Gov. Brown, legislators fight over Prop. 39 funds for schools

Feb. 3, 2013

By Dave Roberts

Gov. Jerry Brown declared at the start of his State of the State address, “We have wrought in just two years a solid and enduring budget.” But in recent legislative hearings, the Legislative Analyst’s Office charged that he raided the Proposition 39 energy fund to make it look like he’s increasing general education spending. And some legislators claimed that Brown’s budget is unfairly expanding the use of the rural fire tax.

“On Proposition 39 we have some significant concerns with the governor’s proposal,” Legislative Analyst Mac Taylor told the Senate Budget Committee. “The governor’s proposal has the strange effect that it actually reduces by about $190 million the ongoing support for schools. We just think that that’s not in keeping both with what the ballot pamphlet said the way these monies would be treated or the way we’ve considered these revenues over the years.”

Prop. 39, which last Nov. 6 voters passed easily, 61 percent to 39 percent, increased taxation on multi-state corporations doing business in California. It’s projected to generate an extra $900 million in corporate taxes in the next budget year. Half of that revenue — $450 million — must be spent on energy efficiency projects in the state. In other words, those are restricted funds. They can’t be considered part of the General Fund, which can be spent for any purpose the Legislature chooses, according to the LAO.

Brown’s budget treats Prop. 39 revenue and spending as part of the General Fund, and thus subject to the Proposition 98 requirement that about 40 percent of such money be spent on K-12 education.

Not so fast, said the LAO.

“By our longstanding reading of Proposition 98, and something that we worked with counsel on, we don’t believe that the monies that are to be transferred to the energy fund should count as Proposition 98 [revenue], only the monies that the Legislature truly has control over,” said Taylor. “So we have a very different take that you would not count those monies as [Prop.] 98. Therefore you would not count the spending either.”

Brown’s budget also proposed to use all of the Prop. 39 energy efficiency spending on the schools: $400 million for K-12 and $50 million for community colleges. He’s taken a restricted energy project fund that was supposed to be used for both school- and non-school-related projects and counted all of it toward the general-education spending requirement, according to the LAO.

Poorer schools could lose out 

Making matters worse, Brown is not proposing to spend those funds where they are needed most: the schools with the oldest, most energy inefficient buildings and utilities. Instead, he wants to divvy the funds based on the number of students in each school district. As a result, a large, wealthy, suburban district with modern, state-of-the-art facilities would receive more funding for energy efficiency improvements than a smaller, poorer, urban district with antiquated equipment and drafty buildings.

That funding formula also ignores another goal of Prop. 39: to create jobs. There may be non-school projects eligible to receive money from the Clean Energy Job Creation Fund that would create more jobs than school-related projects. Perhaps a food bank in Compton or a women’s shelter in Oakland. But they would receive nothing from Brown’s budget.

“When we look at the actual plain language of the measure, Proposition 39 seems to set up a process where you have to make sure that the energy benefits and the job creation benefits are maximized,” said Taylor. “And that you have to go through a process where agencies with experience in energy-related projects allocate the funds. We’re just not sure that his proposal follows the language of [Prop.] 39.”

In a report to the committee, titled “Treatment of Proposition 39 Revenues Highly Questionable,” the LAO concluded that what Brown has done “is a serious departure from our longstanding view of how revenues are to be treated for the purposes of Proposition 98. It also is directly contrary to what the voters were told in the official voter guide as to how the revenues would be treated.”

The report made two recommendations:

* The Legislature should exclude from the Prop. 98 calculation all Prop. 39 revenues required to be used on energy-related projects. This would reduce the minimum guarantee by roughly $260 million.

* The Legislature should count the $450 million in allocations for energy efficiency projects as non-Prop. 98 expenditures (though the state still could choose to spend a portion on schools and community colleges).

The LAO report said, “Relative to the Governor’s proposal, these two recommendations combined would result in roughly $190 million in additional operational Proposition 98 support for schools and community colleges (with total state costs increasing by the same amount).”

