Editorial:  California needs a rainy-day fund that works

At Gov. Jerry Brown’s request, lawmakers will start working next week on a rainy-day fund to better prepare the state for the inevitable next downturn. The fund is such a sensible idea that the state already has one: the Budget Stabilization Account, which was created by Proposition 58 in 2004. The problem is that it doesn’t work. And an initiative to create another flawed version is already on the November ballot. Brown has suggested a third version with several improvements that would address the problem of volatile revenues more directly, but his proposal would do too little to curb irresponsible spending.

Existing law requires the state to set aside 3% of the income taxes, sales taxes and other revenue that flow into the general fund every year. The deposits continue until the Budget Stabilization Account reaches $8 billion or 5% of general fund revenue, whichever is greater. But the governor can suspend the deposits by fiat, and the Legislature can drain the account for any reason. As a result, the fund received only $1.5 billion before it was emptied in early 2008 — not nearly enough to absorb the fiscal shock caused by the recession.

The point of a rainy-day fund is to build up reserves by limiting budget growth during boom times. The current rules, by contrast, simply calls for the state to save 3% of its general fund revenue every year, regardless of how well or poorly the state economy is doing. The pending ballot initiative would go a step further, requiring the state to hold in reserve any revenue that exceeded the previous year’s general fund spending, adjusted for inflation and population growth. The effect would be a spending cap that tightens permanently any time the economy flags.

Brown has proposed replacing the pending initiative with a new one that would tie the rainy-day fund to large increases in capital gains tax revenue. Although that revenue may gyrate too wildly to build a substantial reserve, it makes sense to design the fund in a way that levels out the most volatile sources of state income. Among other improvements, the governor’s plan would allow legislators to reduce the state’s debt burden instead of increasing the rainy-day fund, and would create a reserve within the fund to smooth the ups and downs in school budgets. Unfortunately, Brown’s plan wouldn’t stop Sacramento from declaring a specious emergency and withdrawing from the fund by just a majority vote, which was one of the main problems with Proposition 58.

With state revenue surging thanks to a rebounding economy and a temporary tax increase, it’s an opportune time to build a more effective safeguard against boom-and-bust budgeting. Although his plan has its own problems, legislators should heed Brown’s call to come up with a better rainy-day fund proposal before residents are asked to vote on another one that won’t fulfill its promises.