Capitol Alert Breaking

Proposition 2 would expand rainy-day fund

Bee photo illustration

Next month’s election will not be the first time California voters have weighed in on a measure billed as the fix for the state’s fluctuating finances by setting aside money in good times for bad. Far from it.

The state long has had a budget reserve of one type or another. In March 2004, voters created a new one when they overwhelmingly approved a measure pitched by Gov. Arnold Schwarzenegger, Proposition 58. The next November, though, voters rejected Proposition 76, another Schwarzenegger-supported initiative that sought to limit spending while putting revenue above the limit into a reserve. And in May 2009, voters trashed Proposition 1A, another reserve-creating initiative that was linked to a tax increase.

A year later, lawmakers voted to put yet another reserve measure on the 2012 ballot as part of a budget deal, and then postponed it two years. That measure, ACA 4, stood until this past May – when lawmakers of both parties voted unanimously to replace it with legislation that came to be Proposition 2.

The swap came after Gov. Jerry Brown, joined by former Assembly Speaker John A. Pérez, pushed for a revamped rainy-day reserve. Legislative Republicans, who initially balked at abandoning ACA 4, ultimately signed on to its ballot replacement. Unions and other groups that have campaigned against reserve measures in the past could have come out against ACA 4, but they lined up in support or stayed neutral on Proposition 2.

Will Proposition 2 finally settle the years-long debate over budget reserves? Supporters say the measure would be much more effective than Proposition 58, which lawmakers suspended in almost every year since it took effect.

The loudest complaints have come from the group Educate Our State, which contends that the separate school reserve created by Proposition 2 would divert too much money from schools.

Whatever happens to Proposition 2, the reserve fights may not be over.

What it does

▪ Requires the state every year for 15 years to spend a minimum amount (about $800 million this year, growing over time) to pay some debts. That includes liabilities for employee pensions and health care benefit costs. Payments would be higher in years in which state revenue from capital-gains taxes is higher.

▪ Requires the state every year for 15 years to put a like amount into its budget reserve, and more when revenue from capital-gains taxes bring in more revenue. The state could put in less if the governor calls a budget emergency due to a natural disaster or confronts a situation in which the state is unable to maintain spending equal to the highest spending level over the previous three years, adjusted for inflation and population.

▪ Allows lawmakers and the governor to spend up to half the money from the reserve account, but only enough to pay for costs stemming from a natural disaster or to bring spending to a level equal to the highest level over the previous three years. In a second consecutive year of emergency, all of the reserve money could be spent.

▪ Creates a new pot of money for schools that could be used under certain circumstances.

▪ Enacts a separate law – which could later be changed by the Legislature without a vote of the people – that caps the amount local school districts can keep in reserve, to an estimated 3 percent to 10 percent of their annual budget.

Who’s for it?

▪ Gov. Jerry Brown

▪ Neel Kashkari, Republican nominee for governor

▪ California Democratic Party

▪ California Republican Party

▪ Howard Jarvis Taxpayers Association

▪ California Chamber of Commerce

▪ League of Women Voters

Who’s against it?

▪ Educate Our State

▪ Association of California School Administrators

Major contributorson both sides


Brown’s ballot measure committee, which raised money for Proposition 30 in November 2012, was recast last month to raise money for Proposition 2 as well as Proposition 1, the $7.5 billion water bond. There also are three other campaign committees supporting Proposition 2. Here are the top donors through Tuesday:

▪ The Fisher family, owners of the Gap: $1.5 million

▪ Tech mogul Sean Parker: $1 million

▪ Brown for Governor 2014: $875,765

▪ California Alliance for Jobs - Rebuild California Committee: $521,250

▪ L. John Doerr, venture capitalist: $475,000

▪ Laborers Pacific Southwest Regional Organizing Coalition PAC: $400,000

▪ California Farm Bureau Federation: $250,000


No opposition campaign committee

How true are competing claims?


▪ Proposition 2 will force politicians to live within their means and protect against unnecessary tax increases.

Proponents of rainy-day reserves always talk about the need to rein in spendthrift politicians. Remember Schwarzenegger’s promise that passing Proposition 58 would be “basically taking the credit cards, cutting them up and throwing them away”?

Proposition 2 would go further than the 2004 measure and allow the budget stabilization account to grow to 10 percent of general fund revenues, currently about $11 billion, compared to $8 billion, or 5 percent, whichever is greater, under Proposition 58.

Unlike some past ballot measures, though, Proposition 2 is not a spending limit. Lawmakers could still seek to increase spending for particular programs. Governors would continue to have the ability to veto Legislature-approved spending increases in the budget.

The initiative also does nothing to restrict tax increases. Indeed, there already is talk about putting a measure to extend Proposition 30’s temporary taxes on the 2016 ballot.

▪ Proposition 2 protects funding for K-12 schools.

School district finances cratered during the recession. Proponents say Proposition 2 would create a larger reserve that politicians could tap to avoid deep spending cuts during the next economic downturn.

Teacher unions, administrators and some other school interests, though, traditionally have been uneasy about setting aside state money for purposes other than education, citing major classroom needs after years of cuts or stagnant revenue. In addition, school management groups were angry with late-blooming budget legislation this year that, should Proposition 2 pass, would limit how much money districts can set aside in local reserves.


▪ Other proposed rainy-day reserves would have been better than Proposition 2.

The 2010 budget measure, ACA 4, would have diverted 3 percent of annual revenue as well as “unanticipated revenue” above a 20-year trend line. Besides setting aside more money, the legislation would have set tighter limits on when it could be used. That reserve only could have been tapped when total projected revenue for a budget year was less than spending in the previous year, or when there was an earthquake or other emergency.

But Democrats, as well as Republicans who initially balked at abandoning ACA 4 this year, came to view the 2010 measure as unworkable and confusing.

▪ Proposition 2 undercuts the new Local Control Funding Formula and local district finances.

The Association of California School Administrators has questioned whether diverting money to a reserve would delay full implementation of the funding formula, the central piece of Brown’s efforts to revamp school funding. School officials worry that another economic downturn will hit before schools receive the money they’ve been promised. Management groups intend to work with the Brown administration in the coming months to reverse the budget bill’s cap on local reserves.

Proposition 2 supporters, though, say schools will benefit if the initiative keeps state finances on a more even keel. They also have downplayed school districts’ need to sock away savings if the Proposition 2-created reserve sets aside its own pot of money for schools.