Capitol Alert Breaking

Jerry Brown back to negotiating table with Republicans over rainy-day fund

Gov. Jerry Brown called Wednesday for a special session of the Legislature to take up his proposal to create a rainy-day fund, and for the first time since 2011 he will have to negotiate a major budget deal with Republicans.

The special session, scheduled to begin next week, is a significant test for the Democratic governor, who tried – and failed – to reach a budget accord with GOP lawmakers in the first year of his second stint as governor. That was before Democrats achieved a supermajority in the Legislature, and Brown hasn’t needed Republicans for much since.

But the suspension of three state lawmakers involved in separate criminal cases in recent months has dropped Democrats below their supermajority status in the Senate, forcing Brown to reach back across the aisle. Yet Brown and majority Democrats also have leverage on the issue, because a Republican-backed budget reserve measure already on the November ballot has been criticized by public employee unions that could campaign against it.

Brown’s proposal would eliminate some provisions of that measure, which the governor’s liberal allies have complained would collect too much money and make it too difficult to increase spending.

Brown has said the measure fails to address the volatility of capital gains revenue and didn’t allow lawmakers to pay down debt, among other shortcomings.

“We simply must prevent the massive deficits of the last decade, and we can only do that by paying down our debts and creating a solid Rainy Day Fund,” Brown said in a prepared statement Wednesday.

The original measure, ACA 4, was part of a 2010 budget deal among Democrats, Republicans and then-Gov. Arnold Schwarzenegger and originally scheduled to go before voters in 2012, but lawmakers postponed it to 2014.

Republicans reacted skeptically to Brown’s proposal when he first announced it in January, and they remained unconvinced Wednesday.

Bob Huff, the Senate Republican leader, said Brown’s proposal would allow a governor and lawmakers to withdraw funding from the account too easily, describing it as “more of a slush fund” than a reserve.

He said Republicans “are not rigidly tied” to ACA 4 and that he and Brown already have met once to discuss the proposal. He said it is “too early to tell” whether the negotiation will be fruitful or break down as it did in 2011.

That year, Brown tried for months to move Republicans to put a tax increase on the ballot, failing and turning instead to voters the following year in a successful ballot initiative to raise taxes.

A reserve account may be easier to negotiate than taxes, however.

Brown’s proposal includes a $1.6 billion allocation to the rainy-day fund, in addition to $1.6 billion to pay down long-term debt. He proposes to increase deposits during years when capital gains revenue is high, to raise the maximum size of the fund to 10 percent of general fund revenue and to create a special reserve for school funding.

“If there’s any issue on which he can work with Republicans, it’s this one,” said Jack Pitney, a government professor at Claremont McKenna College.

Republicans are generally supportive of limiting spending and increasing reserves, and with Brown’s public approval rating soaring in a re-election year, Pitney said, “Republicans are pretty sure that he’s going to be around for the next four years, so it might be a good idea to work with him.”

Debate over the rainy-day fund will start ahead of the release of Brown’s revised budget proposal in May, when annual budget negotiations traditionally begin. Brown’s calling of a special session serves to focus public attention on the issue, but it could also separate the matter from any other disputes about the budget.

Michael Cohen, Brown’s director of finance, told reporters at the Capitol on Wednesday, “We thought this was important enough to start the discussion and have the discussion now, when there aren’t all of those other deliberations going on.”

Yet even a bipartisan agreement in Sacramento on a budget reserve doesn’t ensure success at the ballot box.

In 2009, the last time a budget reserve was on the ballot, both caucuses and Schwarzenegger signed off on a ballot measure to divert more money into reserves. That spring, though, the “Rainy-Day Budget Stabilization Fund” faced opposition from both ends of the political spectrum and lost by almost 31 percentage points.

Budget experts have raised concerns about making capital gains the basis for any rainy-day reserve, as Brown’s plan does.

Brad Williams, the former chief economist at the nonpartisan Legislative Analyst’s Office, said it can take years for policymakers to get an accurate accounting of capital gains for a given budget year. Capital gains data for 2012 only recently became available, he said.

“Conceptually, it makes perfect sense. The concern is that we don’t know what capital gains are until, really, two years after the fact,” Williams, an economist with Capitol Matrix Consulting, said Wednesday. “You can imagine the dynamic that would arise when everybody is just guessing about the level of capital gains.”

The administration’s proposal includes a provision to revise capital gains totals in future years. But Williams said that could cause significant problems if lawmakers have to make up for lower-than-projected capital gains revenue.

A better approach, Williams said, is for reserve calculations to be based on actual revenue.

Some officials also have warned about injecting another calculation into the annual budget process.

At a budget hearing several weeks ago, Jason Sisney of the analyst’s office warned that any reserve formula could be subject to competing interpretations. That would further muddle an already complicated budget process that Sisney likened to “quantum physics.”

Both Assembly Speaker John A. Pérez and Senate President Pro Tem Darrell Steinberg issued statements welcoming the special session. It is unclear what impact liberal interest groups, including labor unions, will have on the negotiation.

Various unions and organizations representing low-income residents have raised concerns that ACA 4 would be unworkable and unfairly limit spending increases after years of recession-era cuts.

Dave Low, executive director of the California School Employees Association, said the association has concerns about any proposal that would limit spending. The California Teachers Association said it has not taken a position on ACA 4 and is still reviewing the governor’s latest proposal. The California Labor Federation similarly said it was too soon to comment.

“I think conceptually we get the idea of having a rainy-day reserve,” Low said. “But how big a reserve makes sense? If school districts are already holding onto reserves, and the state will be holding onto 5 percent, that’s kind of excessive in my opinion.”

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