Newsom and state lawmakers from both parties want to be able to save more. But constitutional rules constrain how much they can put into California鈥檚 rainy day fund. And they鈥檒l have to convince voters before they can make any meaningful changes to the state鈥檚 savings account.
It鈥檚 pretty dry stuff to dig into the state鈥檚 accounting rules. But it鈥檚 important, especially if you鈥檙e a voter, since you may have to weigh in on this at some point. So stick with us as we make the trip among the billions of dollars in California budget land.
Why California鈥檚 budget pendulums from surplus to shortfall
First, it鈥檚 important to understand why California鈥檚 budget fluctuates so wildly.
The Golden State has a progressive tax structure, which means higher earners pay a larger share of taxes. When the state鈥檚 highest earners do well, the state budget does well.
Newsom has long defended this setup, arguing it creates a lower tax burden on low- and middle-income workers compared to states that have a flat income tax rate or no income tax at all.
But this system also comes with a natural boom-and-bust cycle, which can present a challenge for state lawmakers and the governor from one year to the next. Last week, Newsom repeatedly compared a chart showing decades of income, sales and corporate tax revenue fluctuations to an EKG chart, which measures heart activity.
How Newsom wants to change budgeting law to save more
Voters created the state鈥檚 rainy day fund 20 years ago under Proposition 58 to help state lawmakers 鈥� who are responsible for passing a balanced budget 鈥� navigate the oft-erratic revenue streams.
A decade later, in 2014, voters also approved Proposition 2, which requires an annual deposit equal to 1.5% of the state鈥檚 General Fund into the rainy day fund. The General Fund is sometimes called California鈥檚 checking account because it holds revenue from income, sales and other taxes.
But once the rainy day fund 鈥� formally called the Budget Stabilization Account 鈥� equals 10% of the state鈥檚 General Fund revenue, those deposits are no longer mandatory.
The account currently has a balance of $23.1 billion, which is more than 10% of the current fiscal year鈥檚 General Fund revenue of $196.8 billion. That means the rainy day fund is considered full.
Newsom sees a problem where the rainy day fund meets another pillar of California tax law: the Gann Limit, which requires the state to issue refunds to taxpayers if spending gets high enough.
State leaders are allowed to deposit money into the rainy day fund beyond what is constitutionally required, but any additional installments are considered expenditures. That means adding more to the rainy day fund counts against the state鈥檚 Gann limit.
鈥淪aving a dollar is treated the same as spending a dollar鈥� beyond the required 1.5% deposit or once the rainy day fund is considered full, said Anthony York, who until recently Friday was communications director for Newsom. (York is now working on a campaign for Proposition 1, Newsom鈥檚 $6.4 billion bond for behavioral health treatment centers.)
鈥淥nce you hit that Gann Limit 鈥� you also have to return one dollar to taxpayers and then give an additional dollar to the schools. So it costs you three dollars to save one dollar,鈥� York said. 鈥淲hat the governor would like to do is find a way to say, maybe the money that you put into the budget stabilization account is not counted against the Gann Limit.鈥�
Newsom said during his budget presentation last week that the 10% cap on the rainy day fund is 鈥渘ot adequate鈥� and 鈥渨e鈥檇 love to capture more.鈥�
The challenges of budgeting by ballot measure
Chris Hoene, executive director of the nonpartisan California Budget and Policy Center, agreed a change could help state lawmakers and the governor weather budget uncertainty.
He said it鈥檚 important for leaders charged with passing a balanced budget to have flexibility when it comes to spending, saving and refunding tax dollars. He pointed to tax rebates in 2022, which Democratic legislative leaders pushed heavily to Californians.
鈥淚 think if state leaders had to go back, they鈥檇 still make those kinds of decisions to provide that relief鈥� to the Californians more likely to be impacted by inflation, Hoene said.
鈥淏ut what they don鈥檛 want to see is their hands tied completely by constitutional measures,鈥� he said. 鈥淭here鈥檚 no way anything you put in the constitution from years ago could predict a global pandemic鈥� and its massive economic impacts.
Hoene also said this problem illustrates a 鈥渃hallenge鈥� of using ballot measures to govern state budget rules.
鈥淵ou inevitably end up with unintended consequences because the technical nuances aren't able to be adequately dealt with in the confines of ballot measures,鈥� he said.
The governor said he raised the issue with state lawmakers last year, but many were more focused on the Gann Limit. Newsom said he does not have a specific proposal yet but wants to 鈥渞e-engage the Legislature鈥� on the topic.
Will lawmakers and voters go for it?
The nonpartisan Legislative Analyst鈥檚 Office and some lawmakers have raised this issue in recent years, when California had enormous surpluses and was on-track to hit the Gann Limit.
Senate President pro Tempore Toni Atkins (D鈥揝an Diego) signaled she would be on board, saying while the state鈥檚 budget reserves have grown over the past decade, 鈥渙ut-of-date constitutional restraints continue to limit our common sense options.鈥�
鈥淚 look forward to the Legislature and Governor working together to strengthen our reserves and finding even more ways to budget responsibly,鈥� she said.
Assembly Speaker Robert Rivas鈥� office (D鈥揌ollister) declined to comment.
Republican lawmakers have long criticized the way Democrats budget, accusing them of excessive spending.
Sen. Roger Niello (R鈥揊air Oaks), the top Republican on the Senate Budget Committee, said he supports the idea of allowing more flexible deposits into reserve funds.
鈥淚t would discourage irresponsible spending by the Legislature and would also better prepare the state for economic uncertainty,鈥� Niello wrote in a statement. 鈥淭he reality now is that the Governor and the majority party chose to spend the funds in other areas than building the reserves, despite two years of major surpluses.鈥�
Because many of California鈥檚 budget rules are outlined in the state constitution, any changes require voter sign-off. State lawmakers can 鈥� and often do 鈥� add constitutional amendments to the ballot for voter approval.
Newsom said he commissioned surveys on the issue and found 鈥渨e鈥檝e got tons of work to do鈥� when it comes to educating and convincing voters to make the change.
The governor is focused on supporting Prop 1, which will be on the March primary ballot, and said a proposal to reform the rainy day fund could be months or years away.
Hoene also agreed it could be a tough sell to voters.
鈥淧eople want to see progress happen,鈥� he said. 鈥淭hey want to see their tax dollars put to work, rather than saved.鈥�
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