Agreement on Rainy Day Fund bolsters California’s financial future

150 150 Christopher Nelson

Although much talk has been about the severe drought facing California in 2014, today Sacramento safeguarded the state from the one rainy day we all most certainly do not want to see right now.

Today, Governor Jerry Brown and legislative leaders announced a bipartisan deal that would require consistent, dependable deposits into the state’s rainy day fund and place stricter limits on when and how the reserve can be withdrawn, much in line with what California Forward proposed earlier this year and in testimony to the Assembly Budget Committee last week.

“There’s nothing complicated about the idea of saving money and exercising fiscal restraint, but it’s not always easy to do,” said Gov. Brown in a statement. “Democrats and Republicans have come together to create a Rainy Day Fund that ensures we’re not only saving for the next downturn, but also paying off our debt.”

Good work was done to ensure that there are resources available for health and human services as well as higher education in an economic downturn. This supports the co-equal goals of capturing spikes in tax revenue and making sure that the reserve has money in it when it’s needed most.

The deal struck today would replace ACA 4, a rainy day fund ballot measure scheduled to appear before voters this fall. According to the governor’s website, the new budget reserve proposal would:

  • Increase deposits when the state experiences spikes in capital gains revenues, the state’s most volatile tax revenue, and require annual deposits.
  • Require supplemental payments to accelerate payoffs of the state’s debts and liabilities.
  • Raise the maximum size of the Rainy Day Fund to 10 percent of General Fund revenues.
  • Allow transfers to be suspended and withdrawals to be made from the Rainy Day Fund when needed during recessions within prescribed limits.
  • Create a Proposition 98 reserve to smooth school spending and avoid future cuts. This reserve for schools makes no changes to the guaranteed level of funding dedicated to schools under Proposition 98. In addition, the Proposition 98 reserve would not begin until school funding is fully restored following cuts made during the Great Recession.

“We are grateful for the bipartisan leadership that helped solve a significant problem with a meaningful answer,” said Jim Mayer, President & CEO of CA Fwd.

The progress is worthy of applause. What is noteworthy is that without a supermajority in the State Senate, Democrats compromised with Republicans to achieve the two-thirds vote required to put the measure on the ballot.

Californians are all too familiar with the boom and bust cycle of revenue. As a state largely dependent on capital gains, California is subject to market whims in ways that other states with heavy natural resource reserves, for example, are not. When the housing bubble burst and the market went belly up in 2008, few states felt it harder than California.

It took a slew of deep cuts to the state budget that left few state-funded areas unscathed, but Gov. Brown managed to get the budget balanced. Not only have the markets rebounded in 2014, but they have hit record levels, which has taken us squarely back to a boom after almost 6 years of bust.

So it stands to reason that history shouldn’t be allowed to repeat itself. We’re back in the black and revenues are beating projections. Let’s do like any normal family in the state would when we have a windfall and set it aside for when the unexpected decimates our best laid plans.


Christopher Nelson

All stories by: Christopher Nelson