Proposition 32
Title: Veterans' Bond Act of 2000
Sponsors: Assembly Member John Dutra
Legislative History: AB 2305 (Chapter 51, 2000), Assembly: Ayes 76 - Noes 0; Senate: 
Ayes 36 - Noes 0.

Major Provision:

• Would authorize the issuance of $500 million of state general obligation (G.O.) bonds to assist veterans to purchase farms and homes.

Background:
Since 1921, after World War I, voters have approved a total of 25 G.O. bonds worth about $7.9 billion to finance the California veterans' farm and home purchase (Cal-Vet) program. As of July 2000, about $270 million remained from these funds, which are expected to be depleted by 2002.

The money from these bond sales is used by the Department of Veterans Affairs to purchase farms, homes, and mobile homes that are then resold to California veterans. The program is fully self-supporting. Each participant makes monthly payments to the department in an amount sufficient to (1) reimburse the department for its costs in purchasing the farm, home, or mobile home; (2) cover all costs resulting from the sale of the bonds, including interest on the bonds, and (3) cover the costs of operating the Cal-Vet program.

To date, about 400,000 veterans have been assisted by this program. This G.O. bond would provide sufficient funds for at least 2,500 additional veterans to receive loans.

Reports of the Cal-Vet program by the Legislative Analyst's Office (LAO) and Bureau of State Audits found excessive program costs, loan processing delays and mismanaged information systems, contributing to inefficiency. As a result, several reforms have been made and others are being developed.

Fiscal Impact:
Based on the LAO's estimate, the bonds would be paid off in about 25 years. If the $500 million in bonds were sold at an interest rate of 5.5 percent, the cost would be about $858 million to pay off both the principal ($500 million) and the interest ($358 million). The average payment for principal and interest would be about $34 million per year.

Throughout its history, the Cal-Vet program has been totally supported by the participating veterans, at no direct cost to taxpayers. However, because general obligation bonds are backed by the state, if the payments made by those veterans participating in the program do not fully cover the amount owed on the bonds, the state's taxpayers would pay the difference.

Policy Considerations:

• Should the state be in the business of incurring debt for this type of program? Is there a more efficient, non-governmental approach to provide home loans for vets that does not require the state to issue debt, such as allowing the private sector to serve their needs?
• Veterans have subsidized loans available to them through the federal VA home loan program. Is the Cal-Vet program necessary?
• If participating veterans fail to make adequate loan re-payments, taxpayers would pay the difference. Is this a risk worth taking?

Support Arguments:

• These G.O. bonds finance the Cal-Vet program, and they are repaid by veterans. Veterans are charged the lowest rates on their loans that will cover all costs of the program, including principal and interest on the bonds. The program operates without costs to taxpayers.
• The Cal-Vet program was established after World War I to help veterans following active military service for their country. More than 400,000 wartime veterans have been assisted by this self-supporting program, which is a working memorial to them.
• To ensure veterans receive the best possible service, the Legislature recently directed the Department of Veterans Affairs to operate more efficiently - at a pace competitive with private-sector services.

Support Arguments Signed by: Assemblyman John A. Dutra, chair, Assembly Committee on Veterans Affairs; Senator K. Maurice Johannessen, chair, Senate Committee on Veterans Affairs.

Opposition Arguments:

• Raising money by selling tax-free bonds results in a revenue loss (from income on other investments that would be taxed) to both the state treasury and the federal treasury.
• Most California veterans have been unable to obtain assistance through the Cal-Vet loan program because the program is not limited to war-time veterans, or persons who served in actual combat, or veterans who became disabled by serving in the military. Someone who stayed home in the National Guard can get a Cal-Vet loan.
• Instead of funding another half-billion dollars in low interest loans, let's spend money on programs limited to the most deserving and needy people.

Opposition Arguments Signed by: Melvin L. Emerich, attorney; Gary B. Wesley, co-chair, Voter Information Alliance.

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Major Provisions:

• Allows legislators to join the state Public Employees' Retirement System (PERS).
• Requires legislators to contribute about 5 percent of salary for this benefit. The state (taxpayers) would pay the employer contribution.

Background:
Prior to November 1990, legislators participated in the state Legislators' Retirement System (LRS). Proposition 140 of November 1990, imposed term limits and prohibited legislators from earning any new retirement benefits (other than Social Security). Since legislative service was no longer a career option, new enrollments in the LRS was also prohibited under Proposition 140. However, under the Social Security program, legislators are entitled to retirement, disability and health benefits. Salaries and benefits (other than retirement) of legislators are set annually by an independent commission appointed by the governor.

PERS provides retirement benefits to a majority of public employees. A legislator choosing to participate in the plan would pay almost 5 percent of salary to the system. In addition, the state would pay into the system in the same way it pays for state employees. The state's contribution is determined each year by PERS and is paid as a percent of the employee's salary. These rates can vary significantly from year to year. For instance, the current PERS employer rate is zero (due to recent performance of PERS investments), but this rate is projected to increase to around 4.5 percent in 2001-02.

Under this proposal, legislators would be required to retain their Social Security status and have the option of enrolling simultaneously in the PERS Tier One program, which covers over 100,000 state miscellaneous employees. Most public employees enroll in PERS in lieu of the federal Social Security program.

Fiscal Impact:
The state cost to provide PERS retirement benefits to legislators would depend on: (1) how many legislators choose to participate in PERS and (2) the annual employer PERS contribution rate. The costs would be under $1 million annually, according to the Legislative Analyst's Office.

This expense would be paid out of the annual amount provided for support of the Legislature, and consequently, would not result in additional state costs.

