Proposition 39 – Analysis and Status of Implementation Current as of: 2/14/13

In November 2012, Proposition 39 was approved by the voters of California.  Prior to Proposition 39, corporations were given two options to calculate their state tax liability under California law.  Proposition 39 eliminated one of these two options, and as a result corporation tax revenue is expected to increase by roughly $1 billion per year.

For five years, Proposition 39 places one-half of this additional revenue (up to $550 million per year) into a new Clean Energy Job Creation Fund (“Fund”).  Monies in the fund must be appropriated for “the purpose of funding projects that create jobs in California improving energy efficiency and expanding clean energy generation.”  Proposition 39 states that Fund monies may be spent on upgrading schools and public facilities; monies may also be spent on job-training programs and public-private partnerships.

Proposition 39 requires that the selection and oversight of the Fund-financed projects be “managed by existing state and local government agencies with expertise in managing energy projects and programs.”  Additionally, all programs must be “coordinated with the California Energy Commission and the California Public Utilities Commission.”  Finally, Proposition 39 creates a Citizens Oversight Board that will conduct audits of the program and report annually to the public and the State Legislature.

Although Proposition 39 places some requirements and guidelines upon the use of Fund monies, the appropriation of Fund monies must be implemented by future legislative enactment.  This means that the State Legislature must approve, and the Governor must sign, a bill that appropriates Fund monies.  Such a bill must be consistent with the language of Proposition 39, but because Proposition 39 mostly provides general requirements and guidelines, the State Legislature enjoys fairly wide latitude in choosing which projects will qualify and which agencies will manage the funds.

It should also be noted that the Governor does not have the unilateral authority to appropriate Proposition 39 funds. The authority to procure such resources ultimately rests with the State Legislature.

Implementing Proposition 39

The Governor’s Proposed Budget- Background

The California Constitution requires that the Governor submit a budget to the State Legislature within the first 10 days of each year.  The Governor’s budget is not a bill in the traditional sense; it is a proposal.  Indeed, the Governor’s budget is best seen as his blueprint of what he believes the final budget should look like.  Legislators in the California State Senate and Assembly will craft the statutory language that will be placed within budget bills.  Often, significant portions of the Governor’s proposed budget are never voted on by legislators.  Nevertheless, the Governor’s proposed budget marks the beginning of a multi-month collaborative process between the Governor and legislative leaders that culminates with the approval of the state budget in the summer.

The Governor’s Proposition 39 Proposal

In his 2013-14 budget, the Governor allocates all Fund monies to schools and community colleges for the purpose of reducing utility rates and expanding renewable energy resources.  The Governor budgets $450 million in Fund monies for the 2013-14 year, and $550 million for each of the next four years.  The Governor applies all Proposition 39 funds, including Fund monies, towards the Proposition 98 calculation and the Governor includes Fund monies as Proposition 98 expenditures.  Fund monies are distributed on a per-student basis.

Under the Governor’s budget, monies would be distributed by the Department of Education and the Chancellor’s Office for the Community Colleges.  Both agencies may consult with the California Energy Commission and Public Utilities Commission to develop “guidelines for prioritizing the use of funds.”  The funds may be used for building modernization and career training.

The Legislative Analyst’s Office’s Response

In its January 2013 review of the Governor’s budget proposal, the Legislative Analyst’s Office (“LAO”) expressed “serious concerns with the Governor’s Proposition 39 proposal.”

First, LAO contends that the Governor’s treatment of Proposition 39 monies as Proposition 98 revenue and expenditures is inconsistent with Proposition 39’s voter guide and LAO’s “longstanding view of how revenues are to be treated for the purposes of Proposition 98.”  LAO recommends that the State Legislature “exclude from the Proposition 98 calculation all Proposition 39 revenues required to be used on energy-related projects” and “count the [Fund allocations] as non-Proposition 98 expenditures.”  Under these changes, schools would receive “roughly $190 million in additional operation Proposition 98 support.”

Second, LAO criticizes the Governor’s funding approach, which allocates Fund monies based upon a per-student basis.  LAO finds that the “Governor’s [funding] approach does not take into account that the need for energy efficiency projects varies by district” and it does not “focus on those school and community college energy projects likely to provide the greatest energy and job benefits.”  This is inconsistent with Proposition 39, which requires that the Fund maximize energy and job benefits.

Third, LAO expresses concern that the Governor’s selection of Department of Education and the Chancellor’s Office as the agencies responsible to manage Fund monies may not conform to Proposition 39’s requirement that “[p]roject selection and oversight shall be managed by existing state and local government agencies with expertise in managing energy projects and programs.” The Governor’s proposal also indicates that the Department of Education and the Chancellor’s office may consult with the California Energy Commission and the California Public Utilities Commission; Proposition 39 mandates coordination with both agencies.

Current Legislative Proposals Implementing Proposition 39

As of February 14, 2013, five bills have been introduced that regard the procurement of Proposition 39 Fund monies.  They are: SB-64, AB-114, AB-29, AB-39, and SB-39.  All of these bills are in the very early stages of the legislative process and none have been heard by a committee.  None are identical to the Governor’s proposal, and they all vary in structure.  Perhaps the most notable of these bills is SB-39, which was introduced by Senators De Leon and Steinberg, and has already attracted 24 co-authors in the Senate and two co-authors in the Assembly.  This bill targets older schools in need of modernization.  Also of note is AB-39, which was introduced by Assemblypersons Skinner and Perez.  This bill provides assistance in the form of interest free loans, in addition to grants.

The Governor’s Proposition 39 proposal does not directly compete with these bills as its own individual bill.  Nevertheless, because the Governor may veto a bill or appropriation and because the Governor and his aides are often actively involved in the legislative process, the Governor’s proposal, or attributes of it, may be seriously considered by legislators.

Moving forward, some of the bills mentioned above will likely be amended by various committees.  New bills implementing Proposition 39 may also be introduced.  Because of this uncertainty, it is impossible to precisely determine which agencies will manage Fund monies and which projects will qualify for financing.  Proposition 39 establishes basic restrictions on how the Fund will operate, but the mechanics of implementation will be established by an enacted bill.  KMTG shall continue to monitor the implementation of Proposition 39 and follow legislative developments in the coming months.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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