California’s swelling budget reserves are approaching a point where the state by law can’t save any more money – but don’t expect a tax rebate.
The state is quickly filling up its so-called rainy day fund, the budget stabilization account voters created in 2014 when they passed an initiative that forced lawmakers to save money in flush years. Gov. Jerry Brown’s budget proposal puts the state on pace to fill it with $13.5 billion by July 1, 2019, but the milestone could come even sooner.
By law, the fund can only hold 10 percent of the state’s projected general fund revenue as a hedge against the cuts that would come in a recession. Any additional revenue has to be spent on infrastructure.
If the revenue keeps pouring in, Legislative Analyst Mac Taylor told senators earlier this month they’ll have a lot of options. The money “will be there for you do whatever you want to do with it, build reserves, tax cut, whatever you want to do.”
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But, in one of those only-in-California budget formulas, filling the rainy day fund presents a different kind of problem for legislators.
If they want to use the windfall of today’s booming economy for other priorities, like paying down debt, they’d have to actually spend money before filling the rainy day fund. Otherwise, the additional revenue would have to be spent on infrastructure like roads and prison repairs.
That’s right, California lawmakers might have to spend money to save it.
Here are some of the ideas they’re floating now to make the most of the surplus:
Give it back
Sen. Jim Nielsen, R-Tehama, remembers the one “glorious time” in the 1980s when California saw a spike in state tax revenue and delivered rebates to taxpayers.
Technically, that could happen again, but don’t hold your breath.
A 1979 ballot initiative that became known as the Gann limit compels state government to return money to taxpayers if state spending exceeds certain thresholds.
Last year, the Legislative Analyst’s Office warned that rising revenue put the Gann limit within reach for the first time in decades. Brown’s office disagreed, and you didn’t get that check.
Nielsen, the top Republican on the Senate Budget Committee, said he’d advocate for some kind of rebate even though he knows it’s unlikely.
“Am I confident about the prospect? No, the temptation to spend money is vastly too great.”
Save even more
Lawmakers from both parties back Brown’s pledge to fill the rainy day fund. They’re thankful that the extra money buys them some insurance if a recession hits and cripples state tax revenue.
California’s state budget is especially vulnerable to recessions because its collection of personal income tax leans heavily on high-earners whose income from capital gains can nose dive in a downturn.
But some wonder whether a rainy day fund that holds 10 percent of one year’s revenue is enough. Past recessions, for example, have slashed revenues by 20 percent. Brown’s own budget suggested that a recession could take a $20 billion bite out of the general fund in its first year.
That history has some lawmakers suggesting that the state might need a bigger savings account. They’d have to put an initiative before voters to raise the cap.
“We can say with certainty (a recession) will come. It’s wise to remember that our state revenue is extremely volatile,” said Assemblyman Jay Obernolte, R-Hesperia, the senior Republican on the Assembly Budget Committee.
Other choices, Taylor told lawmakers in January, include setting aside more money in the state’s emergency fund – the account that pays for unexpected disasters like wildfires – or prepaying known expenses to relieve pressure later.
California’s main public pension funds are riding the soaring stock market to banner years. The California Public Employees’ Retirement System has gained almost $40 billion since July 1, and the California State Teachers’ Retirement System is up at least $20 billion.
But both systems owe tens of billions of dollars more than they have on hand. Brown’s budget estimated the state has more than $270 billion in debt related to its pension funds and promises it has made to pay for the health care state workers receive in retirement.
“We’ve got to get our balance sheet in better shape,” said Sen. John Moorlach, R-Costa Mesa, referring to the pension debts and the state’s bond debts.
CalPERS and CalSTRS have handed a series of fee increases to local governments and school districts since the recession a decade ago to get a better handle on the debts and to fund pensions. Some government agencies say they can’t afford to pay more and they’re worried about how the rate hikes will affect their services if a recession hits.
“The state is taking away more than it is giving primarily by way of the ramping of the CalSTRS pension schedule,” said Democratic Assemblyman Al Muratsuchi, a former Torrance school board member. “There is such a disconnect between the prevailing narrative here in Sacramento and what the districts are reporting at the local level.”
He wants to fill the rainy day fund, but he said he’s looking for ways to provide some pension relief to school districts.
California has no shortage of deferred maintenance and capital construction projects, from bumpy roads to aging prisons. The Legislative Analyst’s Office two years ago estimated the total bill for those delayed projects topped $77 billion.
That’s why some lawmakers would be happy to see the surplus work as voters intended when they created the rainy day fund four years ago, by first filling up a savings account and then putting money into capital projects.
“We have done a terrible job at investing in infrastructure lately in California,” Obernolte said.
Go in another direction
Lawmakers might choose to go in another direction, perhaps by following through on pledges to extend health care coverage to undocumented immigrants, extending tax credits to lower-income residents, expanding access to preschool or by setting aside money to spur more affordable housing projects.
“The state is doing well. We are a great strong economy, we have the lowest unemployment in forever,” said Sen. Nancy Skinner, D-Berkeley, at a January hearing. “And yet … in most of our communities we both see the benefits the strength of the economy has given, but also areas where it has not,” she said, describing proliferating homeless encampments.
She suggested putting $4 billion of the surplus into affordable housing.
Taylor, the legislative analyst, said the state would have a better sense of its financial standing by May. His office in November projected that the state would exceed its revenue expectations over the next 18 months by $3.5 billion. He told senators last month that if he had to update the number, he’d expect that his office would revise its revenue projections upward.
“It’s important to take a moment to enjoy these times budgetarily speaking. They don’t get much better than this,” he said at a Senate Budget Committee hearing.