Budget +29: Does California Have A Rainy Day Fund?

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As Governor Arnold Schwarzenegger hits the road to talk to groups around the state about the stalled budget talks here in Sacramento, he keeps telling audiences that California has no reserve "rainy day" fund.

It's a statement that, one assumes, proves the need for systemic budget reform before he signs any new spending plan for the now 29 day late budget.

But it's also hard to square with the past.

Schwarzenegger appearing at an event in Orange on Feb. 13, 2004 in support of a measure that created a "rainy day fund" for the state budget.

Photo: Getty Images

That kind of comment, which he's now made at several recent events, seems to always get a nod of approval from the audience; after all, who doesn't think the state needs a place to sock away money for tough times?

Trouble is, that's exactly what the newly elected Schwarzenegger persuaded voters to establish in the election held on March 2, 2004.

That night, he called the passage of the two budget related measures he had been campaigning for a victory for "fiscal responsibility" in a state that had been battered by economic chaos. As we know, Proposition 57 and Proposition 58 were sibling proposals -- one approving $15 billion in borrowing to balance the budget, the other to ban all future borrowing (a topic that recently resurfaced) and... yes... create a rainy day fund.

The governor himself signed the ballot argument in favor of Prop 58 which said, in part:

The California Balanced Budget Act:
WILL require a BALANCED BUDGET;
WILL require that SPENDING NOT EXCEED INCOME each fiscal year;
WILL require general funds to be put in a "Rainy Day" fund to build a RESERVE to protect California from future economic downturns.

The "rainy day fund" admittedly got less attention during that campaign than either the $15 billion of borrowing in Prop 57 or the promise that Prop 58 would force the state to "live within its means." And admittedly, it was not exactly the reserve fund he wanted.

"Schwarzenegger wanted 10 percent of state revenue to go into the fund," wrote Joe Mathews in his 2006 book on the governor's early years. But Democrats in the Legislature balked, and the governor compromised. Prop 58's rainy day fund -- technically now known as the Budget Stabilization Account (BSA) -- would take a slice of annual revenues "until the balance in the account reaches $8 billion or 5 percent of General Fund revenues, whichever is greater," said the official ballot analysis.

Though the campaign presented the BSA as a strong reform, its legacy since 2004 indicates otherwise. In the thoughtful new book California Crackup: How Reform Broke The Golden State and How We Can Fix It, the aforementioned Mathews and co-author Mark Paul make the following observation:

...the badly designed Budget Stabilization Account created by Prop 58 in 2004 has been a fiscal flop. Capped at $8 billion, or 5 percent of projected general fund revenues, it's too small to deal with the much larger revenue swings the state has experienced in the past three recessions. It requires the state to squirrel away 3 percent of revenues every year, without regard to California's budget or economic condition, but allows the governor to withhold all or part of the annual contribution, for any reason. And it allows up to half of the money in the account to be spent, whether it's rainy or sunny.

With all of that in mind, it's not terribly surprising that Schwarzenegger wants a more robust reserve fund. And it's not surprising that, in his last budget negotiation, he's demanding some kind of better systemic fix on which he can hang his hat on when folks look back to his tenure as governor.

At least that's the way he described his effort earlier this spring. But lately, it seems all of the qualifiers (better, improved, fixed) in the sales pitch for a rainy day fund seem to have been dropped. My scan of recent transcripts offers a few examples:

May 6 in remarks to the Bay Area Council: "We are one of the only states in the United States that does not have a rainy day fund."

May 8 in remarks to the California Chamber of Commerce: "One of the only states that does not have a rainy day fund." He goes on to say that "We need to put money aside. And you know, this state has consistently tried to avoid putting a rainy day fund aside and tried to avoid to live within its means."

And then this morning, in remarks both to the San Diego Regional Chamber of Commerce and afterwards with reporters: "We don't have a rainy day fund."

So why would Schwarzenegger say there's no fund at all?

Because, says his chief of staff, Susan Kennedy, there's not one... not really.

In a phone call this afternoon, the governor's second-in-command dismissed any notion that Schwarzenegger has been off base in his sales pitch. Calling the Prop 58 reserve fund "a first step" that, in hindsight, turned out not to be enough, Kennedy says the governor is trying one more time to get a strong cushion in place -- something she (accurately) points out he's been talking about since the budget impasse of 2008 and the unsuccessful campaign for Proposition 1A in 2009.

She says if a reserve fund fails to achieve its goal -- setting aside money for bad times -- then it's not inaccurate to proclaim the lack of a "rainy day fund."

So might, then, the governor regret the compromises he made in crafting Proposition 58 in late 2003?

"There's no regrets about what happened," says Kennedy. "The lesson learned is that you have to have a stronger mechanism in place." And that's why Schwarzenegger is out on the stump, again, calling for a way to prepare for bad times down the road.

That's a reasonable explanation about the realities of governing, but it's also an example of how political campaigns often leave an impression with voters that all they have to do is act as instructed, and a problem is solved.

As Californians are probably learning, it's not that simple.

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About John Myers

John Myers is Sacramento Bureau Chief for KQED Public Radio and "The California Report," heard daily on 23 public radio stations across the Golden State.

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