School & Local Public Safety Protection Act of 2012 Governor's Initiative. Our Children, Our Future 2012: The Education Initiative Molly Munger / PTA

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1 What does the initiative do? School & Local Public Safety Protection Act of 2012 Governor's Would increase income tax rates on personal incomes in excess of a quarter million dollars per year, and increase the state sales tax by ¼ cent, to provide revenues to rebuild schools and public safety services. Would increase rates on the vast majority of Californian personal income taxpayers and uses the funds for schools, Early Care and education (ECE) programs, and state debtservice payments. Personal income tax (PIC) rate Increases Income Tax Rates on Higher Incomes for Seven Years ~ Under current law, the maximum marginal personal income tax (PIT) rate is 9.3 percent, and it applies to taxable income in excess of $48,209 for individuals; $65,376 for heads of household; and $96,058 for joint filers. This measure temporarily increases PIT rates for higher incomes by creating three additional tax brackets with rates above 9.3 percent. Specifically, this measure imposes: A 10.3 percent tax rate on income between $250,000 and $300,000 for individuals; $340,000 and $408,000 for heads of household; and $500,000 and $600,000 for joint filers. An 11.3 percent tax rate on income between $300,000 and $500,000 for individuals; $408,000 and $680,000 for heads of household; and $600,000 and $1 million for joint filers. Increases Personal income tax (PIT) Rates Through 2024 Increases PIT rates on all but the lowest income bracket, effective beginning in 2013 and ending in For couples, the increases range from 4/10ths of 1% on incomes after all deductions under $35,000 to 2.2% for couples with income after all deductions over $5 million. 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, 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 current mental health tax would continue to be imposed.

2 Governor's A 12.3 percent tax rate on income in excess of $500,000 for individuals; $680,000 for heads of household; and $1 million for joint filers. The tax rates would be in effect for seven years starting in the 2012 tax year and ending at the conclusion of the 2018 tax year. California s sales and use tax (SUT) Increases California s sales and use tax (SUT) Rate for Four Years ~ Temporarily increases the state SUT rate by 0.25 percent. California s sales and use tax (SUT) is levied on the final purchase price of tangible consumer goods, except for food and certain other items. The SUT rate consists of both a statewide rate and a local rate. The current statewide rate is 7.25 percent. The higher tax rate would be in effect for four years from January 1, 2013 through the end of Under the measure, the average SUT rate in the state would increase to around 8.4 percent. None Realignment Sales Tax Revenues Permanently Removes Realigned Sales Tax Revenues From Proposition 98 Calculation ~ Amends the Constitution to explicitly exclude the cent sales tax revenues directed to realignment programs from the Proposition 98 calculation. None Education New Tax Revenues Deposited Into New Account for Schools and Community Colleges ~ Requires that the additional tax revenues generated by the temporary increases in PIT and The revenues raised by the measure would be deposited into a newly created California Education Trust Fund (CETF).

3 Account Established School & Local Public Safety Protection Act of 2012 Governor's SUT rates be deposited into a newly created Education Protection Account (EPA). Appropriations from the account could be used for any educational purpose and would count towards meeting the Proposition 98 minimum guarantee. Of the monies deposited into the account, 89 percent would be provided to schools and 11 percent would be provided to community colleges. Allocates Funds for Schools and Early care and education (ECE) Programs ~ For the first few years of the measure, all remaining CETF funds (those not used to pay debtservice costs as described below) would be allocated for schools and ECE programs. Beginning in , 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 , 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, Funding Allocation Method The Education Protection Account (EPA) funds for schools would be distributed the same way as existing general purpose per-pupil funding, except that no school district is to receive less than $200 in EPA funds per pupil. Similarly, the EPA funds for community colleges would be distributed the same way as existing general purpose per-student funding, except that no community college district is to receive less than $100 in EPA funds per full-time equivalent student. 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

4 Governor's 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. Debt Service Repayment None Funds for Debt Service Through ~ Until the end of , 30% 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. Proposition 98 Calculations The measure affects the Proposition 98 calculations. In the near term, the effect of the temporary tax increases would more than offset the state savings generated by the exclusion of the realignment SUT revenues. The change in the minimum All revenue collected by the measure and allocations made to schools are excluded from the calculation of the Proposition 98 minimum guarantee.

5 Governor's guarantee, however, would depend on a number of factors, including the amount of revenue raised by the measure, yearto-year growth in General Fund revenues, and the way in which Proposition 98 maintenance factor obligations are paid. By excluding the realignment SUT revenues from the Proposition 98 calculations beginning in , the state would no longer have a settle-up obligation. As a result, the state would not need to pay hundreds of millions of dollars annually from through Accountability The initiative guarantees that new revenues will go to education through the Proposition 98 funding mechanism (40% of the general fund goes to K 14 education), and requires that education funds be subject to a public audit when they are allocated, ensuring transparency in state spending. Includes Several School-Site Spending Restrictions ~ Up to 2% 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% 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. New School Reporting Requirements None 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

6 Governor's LEA s jurisdiction. The State SPI 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. Changes to the Cannot Be Amended by the Legislature ~ This measure amends the Constitution to permanently dedicate revenues to local governments to pay for the programs realigned in 2011 and temporarily increases state taxes. 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. Revenue Estimates For the budget, the Legislative Analyst Office (LAO) currently forecasts this measure would generate $6.8 billion of additional revenues, and the Department of Education (DOF) forecasts $9 billion of additional revenues. (This essentially reflects six months of SUT receipts in 2013 and 18 months of PIT receipts from all of tax year 2012 and half of tax year 2013.) In the following five fiscal years, the LAO currently forecasts an average annual increase in state revenues of $5.4 billion, and DOF currently forecasts an average annual increase in If approved, the measure s tax provisions would take effect January 1, In (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 , the partial-year effect would be additional revenues of about half this amount.) Initial State Debt Service Relief ~ Until the end of ,

7 Governor's state revenues of $7.6 billion. In , the measure s PIT increase would be in effect for only six months of the fiscal year before expiring and generate lesser amounts of state revenue. the measure would use 30%of CETF monies to pay for state debt-service costs, resulting in associated state General Fund savings. In , the first full fiscal year of this measure, estimates are that 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 Beginning in , 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. Interaction With Rest of State Budget ~ The measure would help the state balance its General Fund budget from through by providing roughly 30% of the revenues for debt-service relief. These savings would be about $1.5 billion in and $3 billion in , tending to grow thereafter until 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 Time Frame These tax rates would impact roughly 1 percent of California PIT filers due to the high income threshold. The tax rates This measure increases PIT rates on all but the lowest income bracket, effective beginning in 2013 and ending in

8 Governor's would be in effect for seven years starting in the 2012 tax year and ending at the conclusion of the 2018 tax year Conflicting s In the event that this measure and another measure that imposes an incremental increase in the tax rates for personal income shall appear on the same statewide ballot, the provisions of the other measure or measures shall be deemed to be in conflict with this measure. In the event that this measure receives a greater number of affirmative votes than a measure deemed to be in conflict with it, the provisions of this measure shall prevail in their entirety, and other measure or measures shall be null and void. This initiative has very similar conflict language to the Governor s. However it also states that, In the event that this measure receives a greater number of affirmative votes than any such other measure, the rate amending provisions of the other measure, and all provisions of that measure that are funded by its rate amending provisions, shall be null and void, and the provisions of this measure shall prevail instead. Supporters Governor Jerry Brown California Federation of Teachers Alliance of Californians for Community Empowerment (ACCE) California School Employees Association California Teachers Association Service Employees International Union State Council Molly Munger California Parent Teacher Association (PTA) Advancement Project