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CORRECTED-California ballot measures draw free-spending billionaires

(Fixes number of tax loophole proposition to 39, adds that GMO prop is number 37)

* Governor Jerry Brown's tax initiative in trouble

* Munger siblings dominating multiple campaigns

* Steyer: ``System is working exactly the way it is supposed to''

SAN FRANCISCO, Oct 29 (Reuters) - A handful of individual super-donors, business groups and unions have poured more than $350 million into California ballot initiatives ahead of the Nov. 6 election, underscoring the extent to which the state's system of ``direct democracy'' has morphed into a big-money battleground.

Some of the spending is directly tied to the financial interests of the donors. Food and agriculture interests, for example, have spent $43 million so far to defeat a proposition that would require labeling of genetically modified foods, according to non-partisan researcher Maplight, which uses state data for its calculations.

In other cases, long-standing political divisions are at play: the most expensive single battle is over Proposition 32, which would ban payroll deductions for political activity and strikes at the core of labor unions' power. Unions have led a ``no on 32'' campaign that has raised $68.8 million.

On the other side, Stanford physicist Charles Munger Jr, son of Warren Buffett's partner Charles Munger, sees the effort to do away with payroll deductions as a way to rein in special interests, and has put up nearly $36 million of the $59 million raised to pass it.

``There is going to be a lot of money spent in California on this, and all the voters are going to hear both sides,'' he vowed in an interview a month ago.

Propositions were added to the California political mix in 1911 by reformist leaders who wanted voters to be able to stand up against special interests - mainly railroads, at that time.

By gathering signatures - 504,760 are currently required, with extras in case some are thrown out - anyone can in principle get a simple proposition on the ballot. If a majority of general election voters say yes, the measure passes into law.

Today though, many of the measures are sponsored by groups that could themselves be called special interests. Almost no proposition gets on the ballot without the use of professional signature gatherers, which can cost several million dollars. Many millions more are usually needed for ad campaigns to generate voter support for passage.

Billionaire hedge fund manager Tom Steyer has all but single-handedly sponsored Proposition 39, spending nearly $29 million on a measure to close a corporate tax loophole. It would force companies with out-of-state operations to pay taxes based on California sales, rather than the number of California workers, raising approximately $1 billion annually.

``The proposition system is working exactly the way it is supposed to, which is to give a direct democracy vote to the people of California in opposition to organized, rich interests, who are opposing them,'' said Steyer.

``It is ironic,'' to see the super-rich fund direct democracy, he said, but noted that the legislature had failed in several attempts to close the loophole he opposes.

Indeed, ballot propositions have become a preferred means for legislating in a state where Democrats have enough political strength to crush conservative policies, but lack the two-thirds supermajority needed to pass tax hikes.

A tax measure by Governor Jerry Brown, Proposition 30, is a case in point: when he was unable to persuade any Republican legislators to support his plan, which would avoid further school funding cuts by increasing the sales taxes and raising income tax on those earning more than $250,000, he took his case to the voters.

Brown's team has a $61.8 million war chest. Opponents, including Charles Munger Jr, have put up $52.8 million.

And Munger's half-sister, Molly, a Los Angeles attorney and education activist, has spent more than $44 million on a tax hike initiative that competes with Brown's plan and would funnel more money to schools.

This year, the list of wealthy individuals with a cause is lengthy: billionaire industrialist Nicolas Berggruen's trust is behind Prop 31, which would create a two-year budget cycle. Hotel heir Nicholas Pritzker is one of the two biggest supporters of Prop 34, to end the death penalty, while hedge-fund titan George Soros is the biggest donor to Prop 36, which would soften the state's tough ``three strikes'' sentencing law.

Funding for the 11 ballot measures on the ballot topped $353 million last week, Maplight calculated, adjusting to avoid doublecounting contributions to committees active on more than one issue.

Mark Baldassare, president of the Public Policy Institute of California, said that one of the rules of thumb of propositions is that it is easier to buy failure. Overall, only a third of ballot measures pass.

``Money on the 'no' side matters quite a bit. Money on the 'yes' side doesn't necessarily get you a 'yes' vote,'' he said.

Polls suggest Brown's tax measure, as well as the anti-union payroll deduction initiative and the genetically modified food initiative, Proposition 37, have all been undercut by intensive advertising on the ``no'' side.

(Editing by Jonathan Weber; Editing by David Brunnstrom)