California Lawmakers Strike Deal With Brown on Reserve

California Governor Jerry Brown and legislative leaders struck a compromise on a multibillion-dollar rainy-day reserve to help boost the state’s credit rating.

Voters will be asked to approve a constitutional amendment requiring the most populous U.S. state to set aside revenue each year, including excess capital gains taxes that finance the general fund, which pays for most basic services.

“There’s nothing complicated about the idea of saving money and exercising fiscal restraint, but it’s not always easy to do,” Brown said in a statement. “Democrats and Republicans have come together to create a rainy day fund that ensures we’re not only saving for the next downturn, but also paying off our debt.”

Credit rating companies such as Standard & Poor’s have long criticized California for its failure to set aside money when the economy is booming and for relying on capital gains, which vary with the performance of the stock market, to pay for two-thirds of the state’s general spending.

S&P, which raised California’s credit grade to the second-lowest in the U.S. in 2013, said May 6 that failing to enact a rainy-day fund now would “be a missed opportunity.”

The compromise would boost the size of the reserve to 10 percent of the general fund, more than the 6.2 percent nationwide average, according to the National Association of State Budget Officers.

Two-thirds of the legislature is needed to approve sending the measure to voters. Until last month, Brown had enough Democratic votes in both chambers to meet the requirement.

Suspended Lawmakers

Then three Democratic senators were suspended after being charged in unrelated corruption cases, including one accused of conspiring to traffic illegal firearms. That means Brown also has to negotiate with Republicans to win support for his plan.

Republicans were demanding that the money be deposited into the fund more regularly than Brown proposed and sought stricter rules governing when and how the money is spent.

Brown outlined a record $106.8 billion budget in January for the fiscal year that begins July 1, an 8.5 percent increase from current spending. His budget would devote $11 billion to pay off loans that papered-over previous deficits and leave $1.6 billion in reserves.

Easily Suspended

California already has a rainy-day provision known as the budget stabilization fund, approved by voters in 2004. That law requires depositing 3 percent of annual revenues into the reserve each year. Payments are easily suspended, something that has happened every year since 2007. There are few restrictions on when and how the reserve money can be spent.

In 2010, lawmakers and then-Governor Arnold Schwarzenegger, a Republican, struck a deal to ask voters to set restrictions on suspending deposits and make it harder to spend the money. A vote on that plan was delayed until this year. Under today’s deal, the constitutional amendment would take the place of that proposition on the ballot.

Brown, who is already California’s longest-serving governor, is running for an unprecedented fourth term. The rainy-day fund would add to his fiscal victories in leading the state from a $26 billion deficit to the biggest surplus in more than a decade.

To contact the reporter on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Pete Young, Jeffrey Taylor

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