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Legislature approves change to rainy-day fund measure
May 16, 2014, 05:00 AM By Fenit Nirappil The Associated

SACRAMENTO — The state Legislature on Thursday overwhelmingly passed a fresh version of a rainy-day fund measure for the November ballot, a bipartisan plan that seeks to smooth out the boom-and-bust cycles of state budgeting while creating a clear path for paying down California’s massive debts and unfunded liabilities.

Lawmakers voted 75-0 in the Assembly and 36-0 in the Senate to replace a rainy-day fund measure already scheduled to go before voters this fall. The proposed constitutional amendment required a two-thirds vote in both houses and easily surpassed that threshold.

It does not require action by Gov. Jerry Brown, who negotiated the deal with legislative leaders of both parties.

Democratic and Republican lawmakers praised the compromise during debate in both houses.

“This is a genuine bipartisan proposal that will build on the progress we made in terms of stabilizing and strengthening California’s finances,” said Assemblyman John Perez, D-Los Angeles, who negotiated the deal before stepping down as speaker this week. “It represents a commitment to break the bad habits of the past.”

The version that passed during a special legislative session Thursday, known as Assembly Constitutional Amendment 1, will create a reserve funded primarily from excess capital gains revenue during boom years as well as an annual contribution equal to 1.5 percent of the state’s general fund. The set yearly contribution was a provision pushed by Republican lawmakers.

“I think it demonstrates to the people of California that when you have a robust bipartisan discussion, you can make things better because we all bring something to the table...” said Senate Minority Leader Bob Huff, R-Diamond Bar. “To that end, we wanted to make sure that it’s truly a rainy-day fund, and not an everyday fund.”

If voters approve ACA1 in November, half the money in the fund will be dedicated to paying down California’s long-term debts and liabilities for the next 15 years. The Legislative Analyst’s Office has estimated those liabilities at $340 billion, mostly for public employee pension obligations and retiree health care costs.

The state’s existing rainy-day fund dates back a decade. It was first approved by voters in 2004 but was quickly drained and not refilled. The Legislature last contributed to it in 2007.

Former Republican Gov. Arnold Schwarzenegger negotiated a revised rainy-day fund that was preferred by GOP lawmakers during a 2010 budget crisis, but it was delayed in going before voters two years ago. That version required a 3 percent annual contribution from the state’s general fund.

The one now going before voters reduces the annual contribution to 1.5 percent but also requires it to be supplemented with capital gains tax revenue that soars when the economy and stock market take off. The rainy-day fund can grow to a maximum of 10 percent of the state’s general fund, which is expected to be nearly $108 billion in the next fiscal year.

Brown also wanted more flexibility in withdrawing from the fund. He said the earlier version negotiated under Schwarzenegger was too difficult to tap in case of emergencies, disasters or recessions.

Lawmakers from both parties said there were enough safeguards in place to ensure that the Legislature could not draw from the fund at will. In addition, transfers to the fund could be suspended and additional withdrawals could be made during a recession, but only within certain limits.

“While you may not believe it to be perfect, it is significantly stronger than existing law,” Assembly Republican leader Connie Conway told members of her party before the vote.

The compromise also creates a reserve for education spending, which would not be implemented until school funding is fully restored to pre-recession levels.

Five things to know about the rainy-day fund



Yes. Voters established a rainy-day fund in 2004, which is supposed to be filled annually with 3 percent of general fund revenue. But it has been criticized for having loose rules governing when lawmakers can tap it and when they must replenish it. It has not received a contribution since 2007.



The bipartisan measure overwhelmingly approved Thursday by the Legislature replaces a rainy-day fund measure that already was on the November ballot. It will be known as Assembly Constitutional Amendment 1.

During a budget crisis in 2010, under then-Gov. Arnold Schwarzenegger, lawmakers negotiated a fix to the existing rainy-day fund and placed it on the 2012 ballot. It was then delayed until this November. Last month, Gov. Jerry Brown called on lawmakers to change that version, saying it was too rigid and made the fund difficult to tap in times of natural disasters, emergencies and recessions.


Instead of requiring an annual contribution equal to 3 percent of state general fund revenue, the new version will require an annual contribution equal to just 1.5 percent. But additional money would flow in from increases in capital gains tax revenue during boom years, until the fund reached a level equal to 10 percent of the general fund. The existing voter-approved rainy-day fund sets the maximum at 5 percent of general fund revenue.


The deal requires the state to use half the money to pay down debts and liabilities for 15 years, with the other half available for disasters and budget crises. California’s total debts and liabilities have been pegged at $340 billion, most of which are for unfunded public employee pensions and retiree health care.



Republicans got to keep a minimum annual contribution to the fund and tightened the definition of debt to exclude voter-approved bonds such as those dedicated to the high-speed rail project. Democrats won greater flexibility to use the rainy-day fund as a way to reduce the severity of budget cuts during economic downturns.



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