Capitol Alert

California has billions in extra money. Why don't taxpayers get a refund?

Watch Gov. Jerry Brown defend his revised budget for California

Gov. Jerry Brown discusses his plans for California's surging budget surplus for 2018-19 at a press conference on Friday, May 11.
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Gov. Jerry Brown discusses his plans for California's surging budget surplus for 2018-19 at a press conference on Friday, May 11.

California state government has so much money this year that it’s opening two new savings accounts so it can keep socking away even more cash for the rainy day that Gov. Jerry Brown says is just over the horizon.

That tactic — setting a course to pile up $16 billion in savings over the next 12 months — should reassure taxpayers that cuts to government services won’t be as severe as they were a decade ago when the state’s economy plummeted into the Great Recession.

But the money is inviting a different kind ofpolitical problem for majority Democrats. It could be used to fuel the campaign that would repeal the 12-cents-a-gallon gas tax that they and Brown championed last year to lock in $52 billion in road repair funding for the next decade.

That record surplus gives gas tax opponents a simple message for their social media posts and radio ads.

“Why do we need the highest gas tax in the nation when we have this surplus?” asked Jon Coupal, executive director of the Howard Jarvis Taxpayers Association, who is working on the gas tax repeal campaign.

Brown’s surplus reflects a dramatic turnaround in the state’s fortunes since he took office for his second run leading the state eight years ago, when California faced a $27 billion deficit.

The state clawed out of the hole in part with tax increases on high earners that Brown championed in 2012, including one that voters renewed two years ago. Now, with a booming economy, the state is on much more solid ground.

Democratic lawmakers whose perspectives were shaped by slashing programs a decade ago say the savings are critical, more so than sending money back to taxpayers.

“For government over the years not to save money is fiscally irresponsible, and we’ve seen it,” Assembly Budget Committee Chairman Phil Ting, D-San Francisco, said. “What happens in a downturn? Devastating cuts, classrooms got closed, teachers were laid off, potholes weren’t filled, people starved (because they lost food assistance). For us, what we are doing is completely fiscally responsible.”

The new budget that lawmakers are expected to approve by Friday gives California four savings accounts that could hold as much as $16 billion. They are:

  • The state’s traditional emergency fund that pays for natural disasters and other unexpected events. It’ll get about $2 billion in the next budget.

  • The so-called Rainy Day Fund that Brown created with a 2014 ballot measure. It can hold 10 percent of the state’s general fund revenue, and anything more is supposed to be spent on infrastructure like roads and prisons. The state is required to steer 1.5 percent of general fund revenue to the Rainy Day Fund. If projections hold, it’ll have $13.8 billion on July 1, 2019.

  • A new account that temporarily holds any money lawmakers want to put in the Rainy Day Fund in excess of the minimum payment. At the end of the budget year, the money goes into the Rainy Day Fund.

  • Another new account that sets aside money specifically for social services that typically face the ax first in a recession. Democratic Sen. Holly Mitchell, a former Los Angeles nonprofit director, advocated for that account. It gets $200 million in the new budget.

In writing a budget to hold on to the money for leaner times, Brown and top Democratic lawmakers sidestepped two paths in state law they could have used to send money back to taxpayers.

The Gann Limit

California voters in 1979 passed an initiative that aimed to cap state spending at that year's levels while allowing room for population growth and inflation. If state spending exceeds the 1978-79 threshold, the government must return money to taxpayers.

That happened once, in 1986 during Gov. George Deukmejian's term, when the state sent $1.1 billion back to taxpayers.

Since then, a 1990 initiative gave state and local governments more flexibility to manage the limit. State government tends to approach the cap only in the later years of economic expansion, like the "dot-com" boom and the past couple of years.

Last year, the Legislative Analyst's Office issued a report arguing Brown's office violated the "spirit of the Gann limit" by changing its formula for counting school funding in such a way that the state had another $22 billion of room to spend before sending money back to taxpayers.

This year, the Brown administration reported that its $200 billion budget proposal leaves about $12 billion of room under the cap. Spending on court mandates — like prison health care — as well as money the state sends directly to local government, does not count toward the limit.

The legislative analyst questioned about $6 billion of the exclusions the Brown administration claimed in the new budget, but that still would not trigger a rebate.

A sales tax break

State law has another provision that seems intended to keep lawmakers from hoarding money in reserves. A quarter-cent sales tax cut automatically kicks in if the state's primary emergency account, the so-called special fund for economic uncertainty, holds a sum equivalent to 4 percent of General Fund revenue.

California expects to collect about $138 billion in General Fund revenue over the next year. That means residents would see a sales tax cut a year from now if the emergency fund holds about $5.5 billion.

Brown and Democratic leaders want to put about $2 billion in the emergency fund. Going into budget negotiations, Brown had proposed setting aside as much as $3.2 billion into the traditional reserve fund.

At budget hearings, Republicans questioned whether the two new savings accounts that Democrats propose were really intended to stockpile money in a general reserve without triggering a sales tax cut.

"I don’t think we need a third type of reserve account," Assemblyman Jay Obernolte, R-Big Bear Lake, said at one hearing. "Even if we hit the trigger and we would be required to reduce the state sales tax rate by a quarter percent, I don’t think that would be an inappropriate action for us to take in a year when we have a $9 billion surplus "

Two other Republicans picked up his theme before Ting, the Democratic budget chairman, interjected. "It's an effort to encourage more savings by the state," he said.

The gas tax battle

As of today, a Republican-backed bid to repeal the gas tax has not qualified to reach voters on the November ballot.

Polls suggest voters might scrap the tax if they get the chance. One in March by the Public Policy Institute of California showed that majorities of Republicans and Independents want to roll back the tax. On June 5, voters in Southern California recalled Democratic state Sen. Josh Newman after a campaign in which he was blamed for casting a vote for the gas tax approval.

Republicans have been pointing to the surplus for weeks as the initiative moves forward. "Remind me again why we 'needed' a multi-billion dollar gas tax increase?!" Board of Equalization member George Runner, a Republican, wrote on Facebook when Brown released his May budget proposal and acknowledged a growing surplus.

Transportation advocates say voters might come to regret repealing the initiative if the effort succeeds. Money would quickly dry up in a recession, they say, and there's no guarantee lawmakers would find money for the projects voters seem to want.

Citing the surplus as an argument to repeal the tax is "an illusion, a mirage," said former Assemblyman Roger Dickinson of Transportation California. "It's designed to mislead and fool people into thinking that we can get something for nothing."

Michael Quigley, executive director of contractor-backed California Alliance for Jobs, warned that the surplus could vanish much faster than it appeared.

"California has a very boom-and-bust economic cycle, and that affects our revenues," he said. "Right now, because of how great the tech sector is doing, California has a lot of extra money, but it is not forever."

Increases to California's gas tax were approved in 2017 and will continue for years.

Gov. Jerry Brown on April 19, 2017 spoke with reporters about the gas tax increase to fix roads.

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