Rainy Day Fund--State Budget Reserves--The LWVC supports Prop 2 because it takes an important step toward fiscal discipline in our state government. It requires the state to make contributions to its rainy day reserve fund and pay down debts and liabilities when times are good, with increased contributions in years when revenues spike upwards. In bad times, those reserves can be used to reduce cuts in spending on schools, health care, public safety, and other vital services. Prop 2 requires joint action of the Governor and the Legislature to reduce the amount put in or to take money out of the rainy day fund.

The League’s State and Local Finances position, first adopted in 1969 and updated a number of times since then, emphasizes sufficiency and flexibility of revenues and fiscal management as well as meeting both current and future needs.

In addition, a number of LWVC positions in specific Natural Resources and Social Policy areas speak to the role of the state in providing for adequate, flexible, equitable, reliable and sustainable funding for governmental programs in those areas.

The principle behind Prop 2 is that when the economy is strong, state tax revenues rise and the state transfers to its reserves. When the economy weakens and total tax revenues drop, the state is able to draw on this reserve to mitigate the steps that must be taken to balance the budget. Prop 2 is an improvement over the existing Budget Stabilization Account (rainy day fund) rules, established by Prop 58 in 2004, that have not served the state well.

This proposal modifies the existing reserve requirements in several ways. It reduces the size of the basic transfer required annually, but takes into account the volatility of state revenues by requiring capital gains tax revenue (the most volatile component of state income) over a threshold amount to be transferred into the reserve in years when capital gains are high.

For the first 15 years, half of the money set aside would be used to pay down public debt, such as retirement benefits and intergovernmental debts. In later years, whether to use the funds in this way would be a legislative decision. While paying down this debt  more quickly reduces the amount available for other services in the short term, it frees money for other uses after debts are paid.

Prop 2 would increase the targeted maximum reserve to 10 percent of General Fund revenues, currently about $11 billion. Once this maximum is reached, funds would be redirected to infrastructure programs. The proposition also imposes limits—which are missing in current law--on reductions in the size of the transfer, on when reserves can be drawn down, and on how much can be withdrawn at a time.

Prop 2 replaced another proposed constitutional amendment, ACA 4 of 2009, that was slated to be on this November 2014 ballot. The League opposed ACA 4, in part because of its unwieldy mathematical regression model for calculating “unanticipated revenues” that would go to the reserve fund. We consider Prop 2 to be a better way to stabilize state spending and increase the reserve to protect against draconian cuts to programs and painful middle-class tax increases during economic downturns. While there certainly will be calls to improve and expand some government programs in the coming years, recent economic fluctuations have demonstrated the wisdom of giving priority to putting our fiscal affairs on a sounder basis.

School budget reserves. Prop 2 requires that in some years, when capital gains revenues are high and certain other conditions are met, additional money would go into another state reserve for schools and community colleges (the Public School System Stabilization Account or PSSSA). Because of the limited circumstances under which transfers to the PSSSA would be made, they are unlikely until at least 2020-2021, and in most years thereafter. Prop 2 does not change the long-term requirements for state funding of pre-K through 14 education.

If Prop 2 passes, a new law would go into effect with a requirement that would hold only in the year after a transfer to the PSSSA is made. It would cap the amount that individual school districts could keep in their reserves and thus force some districts to lower their reserves unless they were granted an exemption by the county office of education. While Prop 2 itself is a constitutional amendment, this new cap is statutory and could be changed by a future legislature, with League support.

For more information about Prop 2 with extensive references, see Proposition 2: Should California Prioritize Paying Down Debt and Significantly Change Budget Reserve Policies?, California Budget Project, September 2014, www.cbp.org.

The California Forward Action Fund Prop 2 resources page has useful materials and background information. See www.cafwd-action.org/pages/prop-2-resources.