BILL ANALYSIS Ó
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THIRD READING
Bill No: ACA 1X2
Author: John A. Pérez (D), et al.
Amended: 5/12/14 in Assembly
Vote: 27
ASSEMBLY FLOOR : Not available
SUBJECT : State Budget Reserve Fund
SOURCE : Author
DIGEST : This bill alters the state's existing budget reserve
requirements; mandates annual deposits of 1.5% of General Fund
revenues (plus, in specific circumstances, capital gains-related
tax revenues) to a budget reserve up to an amount equal to 10%
of General Fund revenues; and diverts, for the initial fifteen
years it is in effect, 50% of funds that would otherwise be
deposited to the budget reserve to the payment of debt or
outstanding liabilities. This bill also sets forth provisions
regarding the withdrawal of funds from the reserve fund and the
suspension of otherwise required deposits; creates the Public
School System Stabilization Account; supplants the current
language governing the existing Budget Stabilization Account
(BSA) as specified in the Constitution; results in the
withdrawal of ACA 4 (Gatto and Niello); and serves as a
substitute for that measure on the November 2014 ballot. This
bill goes into effect beginning with the 2015-16 fiscal year.
ANALYSIS :
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California currently has two principal General Fund reserve
accounts, specifically:
Special Fund for Economic Uncertainties (SFEU) . Article XIII B,
Section 5.5 of the California Constitution directs the
Legislature to establish a 'prudent' reserve that it deems
reasonable and necessary. However, the Constitution does not
specify the size of the reserve or the conditions under which
funds must be placed into the reserve. The reserve for 2013-14
was budgeted at $1.1 billion upon the adoption of the budget,
and later reduced to approximately $700 million based on
additional budget actions related to corrections. This general
reserve is known as the SFEU.
BSA . In addition to this regular annual reserve, voters
established an additional reserve account, the BSA, with the
passage of Proposition 58 in March of 2004. The proposition
requires that 3% of estimated annual General Fund revenues be
transferred into the BSA, beginning in 2008-09, and continuing
thereafter. Transfers to the BSA are required until the account
balance reaches $8.0 billion or 5% of General Fund revenues,
whichever is greater. The annual transfer requirement is in
effect whenever the balance in the BSA falls below either the
$8.0 billion or the 5% threshold. During the time the Economic
Recovery Bonds are outstanding, 50% of the annual transfers to
the BSA are to be used for paying off the bonds.
Spending from the fund may occur by transferring monies from the
BSA to the General Fund through a majority vote of the
Legislature and approval of the Governor. In addition, there is
significant flexibility regarding transfers to the BSA, with the
ability to suspend or reduce such transfers for a fiscal year by
an executive order. The state deposited funds to the reserve
twice (in 2006-07 and 2007-08) but subsequently used the funds
during each of those years. The state has suspended the
transfer of monies to the BSA since that time and the BSA
currently has a zero balance. The budget proposed by the
Governor includes a deposit of 3% of General Fund revenues, to
bring the balance in the BSA to $1.6 billion.
In the January budget, the Governor proposed a constitutional
amendment to revise California's budget reserve policy. The
Governor's initial proposal included the following provisions
that would revise the BSA:
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1.Reserve Deposits . Require deposits to the reserve of capital
gains tax revenues in excess of 6.5% of General Fund tax
revenues (after funding of Proposition 98 and certain other
payments). The deposit would be estimated in year one, then
subject to subsequent true-ups (positive or negative) in years
two and three in order to square the original estimate with
actual tax liability data.
2.Proposition 98 Reserve . Create a Proposition 98 reserve equal
to 10% of the Proposition 98 guarantee, whereby spikes in
funding related to capital gains would be retained for future
years of decline, smoothing school spending to prevent
damaging cuts, while making no changes to the Proposition 98
guarantee. Deposits would be made after required increases in
enrollment growth and cost-of-living and the current
maintenance factor has been paid.
