Answering Your Questions About Proposition 2, the Rainy Day Reserve, on the November Ballot

Loren Kaye
President of the California Foundation for Commerce and Education

What is Proposition 2?

Proposition 2 amends the State Constitution to strengthen the requirement for a budget reserve and to pay down budget-related debt. Proposition 2 would increase the size of the state’s “Rainy Day” reserve from $8 billion to $11 billion, and would require minimum annual contributions into that reserve of $800 million – and even more when the economy is strong and state revenues are high. The measure would also require extra revenues be used to reduce budget debts, repay funds borrowed from local school districts, or be used for investment in new infrastructure or reduce long-term pension liabilities.

How did Proposition 2 get on the ballot?

Proposition 2 was placed on the November ballot by the Governor and Legislature. The measure was sponsored by Governor Brown and approved unanimously by the Legislature.

Why was Proposition 2 placed on the ballot?

Proposition 2 is a response to the State’s “feast or famine” budgeting. Historically, when revenues were strong, the Legislature spent all the money, and when revenues were weak, the Legislature spent as if revenues were strong. By preventing ongoing spending of one-time revenues, Proposition 2 over time will reduce pressure for tax increases and cuts in school funding.

Proposition 2 forces the state to save money and requires politicians to live within their means and protect against unnecessary tax increases. In good times, money will be placed in a constitutionally-protected reserve and used to pay down debt. In bad times, the Rainy Day reserve can be used to protect schools, public safety and other vital services.

How does Proposition 2 work?

Proposition 2 requires minimum transfers each year from General Fund revenues to (1) a “Rainy Day” reserve and (2) to pay off old loans used to balance the budget or for longer-term debts for state pensions and retiree health care benefits. The minimum transfers for each of these purposes would be about $800 million in today’s dollars, which will grow as the budget grows.

Will money be transferred for the reserve or debt repayment in addition to these minimum amounts?

Yes. These transfers would be increased – sometimes substantially – in years when there are revenue “spikes” resulting from strong capital gains taxes. Any capital gains revenues that exceed eight percent of all General Fund revenues are split between the budget reserve and debt repayment. In some years, the extra revenues to these purposes could be in the billions of dollars.

Will money be transferred from General Fund revenues to the reserve and debt repayment forever?

No. The debt repayment requirement would expire in 15 years. The reserve requirement would be indefinite. However, once the budget reserve reaches its maximum level (ten percent of General Fund revenues, or about $11 billion today), any excess deposits must be spent on one-time infrastructure purposes.

What will the reserve be used for?

The rainy day reserve will be used to offset revenue shortfalls from economic downturns. This will buffer state finances from the ups-and-downs of the business cycle, and alleviate future tax increases or cuts to education.

Won’t deposits into the reserve shortchange schools?

No. Proposition 2 sets up a separate reserve for K-14 education, also known as the “Proposition 98” portion of the budget. But deposits into this reserve would occur only when (1) revenues are very strong, (2) when school spending is fully funded according to the requirements of the Constitution, and (3) all prior debts and liabilities to schools are repaid. The special reserve for schools would only be tapped in years when schools face budget cuts.

Doesn’t Proposition 2 limit the budget reserves that local school districts can hold?

Only indirectly and infrequently. A statute passed this year will add some requirements to local reserves at some point in the future. Since it’s a statute, it can easily be changed if it’s found unworkable. The Governor has committed as much. These limits will only take effect in any year that the state makes a deposit into the state’s education reserve – which only happens when state school finances are fully funded and all debts are repaid. In this case, the maximum reserves for school districts would be limited to between three percent and ten percent of their annual budgets, depending on the size of the district. These requirements would be waived for schools with fiscal difficulties.

What will be the fiscal effect of Proposition 2?

The Legislative Analyst concluded that this measure would result in the state likely paying down its debts more quickly, meaning that there would be less money available for other budget programs. Over the long term, faster debt repayment means greater budget flexibility over time.

Would Proposition 2 have had any effect on state finances during the last recession – if it had been in effect at the time?

Definitely. According to Michael Cohen, Director of the Department of Finance, if Proposition 2 had been fully in effect at the beginning of the Great Recession in 2008:

  • About 62 percent of the shortfall would have been avoided in 2008-09.
  • Another 23 percent of the shortfall would have been avoided in 2009-10.
  • Nearly $6 billion in education cuts would have been avoided.
  • If all the savings and reserves were dedicated to mitigating the 2009 tax increase, it would have virtually eliminated the need for the first year of the $12.5 billion tax increase.

Who supports Proposition 2?

The ballot argument for Proposition 2 was signed by Governor Brown, Speaker-emeritus Pérez and CalChamber President Allan Zaremberg. Many other business and citizens organizations, and newspaper editorial boards, also support Proposition 2.

Who opposes Proposition 2?

Proposition 2 has not garnered any well-known, funded opposition. The ballot argument was signed by representatives from Educate Our State, who argued that the measure would constrain local school districts from building reserves to guard against economic downturns.

How do I learn more about Proposition 2?

The campaign’s website is www.CaliforniaRainyDayFund.com.​​

 

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