DECISION 2014: California Will Overhaul State Rainy Day Fund

LOS ANGELES (AP) — California will overhaul its rainy day fund to pay down more debt and provide a bigger buffer against future state budget shortfalls under a measure resoundingly approved by voters Tuesday.

With 15 percent of precincts reporting, Proposition 2 was leading 71 percent to 29 percent.

The measure was the result of years of negotiations to address California’s volatile budgeting, which typically means high spending during boom years and large deficits during recessions.

Gov. Jerry Brown said its passage sends the following message: “Save money, create a reserve and don’t spend it all now.'”

Voters first approved a rainy day fund in 2004, before the recession devastated the state budget and diverted annual payments that were supposed to go into the reserve.

Former Gov. Arnold Schwarzenegger and lawmakers negotiated an overhaul during the 2010 budget crisis, but Brown criticized that proposal as too inflexible.

Brown, a Democrat, compromised with legislators of both political parties in May to put Tuesday’s revised proposal before voters.

It will require the state to save 1.5 percent of its annual revenue, half the current requirement. The reserve could grow to as much as 10 percent of the state’s general fund, double its current maximum.

Additional money would come from spikes in capital gains tax revenue generated by real estate and investment sales. The measure also would discourage the state from spending one-time windfalls on continuing programs.

It also would devote half of state reserves over the next 15 years to help pay down more than $150 billion in state debts, most of it for public employee pension obligations and retiree health care costs.

The measure would also create a new reserve fund for K-12 education and community colleges. However, Democratic lawmakers subsequently imposed limits on how much school districts could keep in reserves if Proposition 2 passed. As a result, the California Budget Project projected the state would rarely set aside school-specific reserves.

A parents group called Educate Our State was the only formal opposition to Proposition 2, complaining it could force teacher layoffs and larger class sizes during future recessions.

Brown devoted much of his re-election campaign to championing both Proposition 2 and Proposition 1. The latter would authorize $7.5 billion for water projects. Like Proposition 2, it was placed on the ballot by the Legislature with the governor’s approval.

Much like the inevitability of death and taxes, Brown said Tuesday night, “in California we can talk about droughts and economic downturns.”

“We get shortages of water and shortages of government revenues for necessary programs,” he told The Associated Press in a phone interview.

Twelve other states have reserve funds that tie contributions to volatility in revenue, according to Pew Charitable Trusts.

(Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.)

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