Policy Considerations:

• If legislators decide to increase their retirement benefits, would all miscellaneous employees receive the same benefit increase since they are in the same retirement category? If so, could this lead to massive benefit costs for California taxpayers?
• Cal-Tax is not opposed to legislators participating in a better retirement program; however, we question if this particular proposal is ethical or would create a conflict of interest? Legislators currently vote on PERS benefit legislation. Since this proposal would allow legislators to join PERS, they would be voting for their own benefit increases. Furthermore, would this arrangement entice legislators (who are now serving limited terms in office) to vote for increased retirement benefits? Does this measure allow legislators to hide behind public employees to get huge benefit increases?
• At this time, the employer contribution rate is zero. However, when the economy declines, would taxpayers be forced to pay the additional cost of this retirement benefit - since employer retirement contributions are based on the performance of PERS investments? If employers are forced to pay higher retirement contribution rates for legislators, will this divert funds from vital tax-supported programs?
• This measure allows legislators to participate in both Social Security and PERS. As a result, would employer (i.e., taxpayer) costs increase due to the 6.2% payroll tax the employer pays to Social Security, plus the employer contribution to the PERS fund?
• As a result of term limits, would it be more practical for legislators to remain in a retirement plan that is more portable, i.e., Social Security, especially since plans like PERS reward long-term service? Wouldn't retirement options suited to mobility, such as 401(k)s, better serve legislators?

Support Arguments:

• Legislators are limited to six years in the Assembly and eight years in the Senate. But they are allowed no service time toward their pensions for the time they served in public office. It's possible they will have to work additional years to make up the lost years of service toward their pensions.
• It would allow legislators to put aside some of their paycheck each month and have the state put some in, too. No special deal. No special benefits. Just the same plan available to the majority of state workers.
• Nurses, teachers, firefighters, farmers - people from these jobs can't retire on their investments, they need pension plans. If we don't treat lawmakers like every other public employee, then soon we'll only have candidates rich enough not to need pensions.

Support Arguments Signed by: Peter Szego, chair, State Legislative Committee, American Association of Retired Persons; Allan Zaremberg, president, California Chamber of Commerce; Dan Terry, president, California Professional Firefighters.

Opposition Arguments:

• Proposition 33 does not treat lawmakers "like all other public employees." According to the Department of Finance, it is inequitable because legislators would become eligible for full retiree health benefits upon vesting in five years, while state employees could be required to work 20 years to obtain the same benefit.
• Proposition 33 is an attack on the reform enacted through Proposition 140 of 1990 that enacted term limits and abolished the pension program for legislators.
• State legislators are eligible for a $99,000 salary and some reimbursement for living expenses. They should use some of that to invest for their own retirement, rather than asking taxpayers to foot the bill.

Opposition Arguments Signed by: Ernest F. Dynda, president, United Organizations of Taxpayers; Lewis K. Uhler, president, National Tax Limitation Committee.

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Major Provisions:

• Repeals the campaign contribution and voluntary spending limits for state and local elective offices enacted by Proposition 208 of 1996.
• Establishes new contributions and voluntary campaign spending limits, with higher dollar amounts than specified in Proposition 208, including:

• Establishes incentives for candidates who voluntarily limit spending:

Background:
Both federal law and the state's Political Reform Act of 1974 require candidates for public office to report contributions they receive and spend. While federal law and 44 other states place limits on campaign contributions for individuals and groups, California law generally does not impose similar restrictions, although some localities have imposed limits.

However, there have been several ballot initiatives approved by voters to impose limits on contributions and/or spending (Propositions 68 and 73 of June 1988 and Proposition 208 of 1996), but they have been gutted by the courts.

Proposition 208 is currently being debated in the federal district court. A portion of the initiative was declared an unconstitutional violation of free speech. The court sided with challengers of Proposition 208 that the extremely low spending limitations would have prevented candidates from communicating pertinent information and mounting effective campaigns. A ruling on the other provisions is expected to occur after the November 2000 election since Proposition 34 would pre-empt Proposition 208.

As a result, current state law places no restrictions on candidate spending from personal sources, including personal loans, nor does it restrict campaign expenditures from campaign committees.

Policy Considerations:

• Does a measure that limits political contributions violate First Amendment rights? If enacted, would this proposition lead to lengthy and costly legal battles as have occurred in the past.
• Does the limitation or prohibition of contributions from specified groups (businesses, labor, PACs, political parties, lobbyists) disenfranchise these organizations, i.e., does it unfairly restrict their participation in the political process?

Fiscal Impact:
According to the Legislative Analyst's Office, this measure would result in additional costs to the state, mainly to publish candidate statements in the ballot pamphlet and implement various provisions. Additional state costs would be offset to at least some extent by payments and fines from candidates and committees. The net costs to the state could be several million dollars annually. Local costs probably would be insignificant.

Support Arguments:

• In California, there are no limits on what politicians can collect and spend to get elected to state office. Six-figure campaign contributions are routine. Proposition 34 finally sets enforceable limits and puts voters back in charge of California's political process.
• In no-limits California, candidates flush with cash can swoop into other races and spend hundreds of thousands of dollars at the last minute to elect their friends. Proposition 34 stops these political sneak attacks.
• Three times in the past 12 years, voters have attempted to enact limits only to have the courts strike them down. Proposition 34 has been written to comply with all court rulings and will set reasonable limits that can be enforced.

Support Arguments Signed by: Dan Stanford, former chair, California Fair Political Practices Commission; Eileen Padberg, member, Bipartisan Commission on the Political Reform Act; Howard L. Owens, director of Region IX, National Council of Senior citizens.

Opposition Arguments:

• It is very expensive to run for political office in California. Candidates need campaign contributions to inform voters where they stand on the issues. If candidates are unable to raise the money to finance campaigns, how will voters be able to make informed choices?
• Free speech is a cherished right in our nation. Why should we restrict a political candidate's free speech in the guise of political reform?
• By clamping unworkable limits on campaign contributions, candidates will be forced to spend more time asking donors for money. Incumbents will be begging for money rather than tending to the public's business; challengers will seek campaign funds for political favors.

Opposition Arguments Signed by: Assembly Member Brett Granlund; State Senator Bill Morrow.

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Major Provisions:

• Allows all state, local and regional governmental entities to contract with qualified private architectural and engineering entities for all phases of public works projects.
• Requires all architectural and engineering services be selected by the use of a fair, competitive selection process. This would prohibit all public employees who have financial or business relationships with private contract bidders from participating in the selection process, and require selection participants to adhere to all laws regarding political contributions, conflicts of interest or unlawful activities.
• Subjects architectural and engineering services' contracts to standard accounting practices, and may require financial and performance audits to ensure timely project delivery and cost containment.

