was allocated to
K-12 local education agencies (LEAs)—school districts, county offices of education, and charter schools. The calculation of the minimum guarantee depends on a number of factors, including the year-to-year changes in General Fund revenues, student attendance, and California per capita personal income. With a two-thirds vote in any given year, the Legislature can suspend the Proposition 98 guarantee for one year and provide any level of K-14 funding it chooses.

Early Care and Education (ECE). In 2011‑12, state and federal funds provided roughly $2.5 billion to offer a variety of child care and preschool programs for approximately 530,000, or about 15 percent, of California children ages five and younger. Standards and characteristics—including staff qualifications, curriculum, and adult-to-child ratios—vary across individual programs. In general, participation in these publically subsidized programs is reserved for families that display “need.” Eligibility criteria include low family income, participation in the California Work Opportunities and Responsibility to Kids program or other work or training activities, and/or children with special needs. Because of funding limitations, waiting lists for subsidized programs are common in most counties. As of June 2010, about 125,000 eligible children under the age of five were waiting for a slot in one of the state’s subsidized programs. Limited data are available on children’s participation in non-subsidized programs.

General Obligation Bond Debt Service. Bond financing is a type of long-term borrowing that the state uses to raise money, primarily for long-lived infrastructure assets (including school and university facilities, highways, streets and roads, land and wildlife conservation, and water-related infrastructure). The state obtains this money by selling bonds to investors. In exchange, the state promises to repay this money, with interest, according to a specified schedule. The majority of the state’s bonds are general obligation bonds, which must be approved by the voters and are guaranteed by the state’s general taxing power. General obligation bonds are typically paid off with annual debt-service payments from the General Fund.


This measure increases rates on the vast majority of Californian personal income taxpayers and uses the funds for schools, ECE programs, and state debt-service payments. We discuss these proposals in further detail below.

Increases PIT Rates Through 2024. As shown in Figure 1 (see next page), this measure increases PIT rates on all but the lowest income bracket, effective beginning in 2013 and ending in 2024. The additional marginal tax rates would be higher as taxable income increases. For income of PIT filers currently in the highest current tax bracket (9.3 percent marginal tax rate, excluding the mental health tax), additional marginal tax rates would rise as income increases. For example, as shown in Figure 1, an additional 1.8 percent marginal tax rate would be imposed on income of joint filers between $200,000 and $500,000 per year and an additional 2.2 percent marginal tax rate would be imposed on income of joint filers over $5 million per year. The income levels in the tax brackets shown in Figure 1 would be indexed for inflation. The current mental health tax would continue to be imposed.

Funds for Debt Service Through 2016‑17. The revenues raised by the measure would be deposited into a newly created California Education Trust Fund (CETF). Until the end of 2016‑17, 30 percent of revenues deposited into the CETF would be used by the state to pay bond debt-service costs. The measure requires that these funds first be used to pay education debt-service costs (pre-kindergarten through university school facilities). If, however, the state has no outstanding education debt-service costs, CETF funds can be used to pay other general obligation bond debt-service costs. These funds would offset the state’s General Fund costs and would provide state General Fund savings.

Allocates Funds for Schools and ECE Programs. For the first few years of the measure, all remaining CETF funds would be allocated for schools and ECE programs. Beginning in 2015‑16, total CETF allocations to schools and ECE programs could not increase at a rate greater than the average growth in California personal income per capita in the previous five years (except for 2017‑18, when allocations can increase at a higher rate, since 30 percent of funds would no longer be required to be allocated for debt-service relief). Of the funds available for allocation, 85 percent would go to schools and 15 percent would go to ECE programs. The measure also prohibits CETF monies from being used to replace state, local, or federal funding that was in place prior to November 1, 2012. All revenue collected by the measure and allocations made to schools are excluded from the calculation of the Proposition 98 minimum guarantee.

Excess Funds Used for Debt-Service Payments. Beginning in 2015‑16, the measure requires any CETF monies collected in excess of the growth rate limit described above also be used by the state to pay debt-service costs. As with the debt-service payments mention above, first call on these payments would be to retire education-related debt-service costs.

Provides Three Grants to Schools. The measure requires CETF allocations to schools be provided through three different grants: educational program grants (70 percent of K-12 allocations); low-income per-pupil grants (18 percent); and training, technology, and teaching materials grants (12 percent). Educational program grants are distributed on a per-pupil basis depending on the grade of each student, with students in higher grades receiving more funding than students in the lower grades. Low-income per-pupil grants are allocated based on the number of low-income students (defined as the number of students eligible for free meals) enrolled in each school. These two grants can be spent on a broad range of activities, including instruction, school support staff (such as counselors and librarians), and parent engagement. Training, technology, and teaching materials grants are provided on a per-pupil basis and can be used for professional development activities, new technology, or teaching materials. The governing board of the LEA has sole authority over how to spend CETF funds.

