Hearing on rainy day fund changes

Assembly Budget Subcommittee #7 to discuss options on Wednesday 5/7 at 9 am

Assembly Budget Subcommittee No. 7, chaired by Assemblymember Gregg Hart (D-Santa Barbara), will hold an informational hearing on options to improve California’s rainy day fund, the Budget Stabilization Account (BSA), on Wednesday, May 7, at 9 a.m. (Agenda here and LAO handouts here and here and here.) Speaker Robert Rivas has appointed Assemblymembers Ellis, Fong, Rogers, and Valencia to join Hart on the subcommittee for this hearing; Budget Committee Chair Gabriel and Vice Chair Flora are alternates for all subcommittees.

The Legislative Analyst’s Office notes correctly that Proposition 2—originally proposed as ACAX2 1 by Speaker John Pérez in 2014—”substantially improved” California’s budget reserve policies. Now, the issue is how to grow bigger reserves in the future to guard better against budget deficits of the sort now beginning to be addressed by state leaders.

The Governor included a rainy day fund proposal in his January budget package this year, as he did last year. That is discussed in the agenda, as is ACA 1 as introduced in December 2024 by Assemblymember Avelino Valencia. Legislative leaders and the Governor’s Office have been discussing improvements to the rainy day fund for about four years now, since the initially projected 2022 budget surplus was thought to trigger the Gann Limit, thereby limiting deposits to budget reserves.

I will appear in the concluding panel of the hearing and intend to focus on the issues mentioned in the agenda’s staff comments for that panel, as excerpted below.

Proposition 2 was a complex measure that included additional provisions around debt repayment, and how the state treated capital gains revenue and Proposition 98 expenditures.

In contrast, the two measures that have been proposed make relatively simple changes to the existing law. However, given the rare opportunity to ask voters to revisit state reserves and spending, there are other provisions that the Assembly could consider as part of a package.

These include:

• Assuming there is consensus that the state needs to grow bigger reserves during strong budget times, how much of that growth should be “hard wired” into the Constitution versus growth accomplished via future, discretionary deposits to statutory budget reserves?

• Gann Limit changes likely are required to facilitate savings in both constitutional and statutory budget reserves.

• The Gann Limit helped ensure tax rebates to Californians in 2022, but rarely accomplishes this goal during strong budget times. Should Proposition 2 help provide more regular tax rebates during strong budget periods?

  • Making tax rebates one eligible use for Proposition 2’s “debt repayment funds” is one option.

  • Exempting funding set aside for such rebates from the Gann Limit may help

    provide more regular tax rebates.

• Related to this concept: could similar mechanisms be used to set aside funds to pay down unemployment insurance (UI) loans to the federal government, leading to long-term tax reduction for businesses?

• Should oversight and transparency be increased as reserves grow?

  • One option for a rainy day fund constitutional measure is to ask voters to remove the Legislative Analyst’s Office from the Legislature’s Proposition 140 spending limit.

• Should federal cuts allow a draw from the BSA?

  • Proposition 2 could be amended to explicitly allow BSA draws due to significant federal cutbacks in state or local funding, given that the magnitude of cuts now being discussed are beyond those considered likely in the past.