Background:
The Professional Engineers of California Government (PECG), a union representing nearly 10,000 engineers employed by the California Department of Transportation (Caltrans), has engaged in contentious battles with Caltrans over contracting out public services with private engineering and architectural firms.

Initially, Caltrans planned and designed transportation projects and then hired private companies to perform the construction. However, over the past 15 years, Caltrans has hired private architects and engineers to supplement design work to ensure timely project delivery and promote competition. This action has caused strife between Caltrans management and the union representing state-employed engineers.

The disputes have resulted in litigation with outcomes that favor the engineers' union. According to the Legislative Analyst's Office, the union's first major lawsuit against Caltrans was filed in 1986. PECG's primary aim was to prevent Caltrans from contracting with private design and engineering companies for services that were historically performed by Civil Service employees. In 1990, PECG prevailed when a superior court judge found that Caltrans' use of private contractors violates Civil Service laws. As a result, the court declared that Caltrans could only use private contractors if it could "factually demonstrate" that use of the contractor met at least one of the following criteria:

• The contractor is more cost-effective than using civil service employees.
• The contractor is needed to ensure timely project completion.
• The contractor offers a specialty not found in the public sector.
• The contractor is used to perform a new state function.

Following this decision, several legislative measures were passed to increase Caltrans authority to contract with private sector companies. These laws include:

• SB 1417 (Bergeson) of 1992, which allowed Caltrans to advertise and award engineering and design contracts that were no greater than $250,000, and contract with nonprofit organizations for the construction and maintenance of traveler service information facilities.
• SB 1209 (Bergeson) of 1993, which allowed contracting out to ensure timely project completion and prevent a costly process of short-time hiring and layoffs. The bill also declared that the use of specialty personnel, such as private consultants, is a new state function.
• AB 1958 (Katz) of 1994, which allowed contracting out of seismic retrofitting to the lowest responsible bidder, and the bill described seismic retrofitting as a new state function.

However, in 1997, the California Supreme Court, in Professional Engineers in California Government v. Department of Transportation, declared SB 1209 unconstitutional due to lack of "factual justification." Likewise, in 1998, AB 1958 was proclaimed unconstitutional. In a 1995 suit initiated by Business, Transportation and Housing (BT&H) Agency Secretary Dean Dunphy, Dunphy v. PECG, the superior court declared that the bill lacked substantial evidence to support that seismic retrofitting is a new state function. Consequently, the court ordered Caltrans to terminate or factually justify, using the four criteria previously outlined, all existing seismic retrofit contracts.

Deciding not to appeal, the BT&H agency settled the case. This decision allows PECG's engineers to take over work that private sector employees are implementing and is forcing Caltrans to hire up to 3,000 new employees. The rulings have broader application than Caltrans and strengthens the doctrine that Civil Service employees hold a virtual monopoly on work that has been typically done by public employees.

The 1997 ruling in favor of public engineers is beginning to affect other projects. For example, the city of San Diego is considering whether it needs to "factually justify" its local design and engineering contracts according to the criteria imposed on the state by the courts. The Department of Water Resources has mandated the hiring of in-house staff for the State Water Project.

To increase its control of public-sector engineering and architectural projects, the engineers' union placed an initiative on the ballot in June of 1998. Cal-Tax was an integral part of the campaign against the measure, Proposition 224 received only 38.1 percent support at the polls. Had it passed, it would have:

• Required the state controller to approve or reject all state design contracts and local design contracts that were linked to state agencies or state funding.
• Prior to awarding contracts, authorized the state controller to conduct a cost analysis of performing the work and award contracts to the lowest bidder. The work costs of public employees would have included "only the additional direct costs" to the state to provide the same services as the contractor.
• Forced all private contractors to assume full responsibility and liability for their performance, holding the state, the contracting entity, and employees harmless from any legal action.

Proponents asserted that Proposition 224 would save money for the state by requiring cost analyses before hiring private contractors; an open competitive-bidding process would reduce cronyism in contracts; requiring a cost analysis before awarding a contract would ensure that taxpayers get the best value for their dollar, and holding contractors responsible and financially liable for their mistakes would improve the safety of the state's freeways, bridges and other public works.

Opponents countered that Proposition 224 would give the state controller enormous power to decide on thousands of projects worth billions of dollars; cause state and local project delays of up to 18 months at a cost of billions of dollars; result in a loss of local control over projects, and create a rigged bidding system by allowing public project costs to appear artificially low by ignoring public-sector job expenses (such as staff compensation, rent, utilities, insurance, legal and capital and costs, etc.), which are required in bids from private contractors.

To diminish the court-imposed public employee monopoly and promote competitive bidding on engineering and design work, the Consulting Engineers and Land Surveyors of California (CELSOC) drafted the initiative that has become Proposition 35.

Fiscal Impact:
A study released by proponents says Proposition 35 could save Californians $2.5 billion annually through an accelerated construction schedule and reduced congestion on freeways. The Legislative Analyst's Office (LAO) said passage of the initiative would result in more contracted-out services but the fiscal impact on design and engineering services is unknown. It would depend in large part on how the state used the flexibility granted by the measure. There also could be state fiscal impacts, the LAO said, from faster completion of projects.

Support Arguments:

• The Fair Competition initiative simply gives state and local governments the choice to hire qualified private sector engineers and architects where it makes sense to do so - something many states do already.
• Proposition 35 will allow private experts to get transportation projects completed on time and on budget - and keep taxes down.
• Proposition 35 will allow the state to again make use of private sector earthquake experts to ensure safety of highways and bridges.

Support Arguments Signed by: Larry McCarthy, president, California Taxpayers' Association; Loring A. Wyllie Jr., past president, Earthquake Engineering Research Institute, and Todd Nicholson, president, Californians for Better Transportation.

Opposition Arguments:

• Proposition 35 changes California's Constitution so large engineering corporations benefit; delaying public contracting while a new set of regulations is developed.
• Project delays mean traffic congestion will get worse.
• The proposition will delay construction of health care facilities, increasing the cost of health care.

Opposition Arguments Signed by: Jeff Sedivec, president, California State Firefighters' Association; Lois Wellington, president, Congress of California Seniors, and Marlayne Morgan, Engineers and Scientists of California.