Brown’s defense

Michael Cohen, the Department of Finance chief deputy director, defended the Brownian motions:

“It strongly is precedent-based what we are doing. The closest precedent we have is Proposition 42, which did a very similar thing in terms of transportation funding. We are treating the Proposition 39 money in the exact same way as Proposition 42 monies were dealt with for almost a decade. Basically, if money touches the General Fund, those are General Fund revenues under the Constitution. The Constitution doesn’t say, ‘Well, don’t count the General Fund revenues that are only there for a few minutes.’ The Constitution says that Proposition 98 is built upon General Fund proceeds of taxes. And that’s what we’ve done. Proposition 39 is very clear that the proceeds of the corporation tax from the change in the single-sales factor are deposited into the General Fund. If revenues are deposited into the General Fund, they are General Fund tax revenues.”

Cohen disputed the LAO’s contention that Brown’s budget shortchanges schools by $190 million. He said:

“We think our proposal is the best for education. I disagree with the characterization that schools would be better off under the LAO’s interpretation. Instead, by putting all of the money into the General Fund, as the initiative calls for, the Proposition 98 base does go up. So that is sort of a permanent benefit to schools. In addition, by providing the $450 million to schools, that is a clear benefit to them. Both by letting them fund energy efficiency projects, and also by freeing up additional budget resources to have discretionary funds by lowering their energy costs. The analyst has suggested that some of the money shouldn’t go to schools. Really, if you were to take their interpretation and divert money away from schools to other types of energy efficiency projects, then schools are going to be the loser.”

Cohen also defended doling out the energy funds on a per-pupil basis rather than directing them to schools with the greatest need for energy efficiency improvements:

“Certainly you could devise much more complicated formulas that are trying to account for various districts’ and students’ energy needs. We took a look at it. Basically, there was an argument for all sorts of different factors. Some districts are in hotter climates, some are in colder climates. Some have newer facilities, some have older facilities. Instead of accounting for all of those factors, it was much easier to quickly get the money out, create a system where local districts are responsible for finding a project that is the most cost-effective and meets the requirements of Proposition 39.”

Senators concerned

But several senators were not mollified by Cohen’s rationalizations.

“Your reference to Proposition 42 doesn’t wash,” said Roderick Wright, D-Los Angeles. “Because that money is dedicated [for transportation projects] and never went into the General Fund. We need a much more specific analysis relative to Proposition 98 in that same vein.”

Wright is also concerned that the extra revenue projected from Prop. 39 may not materialize. He said, “You’re potentially co-mingling it with the General Fund, and you’re making an allocation for money that may never occur. You could end up injuring the General Fund by spending money that never occurred as a result of the proposition. So I think there are a number of concerns that I have with the way that you characterize the fund. … I think we need some leg[islative] counsel action here. In South Central, we would say, ‘There’s something in the milk ain’t white.’”

Loni Hancock, D-Berkeley, is concerned about potentially wasting the energy funding by not focusing it where it can do the most good. “Energy efficiency is very important to consider first,” she said. “Otherwise you might be putting solar panels on a sieve.”

Concerns were also raised at the committee hearing about Brown’s proposal to place adult education programs under the purview of community colleges rather than continuing to share them with K-12 school districts. One senator pointed out that community colleges are fewer and further between than high schools, and therefore not as convenient for an adult to attend a night class.

Fire tax expansion

And Tom Berryhill, R-Stanislaus, is angry that Brown’s budget expands programs funded by the $150 rural fire tax.

“I’ve been opposed to these fees from day one,” said Berryhill. “I don’t think they were constitutionally right. As the Board of Equalization first began to send out these bills I’ve been troubled with reports I’ve received about the way the fee is being assessed and administered. In my district I’ve got a lot of timber, a lot of hills and a lot of folks this directly affects.”

Cohen responded that there are numerous items in the budget that displease legislators.

“When we say there’s a balanced budget, it’s a continuation of all of those things that I imagine many of you disagreed with many of the decisions that were made,” he said. “But collectively we’ve got balance. It’s the administration’s view that the fee is an appropriate fee. That it’s responsible for offsetting General Fund costs. Also it’s appropriate for those homeowners to pay a share of the costs of firefighting in their region.”

Berryhill responded, “You can make the argument one way or another whether or not we need to be paying a fee for our own protection. But when this thing starts to expand another $13 million, I don’t get it.”

Legislative Analyst Farra Bracht agreed, saying, “We have similar concerns about the expanded use of the fee. And we are speaking with leg[islative] counsel to get their thoughts on the legality of those uses proposed in the budget.”

The Senate Budget Committee is scheduled to review other aspects of Brown’s budget proposal on Feb. 14.