3.Size of Reserve . Double the maximum size of the Rainy Day
Fund from 5% to 10% of revenues, and allow supplemental
payments to the "wall of debt," or other long-term
liabilities, in lieu of a year's deposit. Restrict uses of
revenues that would otherwise be available to certain onetime
uses, such as debt obligations, in the event the reserve fund
reaches the maximum funding level.
4.Budget Emergency . Require a finding by the Governor of a
budget emergency (natural disaster, fiscal emergency, or an
inability to fund programs at the current year level
accounting for population and cost-of-living changes). Limit
the maximum amount that may be withdrawn during the first year
of a recession to half of the fund's balance, ensuring that
the state does not overly rely on the fund at the start of a
downturn.
This bill works from the same basic framework as the original
January proposal, but contains several specific modifications.
The proposal changes the existing constitutional requirements of
the BSA to reflect the following:
Reserve Fund Deposits . This bill requires annual deposits to
the reserve fund equal to the sum of: (a) 1.5% of General Fund
revenues; plus, (b) an amount equal to revenues derived from tax
liabilities associated with capital gains realizations if, and
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only to the extent, such associated revenues are in excess of
8.0% of General Fund revenues, less any amount required to be
transferred to the Public School System Stabilization Account,
as described below. The deposits to the reserve would be made
no later than October 1 of each year, beginning October 1, 2015.
Deposits to the reserve fund would be made until or unless, the
account balance reaches an amount equal to 10% of General Fund
revenues. Deposits to the budget reserve would be subject to
other provisions discussed below.
Diversion for Debt Payments . For fiscal years 2015-16 until
2029-30, 50% of the revenues that would otherwise be deposited
in the budget reserve must be used to pay for unfunded prior
year General Fund obligations, budgetary loans to the General
Fund, payable claims for mandates incurred prior to 2004-05, and
unfunded liabilities of state-level pension plans. After this
period, up to 50% of revenues that would otherwise be deposited
in the reserve fund may be used to pay such specified
obligations in lieu of being deposited.
Revenues in Excess Balance Requirement . In the event the
reserve fund reaches a balance equal to 10% of General Fund
revenues, addition revenues that would otherwise be deposited in
the reserve fund may be expended only for infrastructure costs,
as defined by Section 13101 of the Government Code, including
any associated deferred maintenance.
Reserve Withdrawals and Deposit Suspensions . If the Governor
declares a budget emergency, the Legislature may take action to
suspend or reduce required deposits to the reserve fund and
return and appropriate funds that have been deposited in the
reserve fund. These withdrawal and suspension provisions also
apply to the Public School System Stabilization Account, as
defined below. No more than 50% of the reserve fund balance may
be withdrawn for appropriation (unless a withdrawal occurred in
the immediately prior year). A budget emergency is defined as:
1.Conditions of disaster or extreme peril, such as a natural
disaster, as set forth in paragraph (2) of subdivision (c) of
Section 3 of Article XIII B of the California Constitution.
2.A determination by the Governor that estimated resources are
inadequate to fund General Fund expenditures equal to the
highest amount of such expenditures over the most recent three
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prior years, after accounting for cost-of-living adjustments
and population growth.
Proposition 98 Reserve . This bill establishes the Public School
System Stabilization Account ("Proposition 98 Reserve"), funded
by a transfer of that portion of tax revenues derived from
capital gains realizations that are in excess of 8.0% of General
Fund revenues and allocable to the Proposition 98 guarantee.
Transfers would occur if the state: has met total school
funding requirements as increased for enrollment growth and the
higher of two cost-of-living factors; has repaid and allocated
the current Proposition 98 maintenance factor amount; is in a
Proposition 98 Test 1 funding level and the transfer is no more
than the difference
between the Test 1 and Test 2 level of funding; is not accruing
Proposition 98 maintenance factor; and, has not suspended
Proposition 98 in the year of the transfer. Such transfers are
subject to true-up calculations and may not result in a balance
in the reserve in excess of 10% of the Proposition 98 guarantee.
