(Photo: mr_tentacle/Flickr)
It’s no secret that the ups and downs of the economy can cause some serious pain for those involved with planning a state’s budget. It’s hard enough for many people to successfully navigate their personal finances through the boom and bust cycles, let alone all the moving parts that keep a state’s ledger in the black.
When the bottom dropped out in 2008, even states such as Utah – with rainy day reserves in the 10 percent range of their total appropriations – were having a hard time staying afloat. California was definitely not in that category, having spent and borrowed its way from one budget cycle to the next based on what turned out to be wholly unsustainable revenue growth.
In its darkest (reddest?) hours, California’s projected budget deficit ballooned to an unfathomable ten figures, obliterating market confidence in the union’s largest economy.
“Obviously when you start getting into projected budget deficits of $50 billion, that sends signals and shudders through Wall Street and through the general business community of ‘how is California going to get out of this hole,’” said Rob Lapsley, President of the California Business Roundtable.
Governor Jerry Brown and a Democratic-controlled Legislature deserve plenty of credit for making tough decisions and getting the state’s budget balanced. But an economic downturn is inevitable and now is the time to focus on preparing for the next rainy day so the state isn’t caught in a fiscal downpour without an umbrella.
California’s tax structure is heavily dependent on income from capital gains and thus fluctuates very closely with the stock market. As Wall Street values plummet, so does tax revenue from those who hold investments.
In the 2001 recession, state revenue from capital gains fell by 50 percent. If California does not have a strong rainy day fund built into the state budget and the potential for massive debt is one market crash away, all of a sudden the Golden State doesn’t look like a safe bet for investors and job creators.
“If there’s always a question of uncertainty of how much revenue you’re going to have, it’s just prudent, fiscal common sense to put money away to smooth out and balance good years versus bad years,” Lapsley said.
Both Lapsley and Loren Kaye, President of the California Foundation for Commerce and Education, agree that the manner in which Proposition 44 on the November ballot in California restructures the state’s Rainy Day Fund will go a long way toward achieving that balance.
“The state will be on the right track if they adopt Proposition 44 in November,” Kaye said. “If they don’t, then we’ll be at the mercy of the next economic downturn, which will very likely happen in the next few years.”
While the business cycle may be inevitable, overspending and borrowing money one year to pay off operating expenses and new programs from the previous year is not. Not only would the business community stand to benefit from a revamped Rainy Day Fund, but the Golden State could also start making long-needed investments in public infrastructure and repair some of the damage done to higher learning and the courts, according to Kaye.
“School teachers, UC students, people who received Medicaid benefits, basically anyone who receives a government salary or services or has a stake in the state’s budget is going to benefit from a robust reserve,” Kaye said.
Both business leaders also agree that a deep enough recession is going to hurt no matter what kind of reserve the state has, but something is most certainly better than nothing.
It’s not an idea unique to California either. Many states felt the burn after 2008 and 13 now have rainy day funds that are dictated by volatility, according to governing.com. Some examples:
Virginia has one of the more unique rules; it compares the increase in tax revenue from the previous year to the average increase over the past six years to determine how much to contribute to its stabilization fund. Other states link their funds to a particularly volatile revenue stream. Massachusetts tied its fund to excess capital gains revenue after it drew down on its reserves significantly during the recession. After the capital gains rule was implemented in 2010, the fund more than doubled to $1.7 billion in just two years.
Kaye admits that not many people are aware of Proposition 44 at this point, yet he’s confident that anyone on the business side would be overwhelmingly in support of anything that lends an air of stability to the investment climate in California.
Proposition 44 may lack the heavy campaign spending or controversy that Propositon 30 saw in 2012 or what will certainly grace the ballot for the next presidential election cycle in 2016, but a lack of controversy or even attention shouldn’t undermine the necessity of building a strong reserve for the state.
