May 8 (Bloomberg) -- California Governor Jerry Brown’s push for more prudent budgeting is facing resistance from fellow Democrats in the Senate who say the most populous U.S. state shouldn’t rush into any decisions.
Brown wants voters to approve a constitutional amendment that would overhaul the state’s rainy-day reserve by stashing excess capital gains taxes -- about $10 billion based on the current budget -- when the economy is booming, to cushion cuts in downturns.
The governor’s plan would create a buffer by stockpiling about 10 percent of annual expenditures, compared with 6.2 percent nationwide, according to the National Association of State Budget Officers. It’s also intended to lower borrowing costs by lifting the state’s credit rating, now the second- lowest in the U.S. because of past budget woes.
“Whatever we do here will lock Californians into a budgeting formula for generations to come,” Senate President Pro Tem Darrell Steinberg, a Sacramento Democrat who urges lawmakers to go slow in approving the plan, told senators April 28. “A poorly-designed constitutional amendment is difficult to fix.”
Steinberg is pushing for additional spending to expand transitional kindergarten to children as young as 4 years old, at a cost of almost $1 billion annually by 2020.
Credit rating companies such as Standard & Poor’s have long criticized California for its reliance on volatile capital gains from the performance of the stock market to pay for two-thirds of the state’s general-fund spending.
Based on the current budget, California’s reserve would be the second biggest among U.S. states, displacing Texas at $6.5 billion. Oil-rich Alaska is first at $17.2 billion, according to budget officers’ association.
“There’s nothing complicated about the idea of saving money,” Brown told a legislative committee late last month. “Voters can understand it.”
Two-thirds of the legislature needs to approve sending the measure to voters. Until last month, Brown had enough Democratic votes to meet the requirement.
Then three Democratic senators were suspended after being charged in unrelated corruption cases, including one accused of conspiring to traffic illegal firearms. That means Brown also has to negotiate with Republicans to win support for his plan.
He ordered lawmakers into a special session, saying he wants his plan passed immediately so that it can be calculated in the budget update he will unveil May 14.
Brown outlined a record $106.8 billion budget in January for the fiscal year that begins July 1, an 8.5 percent increase from current spending. His budget would spend $11 billion to pay off loans that papered-over previous deficits and leave $1.6 billion in reserves.
California already has a rainy-day provision known as the budget stabilization fund that was approved by voters in 2004. That law requires the state to transfer 3 percent of annual revenues into the reserve each year, regardless of whether the budget has a surplus or a deficit. Payments to the fund are easily suspended, something that has happened every year since 2007. There are few restrictions on when and how the reserve money can be spent.
In 2010, lawmakers and then-Governor Arnold Schwarzenegger, a Republican, struck a deal to place a new measure before voters to restrict when lawmakers can suspend deposits into fund and make it harder for them to spend the money. It would require half the reserve be spent on infrastructure or paying down existing bond debt and would cap spending. A vote on that plan was delayed until this year.
Brown wants lawmakers to replace the pending proposition with his own. His measure would require lawmakers to either stash away any excess capital gains taxes that come in 6.5 percent above general-fund revenue, or use that excess cash to pay down long-term debt.
Under Brown’s plan, the reserve fund would grow until it equals 10 percent of the budget -- about $9.6 billion based on this year’s spending plan. The proposal limits how much money lawmakers can take from the reserve during the first year of a recession so that they don’t spend it all at once.
Brown, who is already California’s longest-serving governor, is running for an unprecedented fourth term. The rainy-day fund would add to his fiscal victories in leading the state from a $26 billion deficit to the biggest surplus in more than a decade.
Quick passage of the proposal would also help Assembly Speaker John Perez, the Democrat who is shepherding the plan for Brown. Perez is running for state controller and he could trumpet passage of the rainy-day plan in this campaign during the final weeks before the primary election June 3.
“This needs to be something we do before we pass the next budget because every budget is a set of assumptions about what is going to happen over the course of the next year,” Perez said before an Assembly budget committee last month. “It is essential that we know what our approach to a rainy day fund is before we engage in the meat of the budget for the next year. It lays down the foundation.”