The Rainy Day Fund Speaks

Joe Mathews
Connecting California Columnist and Editor, Zócalo Public Square, Fellow at the Center for Social Cohesion at Arizona State University and co-author of California Crackup: How Reform Broke the Golden State and How We Can Fix It (UC Press, 2010)

I’m ready for my close-up, Ms. Gerwig!

OK, as a budget fund without acting credits, I shouldn’t expect Greta Gerwig to put me in her next film—even if both she and I are Sacramento natives. But the time is coming—quite quickly—when I, California’s humble Rainy Day Fund, will stand at the center of our state’s civic stage, and my fellow Californians will finally have to pay me the attention I deserve. 

I’ve had to stand on the sidelines for the past decade while Californians enjoyed a long economic expansion. Sure, this expansion made me a billionaire many times over—if I were human, I’d rank right between Elon Musk and Laurene Powell Jobs on those billionaire lists. But my real time is the bad times.

Oh, and look, what do we have here? The coronavirus and a monster stock market crash! Do I smell recession and huge drops in state revenues? Because that’s my cue! 

My role is to be the adult fund in the room, holding onto my cash instead of spending it constantly. I have to be stable because you Californians are so volatile. Your incomes, your business receipts, and your investment earnings go up like rockets and down like, mmm, bad rockets, which then open up giant holes in the state budget. It’s my job to plug those holes.

But I must confess to being nervous about the hole-plugging, because I’ve never done this before. 

Yes, Prop 58 created me in 2004, but in that decade,  I was so empty that the state couldn’t tap me when the Great Recession hit. In 2014, voters enhanced me via Prop 2, and ever since, I’ve been filling up with money. 

But I’ve never had my funds drawn down in an economic downturn. I’ve been sitting on the shelf so long—like an old soup can or a two-term vice president—that no one knows if I can prevent teacher layoffs, shore up Medi-Cal, or fund pandemic response when I’m really needed. 

In fact, few people really know how I really work. For one thing, while I’m called the Rainy Day Fund, I actually encompass more than one account. Most of my billions are the Budget Stabilization Account, but I also have a few billion in the Special Fund for Economic Uncertainties, the Safety Net Reserve, and the Public School System Stabilization Account.

Like so much else in California, I’m governed by formulas. The gist: I get 1.5 percent of the state’s general revenues each year, as well as some extra capital gains taxes. 

My success at storing money has really surprised the state. The original estimate was that I would be small, gathering maybe $1 billion a year. But I’ve grown at three times that rate, making me as swole and buff as Schwarzenegger was before he went into politics. Today I’m worth around $20 billion

Why did I get so big? Governor Brown and Governor Newsom put more money into me than required. They had their reasons. First, when you make a deposit into me, it’s easier to balance the budget, because of the way the budget formulas are written. Second, governors love the fact that the legislature has so little power to access my funds. For the state to get my money, the governor has to declare a state of emergency. So the bigger I am, the more leverage a governor has over the legislature!

In recent years, the biggest controversy about me has been whether I’m too big—and whether I should be tapped to handle urgent needs like homelessness. 

But, as the economy takes a bad turn, I’m steeling myself for contention and fights. I fear that, as huge as I am, I won’t be able to handle a larger recession, which could cost the state revenue of $100 billion or more over four years.

Even if we have just a tiny recession, the rules for tapping my dollars are arcane and untested. If state revenues collapse over a coronavirus cliff and drop $20 billion this year, the rules suggest that only about half my money—$10 billion maybe—could be tapped to fill the hole in one budget year. (In the future, I should be redesigned to be used more quickly in an abrupt downturn).

One reason I’m writing this is to manage expectations, so you know I can’t handle an economic crisis alone. I need the help of Californians, who should start making budget plans for a recession right now. 

In other words, while I’ll be there for you, I can’t do everything for you. You have certain obligations from which you can’t run. 

And my presence should keep reminding you of those obligations. To quote a favorite movie of mine, Fatal Attraction, I am not going to be ignored.

Joe Mathews writes the Connecting California column for Zócalo Public Square.

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