Savings May Get Tougher As California Rainy Day Fund Fills
When California finally regained its economic footing following the Great Recession, Gov. Jerry Brown convinced voters to back a measure allowing lawmakers to set aside more money for the inevitable next downturn. Four years later, the state's rainy day fund is on the verge of being full.
That reality brings a strange dynamic: If good economic times continue the state can't put substantially more money in a fund that, even when full, could easily be wiped out by one very bad year.
Lawmakers prepare to vote Thursday on a nearly $140 billion general fund budget that would boost total state savings to $16 billion, almost all in the rainy day fund that can't be tapped unless there's a fiscal emergency caused by a natural disaster or plummeting revenue.
Socking away money has been a top priority for Brown, who negotiated his 16th and final budget during an unusually long period of economic and budgetary strength. When he took office for the second time eight years ago, it was a dramatically different situation — the Great Recession had struck and revenue was falling fast.
California saw a $40 billion deficit in 2009, a number that would dwarf the $16 billion Brown and lawmakers have amassed for the next recession. The state faced cumulative deficits of nearly $100 billion 2008 and 2011.
Lawmakers can continue setting aside money, but it won't carry the same constitutional restrictions tied to the rainy day fund. It also would be an enticing pot of money for legislators and their influential donors who couldn't convince Brown to buy into their priorities but might hope for better fortunes under a new executive.
Proposition 2, approved by voters in 2014, boosted the savings cap to 10 percent of the general fund and put restrictions on tapping it. In the first year of a budget emergency declared by the governor, only half the money can be pulled from the account and only enough to maintain spending levels.
Filling the fund also triggers a new constitutional mandate for infrastructure spending that the state has never encountered.
"You can count on it — when that recession comes it's going to have a huge impact on state revenue," said Mike Genest, who was Gov. Arnold Schwarzenegger's finance director when the Great Recession struck a decade ago. "Having those reserves will help, but it won't solve the problem."
But for all the current emphasis on saving money, the constitution also has ways of ensuring the state's bank account doesn't swell too much, including the rainy day fund cap. If the state's main reserve outside the constitutional rainy day fund exceeds 4 percent of revenue, the sales tax automatically declines by one-quarter cent per dollar for a year.
Partisans on both sides get irritated if reserves get too robust. Democrats see a pot of money that could help people in need, while Republicans say the money should be returned to the people through a tax cut or rebate.
Brown, backed by Republicans, has urged restraint in new long-term spending commitments. Sen. Jim Nielsen, a Republican from Gerber who leads budget work for the Senate GOP, was critical of the growth in spending.
"With (reserves) we can soften the blow, but it's all negated if ongoing spending has been increased, which defeats the very purpose of that rainy day fund," he said.
Schwarzenegger, Brown and lawmakers balanced recessionary budgets with a combination of temporary tax increases, spending cuts and budget gimmicks. Voters have since approved permanent tax increases on the wealthy, so further tax hikes may be a tougher sell in the next emergency, Genest said.
The exact timing and severity of a recession is unpredictable. Mac Taylor, the nonpartisan legislative analyst, modeled a hypothetical "moderate" recession that hits in the late summer of 2019 and found it would deliver an $80 billion blow to revenue over three years. The minimum payment to schools — required under 1988's Proposition 98 — would drop by $35 billion over that period, while demand for social services would rise.
Reserves could absorb the hit initially, Taylor concluded, but the state would later face a deficit particularly if lawmakers choose to the fund schools above the minimum, as they've often done during prior recessions, or make other spending commitments ahead of the recession.
"My first couple of years here I voted on budgets that I knew would cause Californians harm, and that's a horrible reality," said Sen. Holly Mitchell, a Los Angeles Democrat who leads the Senate budget committee and has championed expanding social services for people living in poverty. "I'll never forget those conversations. And I hope we as a state never have to confront that again."