May 10, 2008

SBACC Supports Governor's "Rainy Day Fund" Concept

The Governor’s budget proposal in January 2008 included a 10 percent reduction to nearly all General Fund departments and programs, boards, commissions and elected offices, except in cases where such a reduction is unconstitutional. A clearer impact on state revenue will release in the Governor’s May Revised Budget to be released May 15, 2008.
 

The Governor proposed a Revenue Stabilization Fund (RSF), which is a savings account for excess revenues taken in by the state each year requiring that the state deposit excess revenues into the RSF.
 

The SBACC supports the concept of a rainy day fund to protect the state from future budget deficits. However, the SBACC reserves its right to take a position on a specific legislative proposal once introduced in the State Legislature.

The RSF will make these savings automatic—thus ensuring that California does not again fall into the trap of spending all its revenues in prosperous times.

In years when tax revenues are below average and California cannot meet its spending obligations, the state will transfer the difference from the RSF into the General Fund. Transfers will only take place when revenue grows at a rate below the long-term average.
 

The Budget Stabilization Act will allow California to reduce spending when necessary. Right now, California doesn’t have this flexibility. Once the Governor signs the budget, spending is locked in unless the Governor declares a fiscal state of emergency and calls a special session. Under this Act, automatic reductions in state spending will be triggered by the Governor if the Department of Finance predicts a year-end budget deficit. The Department of Finance will calculate and release this projection three times each year: in November, January and June.
 

California’s economy continues to grow, in spite of the current housing downturn, and the state continues to enjoy overall job growth. California still faces a projected $14 billion budget gap that necessitates across-the-board-cuts. California’s budget problem is chronic, and driven by two factors: The state historically spends all the money it takes in during years of high revenue growth, leading to unsustainable spending levels in the long run.

California has not slowed spending growth fast enough. Automatic formulas will increase spending in FY 2007-08 by 7.3 percent, unless we take action now. Each month California spends $600 million more than the state takes in. The majority of spending in the budget is set on auto-pilot. Currently about 90 percent of the budget is tied up with contracts and statutory requirements.