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Major Provisions:

• Defines "non-violent drug possession offense" as the unlawful possession, use, or transportation for personal use of any controlled substance. (The definition excludes those who sell, produce or manufacture controlled substances.)
• Requires any person convicted of a "non-violent drug possession offense" to receive probation, which includes participating in a 12-month drug treatment or rehabilitation program.
• Denies probationers from participating in the program if they: (1) refuse drug treatment, (2) had a gun in their possession while under the influence of drugs or alcohol, (3) failed the drug treatment program requirements two or more times, and (4) are violent or serious felons (except those felons who, in the prior five years, stayed out of prison and were not convicted of a felony (other than a non-violent drug possession) or a misdemeanor involving physical injury).
• Denies parolees from participating in the drug treatment program if they: (1) refuse treatment; (2) were convicted of a serious or violent felony; (3) committed a non-violent drug possession offense with a misdemeanor (not related to the use of drugs) or any felony.
• Allows the trial court to revoke probation or the Parole Authority to revoke parole if the state proves by a preponderance of the evidence that the defendant poses a danger to the safety of others or is unamenable. Unamenable is described as committing serious or repeated violations of drug treatment program rules (probationers are limited to three violations and parolees are limited to two) or continually refusing to participate in the program.
• After successful completion of the treatment program, allows defendants to petition the court to dismiss the charges almost to the extent that the arrest never occurred. However, the Department of Justice may record and disclose arrest and conviction information to law enforcement personnel.
• Allows defendants to state that they were not arrested or convicted for the offense, except when applying for positions involving public office or peace officer status, seeking licensing from state or local agencies, contracting with the lottery, or serving on a jury.
• Requires the Department of Alcohol and Drug Programs to annually conduct studies to evaluate the effectiveness and financial impact of the programs.
• Requires treatment providers be certified or licensed, and also requires them to prepare and submit progress reports to the probation department for probationers or the Parole Authority and the Department of Corrections for parolees.

Background:
This measure changes state law so that certain adult offenders who use or possess illegal drugs would receive drug treatment and supervision in the community, rather than being sent to prison or jail, or to be supervised in the community, generally without drug treatment. The measure also provides state funds to counties to operate the drug treatment programs.

In 1996, Arizona voters, by a 2-1 margin, passed the Drug Medicalization, Prevention, and Control Act which diverts non-violent drug offenders into drug treatment and education services rather than incarceration. According to a report prepared by the Arizona Supreme Court, the Arizona law is "resulting in safer communities and more substance abusing probationers in recovery," has already saved state taxpayers millions of dollars, and is helping more than 75% of program participants remain drug free. Arizona's measure did not apply to parolees. Proponents claim the state of New York has decided to implement a similar program.

Fiscal Impact:
According to the Legislative Analyst's Office, this measure is likely to result in net savings to the state after several years of between $100 million and $150 million annually, mostly by reducing prison operations costs. Assuming inmate population growth would have otherwise continued, the state would also be able to delay the construction of additional prison beds for a one-time avoidance of capital outlay costs of between $450 million and $550 million in the long term. Counties could probably experience net savings of about $40 million annually because of a lower jail population.

Policy Considerations:

• If this program is so successful, why are Arizona and New York the only states to enact it?
• Drug treatment takes time and self-determination to be effective. With more drug addicts on the streets while enrolled in drug treatment programs, could this potentially increase crime rates and related costs?
• Since states must prove by a preponderance of evidence that some defendants are unamenable, which would be determined over the course of several court hearings (probationers get three strikes/parolees get two), could this further congest California courts and force taxpayers to pay the enhanced court costs?
• Since the state currently spends more money per inmate than per K-12 pupil (about $24,000 per inmate compared to about $8,000 per pupil), doesn't it make sense to adopt a program that would reduce the state's per-inmate costs, possibly freeing up revenues for education?

Support Arguments:

• Proposition 36 only affects those guilty of simple drug possession. If previously convicted of violent or serious felonies, they will not be eligible for the program unless they've served their time and have committed no felony crimes for five years.
• Besides drug treatment, judges can also order job training, literacy training, and family counseling. The idea is to turn addicts into productive citizens, so they pay taxes and stop committing crimes to support their habits.
• Right now, there are 19,300 people incarcerated in California for this offense, at an annual cost of $24,000 per inmate. When they get out, many will return to drugs and crime. Treatment costs about $4,000 and would seem likely to reduce future crime more effectively than prison. A California governmental study showed that taxpayers save $7 for every $1 invested in drug treatment.

Support Arguments Signed by: Peter Banys, president, California Society of Addiction Medicine; Richard Polanco, majority leader, California State Senate; Kay McVay, president, California Nurses Association.

Opposition Arguments:

• Former California Finance Director Jesse Huff warns the "ultimate cost of this initiative is far higher than its promised savings. It commits taxpayers to spending $660 million and contains millions of dollars in hidden costs for law enforcement, probation and court expenses."
• Proposition 36 effectively decriminalizes dangerous and highly addictive drugs like heroin, crack, cocaine, PCP, "date rape drugs" and methamphetamine - allowing drug abusers with a history of criminal violence to avoid jail or prison, including those with prior convictions for murder, child abuse, assault and other violent crimes.
• Under this measure, employers would be forced to keep drug abusers on the job, making it easier for drug abusers to continue working as teachers, school bus drivers, even airline pilots.

Opposition Arguments Signed by: John T. Schwarzlose, president, Betty Ford Center; Alan M. Crogan, president, Chief Probation Officers of California; Thomas J. Orloff, president, California District Attorneys Association.

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Major Provisions:

• Provides that "state taxes" (requiring a two-thirds vote of the Legislature) do not include an "assessment" or "fee," as defined by Proposition 218, real property development fees, or regulatory fees that do not exceed the reasonable costs of regulating the activity for which the fee is charged.
• Fees to monitor, study or mitigate the environmental, societal or economic effects of an activity when the fees impose no regulatory obligation (other than the payment of the fee) and fees exceeding the reasonable costs of regulating the activity for which the fee is charged are deemed taxes subject to the two-thirds vote requirement. At the local level, these taxes can be approved by a majority of the electorate as a general tax or two-thirds of the electorate as a special tax with revenues dedicated to a specific purpose.
• This measure does not apply to monies recoverable as damages, remedial expenses or penalties arising from a specific event (for example, environment contamination).
• It does not apply to fees enacted before July 1, 1999, or to fees that are increased because of inflation or greater workload, as specified.

