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Brown Strikes Deal With Lawmakers on Rainy-Day Reserve

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May 9 (Bloomberg) -- California’s legislative leaders and Governor Jerry Brown struck a deal on a multibillion-dollar rainy-day reserve that would cushion against economic downturns and may help boost the state’s credit rating.

Under the agreement, voters will be asked to approve a constitutional amendment requiring the most populous U.S. state to set aside 1.5 percent of general-fund revenue each year, as well as excess capital gains taxes that exceed 8 percent of the general fund. That’s a higher threshold than the 6.5 percent Brown had sought. Half the money must be spent paying down state debt such as unfunded pension costs.

“There’s nothing complicated about the idea of saving money and exercising fiscal restraint, but it’s not always easy to do,” Brown said yesterday 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.

Bigger than Average

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 rating company said the 6.5 percent Brown proposed was low enough to require deposits in most years. Capital gains tax receipts have cleared that level in seven of the last 10 years.

The amendment would boost the size of the reserve to 10 percent of the general fund -- amounting to about $10 billion based on the current budget -- well above 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.

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 had 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.

Easily Suspended

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.

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, agreed 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 yesterday’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

To contact the editors responsible for this story: Stephen Merelman at Pete Young, Jeffrey Taylor

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