Includes Several School-Site Spending Restrictions. Up to 2 percent of a school district’s allocation can be used to cover the district’s audit, budget, public meeting, and reporting requirements. The remaining funds allocated must be spent at the specific school where the associated student enrollment funding is generated. In the case of low-income per-pupil grants, for example, if 100 percent of low-income students in a school district are located in one particular school, all associated grant funds must be spent at that specific school. The measure also prohibits CETF funds from being used to provide salary or benefit increases for personnel, unless the increases are provided to other like employees that are funded with non-CETF monies.

Creates New School Reporting Requirements. The measure includes several reporting requirements for LEAs. Most notably, the measure requires all LEAs to create and publish an online budget for every school within the LEA’s jurisdiction. The state Superintendent of Public Instruction must provide a uniform format for budgets to be reported and must make all budgets statewide available for the public. The LEA governing boards also must seek input from the public on how to spend CETF funds and explain how CETF expenditures will improve educational outcomes and how those improved outcomes will be measured. In addition, LEAs must provide a report on how CETF funds were spent at each school within the LEA’s jurisdiction within 60 days after the close of the school year.

Expands ECE Programs. CETF allocations to the state’s ECE system is provided for programs benefiting children ages five and younger. Of this amount, the first $300 million allocated each year would need to be used to restore recent state budget reductions to existing child care programs. The majority of remaining funds would be used to expand the number of children from low-income families served in publicly funded child care and preschool programs. The measure also uses new revenues to establish a quality rating scale by which to assess the effectiveness of ECE programs; allocates supplemental funding to those programs achieving higher ratings on that scale; and establishes a new state database to collect and maintain information on ECE programs and participants.

Cannot Be Amended by the Legislature. If adopted by voters, this measure could only be amended by a future ballot measure approved by majority vote in a statewide election. The Legislature would be prohibited from making any modifications to the measure.

Fiscal Effect

Additional State Revenues. If approved, the measure’s tax provisions would take effect January 1, 2013. In 2013‑14 (reflecting a full-year fiscal effect), estimates of the additional state revenues that would be generated from the proposed PIT rate increases currently range from about $10 billion (based on the current Legislative Analyst’s Office revenue forecast) to about $11 billion (based on the current Department of Finance revenue forecast). (In 2012‑13, the partial-year effect would be additional revenues of about half this amount.) The total revenue generated would tend to grow over time, but be somewhat volatile due primarily to the volatility of income for upper-income filers. Most of the income reported by upper-income filers is related in some way to their capital investments, rather than wages and salary-type income, and can change significantly from one year to the next.

Initial State Debt Service Relief. Until the end of 2016‑17, the measure would use 30 percent of CETF monies to pay for state debt-service costs, resulting in associated state General Fund savings. In 2013‑14, the first full fiscal year of this measure, we estimate the measure would provide $3 billion to $3.3 billion in state savings, with savings tending to grow over the next few years.

Funds for Schools and ECE Programs. Initially the measure would allocate roughly $6 billion to $6.5 billion for schools and $1.1 billion to $1.2 billion for ECE programs with funds tending to grow through 2016‑17. Beginning in 2017‑18, annual allocations would increase substantially as funds would no longer be dedicated to debt service relief. Given these revenues are excluded from the Proposition 98 calculations, the minimum guarantee would be unaffected by this measure. Accordingly, funding distributed to these educational entities under this measure would be in addition to their annual Proposition 98 funding.

Beginning in 2015‑16, Likely Some Additional Debt-service Relief. The measure is also likely to provide General Fund relief on bond debt-service costs in some subsequent years that the measure is operative due to the requirement that growth in CETF funds greater than the five-year average growth in per capita personal income be used for debt-service relief. Because PIT revenues would increase as population growth increases, they likely would grow at a faster rate than per capita personal income. In addition, because PIT revenues are more sensitive to swings in the capital gains of upper-income earners, they tend to be considerably more volatile than the five-year average growth in per capita personal income, often exceeding that growth rate. When PIT revenues outpace the five-year rolling average of per capita personal income, the measure would require the excess to be used for debt-service costs. Using CETF funds to offset these costs would result in General Fund savings. The exact amount of associated General Fund savings would depend in the difference in the PIT and per capita personal income growth rates, but state savings easily could be several hundred million dollars per year.

Interaction With Rest of State Budget. The measure would help the state balance its General Fund budget from 2012‑13 through 2016‑17 by providing roughly 30 percent of the revenues for debt-service relief. These savings would be about $1.5 billion in 2012-13 and $3 billion in
2013-14, tending to grow thereafter until 2016-17. In subsequent years, the vast majority of revenues raised by this measure would directly benefit schools and ECE programs, with little corresponding state General Fund savings.

Summary of Fiscal Effect


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