Background: 
The California Constitution requires that any changes in state taxes for the purpose of increasing revenues requires a two-thirds vote of the Legislature. Local governments are limited in raising special taxes only by a two-thirds vote of the electorate and in the case of general taxes by a majority vote of the electorate. The imposition of new or additional "fees," however, requires mere majority vote of the Legislature and, in the case of local government, no vote of the people.

Historically, fees were defined as charges by government for services rendered, compensation for the costs of direct regulation, or for benefits conferred upon the fee payer. In 1991, the Legislature, by majority vote but less than two-thirds, passed a bill imposing fees on paint companies and other businesses that made or make products containing lead. The money raised by the fee was to be used to conduct screening for blood lead levels of children eligible for the program.

One of the fee payers, Sinclair Paint, initiated suit in 1995 arguing that the fee was an unconstitutional tax. In 1997, the state Supreme Court decided Sinclair Paint Company v. State Board of Equalization by ruling that this charge on businesses was a regulatory fee, not a tax. The court's decision, however, expanded upon the traditional meaning given a "regulatory" fee to include exactions by government for virtually any private "negative externality." A negative externality is a cost theoretically imposed on third parties resulting from the production or consumption decisions of others. A fee for the impacts of a negative externality can be remedial to the group damaged or a mere deterrent imposed by government to discourage further conduct of the activity.

According to Sinclair: "[T]he police power is broad enough to include mandatory remedial measures to mitigate the past, present, or future adverse impact of the fee payer's operations, at least where, as here, the measure requires a causal connection or nexus between the product and its adverse effects." (emphasis added).

Further, the court said, "[I]mposition of 'mitigating effects' fees in a substantial amount . . . also 'regulates' future conduct by deterring further manufacture, distribution, or sale of dangerous products, and by stimulating research and development efforts to produce safe or alternative products."

The exposure for taxpayers is both the determination of the alleged "adverse impact" (who gets to determine the real impact of a product or service?) as well as the scope of nexus required between the activity and the alleged cost/harm (is it misuse of the product? Is there merely anecdotal evidence of a causal link? Is mere perception or potential for cause sufficient?) Taxpayers also face the very real prospect that government programs will be shifted "off-budget" into special funds supported by these specialized fees.

Policy Considerations:

• Have the courts opened the door for majority-vote approval by the state Legislature of taxes masquerading as fees? For example, the Legislature conceivably could levy a "fee" on all automakers for hospital trauma centers because people are hurt in collisions; or impose a "fee" on candy makers to pay for dental care; or makers of foods high in fat content to fund a program for the obese.
• Will special public health or safety programs, if funded outside the regular state budget process, escape oversight and scrutiny by the Legislature and the public?
• Would such "off-budget" programs result in inefficient use of "tax" dollars?
• Fees and assessments are a larger cost ($25 billion per year) to taxpayers in California than property taxes, sales taxes or income taxes. The Sinclair decision will take an already-serious problem and make it worse.

Fiscal Impact:
The Legislative Analyst's Office said the potential impact on future revenues cannot be estimated.

Support Arguments:

• Proposition 37 will "stop hidden taxes" by requiring city councils and county boards of supervisors to gain voter approval before raising taxes.
• At the state level, the initiative requires two-thirds votes of approval in the Legislature to increase taxes, meaning politicians must be more accountable to taxpayers.
• Proposition 37 is the most important taxpayer protection the people of California can have.

Support Arguments Signed by: Larry McCarthy, president, California Taxpayers' Association; David Moore, president, Western Growers Association, and Susan Corrales-Diaz, director, California Chamber of Commerce.

Opposition Arguments:

• Proposition 37 asks the simple question: should polluters or taxpayers pay for the cost of cleaning up pollution? This is the Polluter Protection Act.
• Proponents - mainly oil, tobacco and alcohol corporations - want to call clean-up fees "taxes" to require two-thirds approval by the Legislature, knowing that they can get one-third of the Senate or Assembly to block such taxes.
• Proposition 37 would prohibit such clean-up fees and enable companies to hide behind laws designed to protect ordinary taxpayers.

Opposition Arguments Signed by: Clancy Faria, president, Peace Officers Research Association of California; Lenny Goldberg, executive director, California Tax Reform Association, and Jon Rainwater, executive director, California League of Conservation Voters.

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Major Provisions:

• Requires the state to offer annual scholarships (or education vouchers) to parents on behalf of their K-12 children in an amount that is the greater of: (1) $4,000, (2) One-half of the national average, or (3) One-half of California's spending per-pupil.
• Allows students currently enrolled in public schools or entering kindergarten to receive vouchers in 2001. Private school students would be phased into the voucher program over a four-year period:
  
  

  K-12 Private School Children Voucher Phase-in
  Year 1: 2001-02	Year 2: 2002-03	Year 3: 2003-04	Year 4: 2004-05
  K (kindergarten)	K-2nd grade	K-8th grade	K-12th grade

   
• Prohibits voucher-redeeming schools from discriminating on the basis of race, ethnicity, color, or national origin, but they can restrict admissions based on gender, religion, ability, and disability.
• Places excess voucher funds in a trust fund for the student, which can be used for future K-12 or college tuition. The fund would be available until age 21 (if not enrolled in school) or until the student has completed an undergraduate degree. Remaining credits would revert to the state general fund.
• Increases the vote requirement for any new laws affecting private schools from a majority vote to a three-fourths vote of the Legislature, and a two-thirds vote of local governments.
• Requires private schools, upon request, to prepare financial statements only for parents. Schools accepting voucher students must report enrollments to their county office of education, which would compile and report the information to the state controller.
• Replaces Proposition 98 minimum funding guarantee with the national average of per-pupil spending.

