CFCE Blog

Three legal impediments to comprehensive health care reform - Part 2

By Loren Kaye
Posted 5/17/2007

The least discussed legal constraint on health care financing schemes is the requirement, adopted by the voters in Proposition 98 of 1988, in Article XVI, Section 8 of the Constitution that schools get a prescribed portion of state revenues. The complicated formula known as “Test 1” will likely require that about 40 percent of new state revenues from any tax increases be devoted to K-14 education.  Merely placing these revenues in a special fund will not insulate them from the requirement that schools receive their “fair share.”  Therefore, a tax increase ranging from $4.4 billion to $6.6 billion would entitle schools to $1.8 to $2.6 billion off the top.  How would the new subsidies and program expansions be financed under such a circumstance?

In her analysis of the budget earlier this year, the Legislative Analyst estimated that Test 1 will come into play in two years, beginning in the 2009-10 fiscal year, as a result of a healthy economy, strong General Fund increases, strong local property taxes and dropping K-12 enrollment.  However, a boost in General Fund revenues from a tax increase could cause even earlier application of Test 1.

Even though Test 1 is usually characterized as applying to “General Fund revenues,” this is actually not the case, and depositing revenues from a tax increase into a special fund would not avoid applying them to the Prop 98 formula.  The logic is as follows:

Prop 98 (Test 1) defines the denominator as “General Fund revenues which may be appropriated pursuant to Article XIII B.” (Article XVI, Section 8 (b) (1))

Article XIII B defines “appropriations subject to limitation” as spending of “proceeds of taxes,” which are further defined as “all tax revenues,” including certain fees that exceed the cost of regulation.  (Article XIII B, Sections 8 (a) and (c)) There are some exceptions to this definition; pertinent is the exclusion of Article XIX (transportation) revenues, further evidence that the application of Article XIII B is not limited to the General Fund.

Nowhere in Article XIII B is the General Fund distinguished as a separate entity.

Finally, the Legislature has already spoken on this issue.  In 1989, as part of the legislation to temporarily increase the sales tax to pay for Loma Prieta earthquake recovery, an uncodified section was added to the bill (SB 33, Mello; Chapter 14, Section 10, First Extraordinary Session, Statutes of 1989) that suspended Prop 98 for the 1989-90 fiscal year as it would apply to the Disaster Relief Fund.  Interestingly, 1989-90 was also a Test 1 year (the only Test 1 year, so far).

Issues surrounding Proposition 98 make for another good reason for any health care financing legislation to go to a vote of the people.  

 

 

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