Funds in the Proposition 98 Reserve may be used for General
Fund cash-flow requirements to the extent that such use does not
interfere with the purposes of the reserve.
Funds would be appropriated from the Proposition 98 Reserve in
circumstances when the amount required to be applied by the
state for the support of K-14 education exceeds the allocation
of General Fund revenues, allocated local property taxes, and
other available resources. These funds could be used all at
once and would be used to fund enrollment growth and
cost-of-living adjustments. Funds transferred to the
Proposition 98 Reserve are considered Proposition 98 revenues in
the year of transfer, not the year in which such funds are
appropriated from the reserve.
Administrative Provisions . The measure relies on various
estimation and deposit responsibilities by the Administration.
These include an estimate (and notification to the Legislature)
of General Fund proceeds of taxes, tax revenue derived from
capital gains realizations and subsequent follow-up
calculations, and schedules related to debt payments in lieu of
deposits to the reserve. Because of the estimation issues
related to forecasting tax revenues on capital gains
realizations, the Administration would be required to make
so-called "true-up" calculations in the two subsequent years
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following the initial estimate of tax revenues derived from
capital gains realizations. Over-estimation or under-estimation
amounts would generate debits or credits against the reserve
fund, with offsetting debits and credits to the General Fund.
Fiscal Effect: Could result in a reduction in annual
expenditures in initial years by the retention of funds in the
budget reserve that might otherwise be expended. Potential
increase in spending that would otherwise occur in years using
such retained funds when available resources are insufficient to
support General Fund expenditures. The Department of Finance
estimates the following deposits to the proposed budget reserve:
Source: Department of Finance
Comments
The revised budget reserve proposal addresses a number of issues
that had been identified in legislative hearings and over
several months of discussion. These modifications will result
in improved ability of the state to restore or maintain
necessary program funding, provide a more stable and predictable
source of deposits for the reserve fund, and improve the
budgeting process by reducing the frequency and magnitude of
unanticipated required reserve deposits.
The modified proposal incorporates two important changes that
should allow for additional flexibility in maintaining public
services. First, the bill specifically carves out 50% of
deposits that would otherwise go to the budget reserve and
diverts these to the payment of debt. This avoids the potential
of a 'double hit' on the General Fund. Second, the bill allows
for a three-year 'look-back' in determining whether a withdrawal
or suspension can occur and potentially allow for a higher level
of funding. This could increase the chances of 'locking-in'
artificially low spending levels.
The requirement to deposit 1.5% of General Fund revenues in the
budget reserve moves away from the problematic concept in the
original proposal that relied exclusively on "excess" capital
gains revenues. While the measure provides for a supplemental
deposit to the reserve of revenues derived from capital gains
income in excess of 8.0% of General Fund revenues, less amounts
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deposited to the Proposition 98 Reserve, this source is
estimated to be a subordinate component of contributions to the
budget reserve, as shown in the table above. This revision
implicitly recognizes that revenue components other than capital
gains income (bonuses, stock options, corporation taxes) are
also quite volatile by incorporating these revenues in the 1.5%
deposit.
In addition, the reduced reliance on capital gains as a source
for reserve funding-which would only be operative in robust
periods of capital gains spikes-would eliminate or reduce the
impact of a number of technical and fiscal issues that have been
raised. Specifically, the bill would in most years: (1) lessen
the effect on the budget reserve of any changes in federal (or
state) tax rates or tax policy that would affect the capital
gains base or the realization of these gains; (2) reduce the
impact of inevitable misestimations of capital gains tax
revenues, thus avoiding large capital gains true-ups and
facilitating a more certain budgeting process; and (3) make the
selection of the capital gains as a percent of General Fund
revenues threshold less significant given the reduced importance
of these revenue sources to the funding of the budget reserve.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
JA:e 5/14/14 Senate Floor Analyses
SUPPORT/OPPOSITION: NONE RECEIVED
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