Background:
Private Schools:
California has about 650,000 pupils who are enrolled in K-12 private schools. As a result, the state and local school districts generally do not provide funding for pupils attending K-12 private schools. (The only exception is for a relatively small number of children with physical, mental, or learning disabilities who are placed in certain private schools.)

Private schools generally operate under laws and regulations that are significantly less restrictive than public schools.

Public Schools:
Currently, about six million pupils attend K-12 California public schools. Proposition 98, approved by the voters in 1988, establishes a minimum funding level for public schools and community colleges (K-14 education). Proposition 98 permits the state to spend more than this minimum level. Under specified circumstances, the state can spend less. The current minimum funding level for K-14 education is $42 billion. This minimum funding level increases each year generally with changes in public school attendance and growth in the state's economy. (K-14 education also receives additional funds from sources that are "outside" of Proposition 98, such as federal funds and lottery funds.)

This proposition creates an alternative minimum funding level for California's public K-12 schools that would be based on a national average of per-pupil funding of public schools. The definitions of funding are specified in Proposition 38, excluding funding for community colleges, adult education and day care programs, which are included in Proposition 98 funding. According to the Legislative Analyst's Office (LAO), the national average and state per-pupil spending are almost $8,000.

This initiative is similar to Proposition 174 of 1993, rejected by about 70% of voters.

Fiscal Impact:
Private School Children and Shift from Public to Private School:
The primary effects of the proposition on the state involve (1) costs for providing vouchers to private school children, and (2) net savings from pupils who move from public schools to private schools:

Costs for Providing Vouchers to Private School Pupils. The LAO assumes that the initial voucher amount would be $4,000 and the vast majority of existing private schools would become voucher schools. Thus, once all existing private school pupils are eligible, the state would have costs of at least $4,000 per child for almost 650,000 private school children, which amounts to an additional $2.6 billion.

Net Savings From Public School Departures. As children move from public schools to private schools, the state will save money that would have been spent on them in public schools. The LAO estimates that the state initially would save almost $7,000 for each pupil leaving the system. (Other savings, that would not be on a per-pupil basis and therefore not reflected in this estimate, are listed below.) Thus, the net savings would be almost $3,000 for each departing pupil (nearly $7,000 in savings, less $4,000 in scholarship costs).

Within five to 10 years, the LAO believes most people and schools will have responded to this proposition. While it is impossible to predict the proportion of public school pupils who shift to private schools, the LAO believes a reasonable range in the long run would be between 5 percent and 25 percent. As the figure shows, the annual savings resulting from these shifts could range from $1.3 billion to $6.7 billion. The figure also shows that in all cases the state would have costs of about $3.3 billion each year to provide scholarships to existing private school pupils.

Other State Fiscal Impacts. 
In addition to the primary costs and savings identified above, the proposition would have the following impacts:

National Average Guarantee. The national average guarantee could require the state to spend either more or less per pupil than under Proposition 98, depending generally on how California's economy performs relative to the other states.

Capital Outlay Savings. In addition to funding school operating costs, the state and local school districts provide money (through the issuance of state general obligation bonds) to build and renovate facilities. By shifting students from public schools, this proposition would reduce local demand for this state funding. As a result, the state and local school districts would realize significant future savings in bond debt service costs. The amount of these savings could be in excess of a combined $200 million annually in about 10 years to 20 years.

Administrative Costs. The state would have annual costs of about $10 million to administer the voucher program. A portion of these costs could be offset from interest earnings on the trust accounts. County offices of education could have combined costs of several million dollars annually to administer reporting requirements under this proposition.

School Districts. School districts would lose, on average, almost $7,000 in state funding for every pupil who transfers to a private school. (The actual amount per pupil would vary from district to district.)

However, property taxes received by school districts would not be reduced, allowing districts to receive a larger amount of property tax per pupil as students transfer to private schools. For most school districts (non-basic aid), whether the per-pupil amount would increase, decrease or stay the same would be up to the Legislature (typically when property tax revenues increase, funds from the state decrease.) For basic aid school districts, which do not experience state fund reductions, the amount of spending per-pupil would increase, possibly substantially in some districts. This would occur because the substantial property taxes such districts receive would be spread among fewer students and the state basic aid per pupil would not change.

Loss of Federal Funds. Each year California receives almost $4 billion from the federal government to support a variety of public school programs. For many of these programs, the amount received by the state depends on the number of enrolled public school pupils. Thus, this proposition would cause the state and local school districts to lose hundreds of millions of federal dollars annually.

Policy Considerations:

• Should public funds be appropriated for non-state schools, including religious schools? Should this proposition pass, this issue will undoubtedly be litigated. Florida's voucher program is currently being litigated. The U.S. Supreme Court has upheld voucher programs in Milwaukee and Cleveland but invalidated Vermont's voucher program, which allowed vouchers for religious schools.
• Wouldn't the cost of this initiative be reduced if it had eligibility standards for voucher recipients? All of the five voucher programs in effect today, in Milwaukee, Cleveland, Florida, Minnesota, Arizona, are linked to income or school performance.
• What is the national average? Due to use of differing methodologies (such as inconsistent inclusions or exclusions of expenditure categories or average daily attendance rates), the amount of states' spending relative to the national average varies. This initiative excludes certain programs from California's per-pupil expenditures, such as community colleges, adult education and child care, which are counted under Proposition 98's minimum funding guarantee. However, if other states count these programs toward their per-pupil spending base, does this initiative further exacerbate the per-pupil methodology problem? When California's per-student spending reaches the national average, would it actually be above the national per-pupil spending average - as it counts fewer programs than other states?
• Will competition improve the quality of education in California?
• Should parents be given greater choice in selection of schools for their children through a publicly funded voucher even if this includes private school choice?
• In the previous unsuccessful voucher initiative, Proposition 174 of 1993, there was a provision to award supplemental funds for transportation costs of needy students. Since this measure does not provide this additional funding, would the enhanced transportation expense put low-income parents at a disadvantage by limiting their choice of schools to those in or close to their neighborhoods?
• Is it possible for low-income parents to be priced out of private schools that cost more than the amount of the voucher? Advocates claim that some low-income parents would be able to send their students to low-spending private schools. But wouldn't good schools be limited because it would be difficult to offer quality education for half of what is spent in public schools?
• The U.S. has perhaps the best system of higher education in the world providing maximum choice for students. The G.I. Bill, a form of voucher, is said to have been a major stimulus for more schools and more curriculum. Did the G.I. Bill play a role in improving higher education, and can it offer a model for improving public schools?

