Rainy Day Fund Ballot Initiative - Analysis

 

 

 

Governor’s Original Proposal Lacked Teeth. In January the Governor proposed a new rainy day fund (RDF) to replace ACA 4 (2010), which had already been scheduled for a vote on the November 2014 ballot. The Governor’s proposal relied solely upon the state’s capital gains revenues to make deposits into two reserves, one general account and one account for Proposition 98 expenditures. However, the focus on capital gains alone would have resulted in many good tax revenue years in which the state set aside no funds for a rainy day. The Governor’s proposal also left the door open for legislative Democrats to use the RDF as a slush fund rather than a true "locked box" reserve for economic downturns because it could have been raided by a majority vote.

 Real Improvements Made. Legislative negotiations improved upon the Governor’s proposal, and the resulting bipartisan compromise bill, ACA 2X 1 (Chapter 1, 2013-14 Second Extraordinary Session, Perez), reflects the following key improvements:

• Up-Front Annual Deposits. Provides for annual tax revenue transfers of 1.5 percent of all General Fund revenues to the general reserve or to debt reduction. In addition, the "windfall" capital gains in excess of 8 percent of revenue would also increase the reserve or reduce debt, after shifting the Proposition 98 portion to the education reserve. This greatly increases the funding available for reserves or debt reduction compared to the Governor’s proposal to use only capital gains over 6.5 percent of revenue.
• Objective Withdrawal Standards. Sets objective measures for when withdrawals can be made in order to ensure the RDF is a "locked box" for economic downturns, not a slush fund that could easily be raided on a majority vote. Also limits the amount that can be withdrawn to the lesser of 50 percent of the reserve balance if no funds were withdrawn the previous year, or the amount needed to maintain a "current services" budget adjusted for population growth and inflation.
• Ensuring the Reserve Is Built. For the first 15 years, requires half of the RDF transfer amount to go into the reserve fund while the other half is used to reduce budgetary debts, including unfunded pensions and other retiree benefits. After 15 years, all of the RDF transfer will go into the reserve by default, but the state still would have the option to use up to half the transfer to reduce the same debts or unfunded obligations.

Billions in Reserves Projected. The RDF bill (ACA 2X 1) was recently signed into law following a special session, rather than as part of the budget process, but the new requirements would not take effect until 2015-16 if voters pass the measure this November. (The 2014-15 budget does include a $1.6 billion deposit to the current Budget Stabilization Account, made under Proposition 58’s current reserve requirements.) However, as shown in the table on the next page, the Department of Finance projects rainy day transfers of $6.1 billion over three years beginning in 2015-16, including $3 billion for debt reduction and $3 billion for the general reserve. Notably, $5.3 billion of these combined amounts results from the up-front 1.5 percent set-aside that Republicans negotiated.

 

 

 

 

Rainy Day Fund Forecast Dollars in Millions
		2015-16	2016-17	2017-18	Total
	Annual 1.5% of General Fund Revenues	$1,699	$1,772	$1,851	$5,322
	Capital Gains Taxes in Exces s of  8% of General Fund Revenues	$174	$233	$341	$747
	Total Rainy Day Amount	$1,873	$2,005	$2,191	$6,069
	Debt Repaym ent (50%)	$937	$1,002	$1,096	$3,034
	Depos it to General Res erve (50%)	$937	$1,002	$1,096	$3,034
	Note : Capital gains amounts are net of amounts attributable to Proposition 98.  All estimates assume there are no budget shortf alls that w ould allow other uses of Rainy Day amounts to maintain spending.   S o urc e : Department o f Finance, Califo rnia State B udget - 2014-15

Source: Senate Republican Fiscal Office