An agreement between Gov. Jerry Brown and legislative leaders on a rainy-day fund Thursday came uncharacteristically early in the state’s annual budget-making process, with none of the public rancor that seemed likely only recently.
Republican lawmakers, who had been all but ignored by Brown on budget matters since early 2011, had the numbers to block any reserve proposal. Even within Brown’s own Democratic Party, it was just last week that Senate President Pro Tem Darrell Steinberg balked publicly at taking up the reserve account measure apart from broader budget talks.
But on Thursday, following several weeks of private negotiations, Brown and the legislative leaders of both parties announced an agreement on a proposal to set aside 1.5 percent of total general fund revenue every year, plus revenue from capital-gains taxes when the economy is especially robust.
By resolving the rainy-day fund measure now, Brown, who called a special session of the Legislature to focus attention on the issue, will avoid complicating it with controversies around individual line items in his spending plan.
“There’s nothing complicated about the idea of saving money and exercising fiscal restraint, but it’s not always easy to do,” Brown said in a prepared statement. “Democrats and Republicans have come together to create a Rainy Day Fund that ensures we’re not only saving for the next downturn, but also paying off our debt.”
The Senate’s Republican leader, Bob Huff of Diamond Bar, said in a prepared statement that Republicans “have long fought for this type of protection for Californians” and that Brown “set up a good framework” for the agreement.
The proposal, if approved by lawmakers, would replace a reserve measure already on the Nov. 4 ballot. The original measure, ACA 4, was part of a 2010 budget deal originally scheduled to go before voters in 2012. But public-employee unions, among other Democratic allies, criticized the plan, and lawmakers postponed it to 2014.
Republican lawmakers, who embraced ACA 4 as the stronger reserve earlier this year, in recent weeks acknowledged potential problems with its wording. Also, that measure looked likely to draw well-funded opposition from public-employee unions this fall.
The agreement reached Thursday changes a proposal Brown included in his January budget plan to replace ACA 4. The compromise would set aside capital-gains revenue that exceeds 8 percent of total general fund revenue in any year, a higher threshold than the 6.5 percent Brown originally proposed.
But the new proposal also includes the regular annual contributions, a condition to satisfy Republicans, and Brown and lawmakers agreed to use half the money set aside each year to pay off long-term debt, including public pension liabilities.
Steinberg, who made the long-term debt provision a priority in negotiations, feared that without it lawmakers would face pressure in future budget talks to set aside not only the amount of money called for in the rainy-day plan, but also additional money to address long-term debt.
“If they’re not connected in a real way, that will mean billions of dollars off the top in a given year before you could consider investing in the courts or public safety or health and human services or infrastructure,” Steinberg said.
The debt provision could make the revised measure more palatable to liberal groups that have complained ACA 4 would make it too difficult to increase spending following years of budget cuts.
Fred Glass, of the California Federation of Teachers, said his union had not yet reviewed the proposal in detail, but the group was skeptical.
“We support prudent reserves and keeping a lid on debt,” he said. “But more attention needs to be paid to making college affordable again, bringing per-pupil spending up from the bottom and restoring social services to pre-recession levels.”
Brown in January proposed a $154.9 billion spending plan that includes modest increases for social service programs, but also billions of dollars to address long-term debt. Tension between the governor and social service advocates over spending levels has been flaring ever since.
Brown was forced to gain Republican approval for the rainy-day deal because, with three Democratic lawmakers suspended in separate criminal cases, Democrats have fallen below their supermajority status in the Senate. Brown last tried to negotiate a budget deal with Republicans in 2011, when he failed to persuade them to put higher taxes on the ballot, instead turning to voters the following year.
Earlier this week, in a memorandum supportive of a budget reserve, the Wall Street credit-rating agency Standard & Poor’s said that “when it comes to reaching a legislative supermajority on fiscal matters, California has a weak track record,” raising concerns about the possibility that Brown and lawmakers might fail to reach an accord.
S&P called the negotiation “a test of sorts for the state,” adding that “if the Legislature succeeds in assembling the consensus necessary to move the measure forward, it could mark another step in California’s ongoing journey toward a more sustainable fiscal structure.”
But unlike higher taxes, which Republicans opposed, the GOP has long been a proponent of rainy-day fund.
“Negotiating a budget reserve is much different than negotiating tax increases,” said Jeff Cummins, a political science professor at California State University, Fresno. “Republicans have been on board with a budget reserve for a long time, and I don’t think they were that far apart to begin.”
By reaching an early agreement with Brown, Cummins said, “Republicans going into this year’s election can tout this as one of their achievements.”
The state’s current rainy-day fund was established in 2004, but governors can waive its provisions and the state rarely puts money into the fund. Brown said when he signed legislation delaying the original rainy-day fund measure that “this needed reform must wait until we have recovered from the current recession and securely balanced our budget.”
California’s improving financial climate is now more favorable to arguments for a reserve. The state Controller’s Office on Thursday reported total revenue since the start of the fiscal year ahead of projections by about $2.2 billion.
“The economy has treated the state’s finances well so far,” the Controller’s Office said. “Increases in employment and capital gains from stocks and housing have bolstered personal income taxes, while strengthening company profits have finally kicked in on the corporate side.”
The office said the economy “appears to have enough momentum to help the state’s finances end the year in good shape, but nothing should be taken for granted.”
The agreement comes almost exactly a year after Assembly Speaker John A. Pérez, who is running for state controller, first proposed a restructured rainy-day fund. In a prepared statement, he said it is “a strong example of what is possible when we all work together.”