Support Arguments:

• Control over the education and destiny of California's children must be taken from bureaucrats and given to parents. Parents must have the right and financial ability to remove their children from failing schools. These kids are California's future, and it's only fair that every child has the opportunity to learn at the school that is best for him or her.
• Proposition 38 supports California's public schools by guaranteeing they will always be funded at or above the national average in dollars per pupil once this level is reached.
• Proposition 38 will force public schools to compete for students, thereby encouraging public schools to improve their performance.

Support Arguments Signed by: Carmela Garnica, teacher, Escuela de la Raza Unida; Tim Draper, parent; John McCain, United States senator.

Opposition Arguments:

• Proposition 38 gives parents whose kids are already in private schools $4,000 to go to voucher schools, costing California taxpayers between $2 billion to $3 billion per year.
• The California Business Roundtable says, "The full text of Proposition 38 virtually prohibits any real state or local regulation of voucher schools that make them accountable to taxpayers." Voucher schools are not required to have their finances audited and can make decisions on how to spend tax dollars in secret behind closed doors.
• Not every child will have access to this new system of voucher schools. That is because voucher schools will be able to reject students who apply based on their gender, their ability to pay and their academic and physical abilities.

Opposition Arguments Signed by: Lavonne McBroom, president, California PTA; Lois Wellington, president, Congress of California Seniors; Wayne Johnson, president, California Teachers Association.

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Title: School Facilities. 55% Local Vote. Bonds, Taxes. Accountability Requirements. Initiative Constitutional Amendment and Statute.
Sponsors: Joseph Remcho, San Francisco attorney representing such major financial backers as Silicon Valley computer industry executive Reed Hastings.
Legislative History: SCA 1 (O'Connell) 1999. Died on Senate inactive file.
Electoral History: Proposition 26 (March 2000, lowering voter threshold to simple majority), failed passage, 48.7% to 51.3%. Proposition 170 (November 1993, lowering voter threshold to simple majority), failed passage, 31% to 69%.

Major Constitutional Provisions:

• Changes vote threshold: Permits school facilities bond measures to be approved by 55 percent (rather than two-thirds) of the voters in local elections.
• Removes 1% cap on property taxes: Amends Article XIIIA of the state Constitution (Proposition 13 of 1978) to allow local property tax rates to exceed the current 1% limit in order to repay the 55% vote bonds.
• Removes revenue limit: Amends Article XVI, Section 18 to allow local government to incur debt for these 55% general obligation school bonds in excess of annual income and revenues.
• Bond presented to voters must: (1) Limit spending of funds to construction, rehabilitation, and equipment, or acquisition or lease of real property for school facilities; (2) present list of projects to be funded; (3) require annual independent performance audit to ensure proceeds have been used only for facilities and equipment and annual financial audits until bond funds have been spent.

Major Statutory Provision:

• Charter school facilities: Requires local K-12 school districts to provide charter schools sufficient accommodation for their students. Districts would not be required to spend general discretionary funds to provide facilities for charter schools; bond funds, however, could be used. These provisions may be altered by majority vote of the Legislature and approval by the governor.

Related Legislation: In June of 2000, the Legislature adopted and the governor signed AB 1908 (Lempert), placing additional restrictions on the use of the 55% vote for school bonds, including a tax rate cap of $60 per $100,000 of assessed value. In August, the Legislature, to satisfy bond houses, enacted changes to the AB 1908 limits. These are codified in AB 2659 (Lempert), awaiting the governor's anticipated signature at this writing. The restrictions on the approval of 55% bonds contained in AB 1908 and AB 2659 are not part of Proposition 39 and can be changed with a majority vote of both houses of the Legislature and approval by the governor.

AB 1908 Provisions:

• Two-thirds of the governing board of a school district or community college district must approve placing a bond issue on the ballot. (Current law requires a majority vote.)
• The bond proposal must be included on the ballot of a statewide primary or general election, a regularly scheduled local election, or a statewide special election. (Currently, school boards can hold bond elections throughout the year.)
• The tax rate levied as the result of any single election can be no more than $60 (for a unified school district), $30 (for a school district), or $25 (for a community college district), per $100,000 of taxable property value. (Current law does not have this type of restriction.)
• The governing board of a school district or community college district must appoint a citizens' oversight committee to inform the public concerning the spending of the bond revenues. (Existing law does not require appointment of an oversight committee.)
• The governing board may not, regardless of the number of votes cast in favor of the bond, subsequently proceed exclusively under the code that governs bonds authorized by a two-thirds vote.

Provisions of AB 2659 (Pending on Governor's Desk)

• Clarifies that bonds may only be issued if the tax rate levied to pay for the bonds, at a single election, would not exceed specified caps per year ($60, $30 and $25 per $100,000 in assessed value), when the assessed value is projected by the school district to increase.

• Clarifies that the bonds approved by 55% are local general obligation bonds.

These provisions prohibit issuance of bonds unless the district projects increases in assessed value of property in that district. If the bonds are issued, but subsequently values decline, these provisions protect bond holders by allowing increased tax rates above the cap to pay off bonds after they are issued.

Fiscal Effect:
According to the Legislative Analyst's Office, between 1986 and June 2000:

• K-12 Schools. K-12 bond measures totaling over $18 billion received the necessary two-thirds voter approval. During the same period, however, over $13 billion of bonds received over 55 percent but less than two-thirds voter approval and therefore were defeated.
• Community Colleges. Local community college bond measures totaling almost $235 million received the necessary two-thirds voter approval. During the same period, though, $579 million of bonds received over 55 percent but less than two-thirds voter approval and therefore were defeated.
  
  Proponents suggest that local school districts will require more than $40 billion over the next 10 years for school construction and repair.

Background:
Proponents and opponents agree that some measure of additional funding is necessary for California's school construction. Whether for new construction, retrofit, rehabilitation, or equipment upgrades, there is a need that is going only partially fulfilled.

Proposition 39 raises one primary question: Is reducing the two-thirds vote requirement to pass a local general obligation bond to 55% the appropriate means for achieving the agreed-upon goal of providing additional money for school site construction, rehabilitation and equipment purchases?

Current Law: A local general obligation (G.O.) bond is a debt issued by a government entity that guarantees payment through that government's ability to levy ad valorem taxes or assessments without limitation. In California, the voters must approve G.O. bonds whether issued by the state or local government.

State G.O. bonds require a two-thirds vote of the Legislature to be placed on the ballot, but only a majority of statewide voters to be enacted. Local G.O. bonds can be placed on the ballot by a majority of the local governing board but require a two-thirds vote of the electorate for adoption. This has been in the Constitution since 1879. Bonds for the repair, reconstruction or replacement of unsafe schools can be approved by a majority vote of the electorate and exceed the annual revenue limitations. However, a two-thirds vote is needed to exceed the Constitution's limit on the 1% ad valorem tax rate.

Need for funding: California Department of Finance estimates that there is a need for $8.9 billion in new funding for school facility construction, maintenance and modernization. The California Department of Education estimates that there is a need for $2.6 billion in deferred maintenance and $8.1 billion for modernization. In a recent commentary for Cal-Tax Digest, Bill Hauck, president of the California Business Roundtable, suggested that local school districts will require more than $40 billion over the next 10 years for school construction and repair.

The Purpose of the Two-Thirds Vote:
Only property owners pay the tax, and their property becomes collateral for payment.

a)  The two-thirds vote for approval of local general obligation bonds has been in the California Constitution for more than 100 years.

Unlike state G.O. bond debt, local school bond debt is repaid through an automatic increase in the property tax rate on real and personal property located within the school district, and the rate remains in effect for the life of the bond.

Many of those voting on the tax will not actually be liable for payment should it pass. Renters, due to rent control and market forces, may not pay the additional taxes in the form of higher rent.

There is increasing rhetoric from homeowner taxpayer groups about the shift of property tax obligations from business to residential property owners. Reducing the protection for residential property owners will exacerbate that problem and push ever closer to the possibility of a split roll.

Accountability: Not every bond is worthy of approval. Reducing the vote requirements reduces the need for proper planning and accountability.

Policy Considerations:

• Is reducing the vote threshold necessary to provide the funding needed for increased enrollment, repair of existing facilities and additional equipment needs of California schools?
• Is reducing the vote threshold necessary to ensure the availability of local dollars to provide needed matching funds in a statewide financing mechanism?
• Do the accountability provisions of AB 1908 and AB 2659 provide reliable taxpayer protection such that reducing the vote threshold to 55% does not reduce the taxpayer accountability inherent in a two-thirds vote?
• Does Proposition 39 move California school facilities financing toward greater reliance on property tax, and does the fundamental disparity of local property tax wealth in school districts for financing school facilities raise concerns that California will be moving away from providing relative equality in educational opportunities for all its children?
• Does this initiative increase the likelihood of a lawsuit challenging use of property tax for funding schools, since low-wealth districts will find it difficult, if not impossible, to gain equal footing with high-wealth districts in bonding capacity. The Arizona Supreme Court has already ruled that a property tax-based system violates that state's constitutional guarantees for an "equal and uniform public school system."
  
  Will the $60 per $100,000 rate cap force low-property tax wealth communities to have two-thirds vote elections (because building schools within the rate cap in low-income communities will be impossible), while high-income districts can build schools with a 55 percent vote?
  
  
• Without the rate cap, would low property wealth districts be required to levy a much higher property tax than a high-income school district to build an identical school?
• Does Proposition 39, together with the state-level funding that is primarily a dollar-for-dollar match, mean that high-property tax wealth districts will receive the lion share of the benefit from a reduced vote threshold?
• Will it be possible to equalize funding for school facilities and equipment if property-wealthy districts (vote-rich districts) are adequately funded by local property taxes but property-poor districts are dependent upon state aid and therefore a statewide vote?
• Did the 62.5% approval vote of Proposition 1A, the $9.3 billion school bond enacted in November 1998, suggest that California voters think schools facilities should be built with greater reliance on state funding sources?

Support Arguments:

• Approval can fix the way schools spend money and fix the schools. We're all aware of financial abuses in some of our schools - the waste, bureaucracy and mismanagement. Proposition 39 will hold administrators accountable for spending school bond construction money.
• Legislation taking effect with passage of Proposition 39 empowers citizen watchdog committees to stop any project if audits show wasteful or unauthorized spending, inform the public and vigorously investigate and prosecute violations.
• Thomas Hayes, former state treasurer and auditor general, says that based on his thorough analysis, claims that Proposition 39 would result in a doubling of property taxes are significantly overstated and historically inaccurate.

Support Arguments Signed by: Lavonne McBroom, president, California State PTA; Jacqueline N. Antee, AARP state president, and Allan Zaremberg, president, California Chamber of Commerce.

Opposition Arguments:

• Proposition 39 is misleading. It says it's about schools. Actually, it's about your home and your taxes. There is no limit on how much property taxes can eventually increase with passage of 55% bonds.
• These bonds put liens on your home, usually for 30 years. Tax collectors foreclose if homeowners cannot pay. Before Proposition 13 in 1978, excessive taxes often forced home sales.
• In 1978, property taxes were 2.6 times higher. Could history repeat? Could property taxes return to twice, even three times today's levels? Once started, 55% bonds won't stop there. Every government agency will demand 55%. Proposition 39 provides no tax limits. So, yes, 55% could lead to further actions that eventually double, even triple, property taxes.

Opposition Arguments Signed by: Jon Coupal, president, Howard Jarvis Taxpayers Association; Dean Andal, chairman, California Board of Equalization, and Felicia Elkinson, past president, Council of Sacramento Senior Organizations.

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This measure provides a 30-year extension of the one-half cent sales tax for transportation that was adopted in 1976. The VTA estimates that the extended tax would raise about $6 billion over 30 years to help finance expansion of Bay Area Rapid Transit to Milpitas, San Jose and Santa Clara, as well as other transportation projects. Measure A requires two-thirds voter approval.

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