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Can California teach the nation how to save?

(Andrew Harrer/Bloomberg)

The recession was hard on California’s rainy-day fund.

By the end of the 2006 fiscal year, California’s reserves ranked 25th among states—enough saved up to keep the state running for 43 days. Today, it’s ranked 48th, with enough to fund just over three days, according to the Pew Charitable Trusts.  But in November, voters will have the opportunity to upgrade the Golden State’s system for saving—a move that could light the path for other states looking to develop similar cushions.

California rainy-day reserve. (Pew)
California’s rainy-day reserve fund swing. (Pew)

Under the measure, any taxes collected above and beyond the 20-year trend would be funneled to the reserve fund. But, in January, Gov. Jerry Brown (D) came up with an alternative plan, one which leaders of both state houses back. If two thirds of lawmakers go along, it would supplant the ballot measure.

Brown’s plan draws from the excess revenue collected from just one tax—the highly volatile capital gains tax—and that could also help reduce some of the perverse incentives in budgeting. Capital gains fluctuate a lot with the stock market and when that revenue spikes, it’s hard to tell whether it’s a lasting rise or just a blip. So sometimes budgeters see the bump and assume it’s there to stay, according to Pew.

Forecasters say it is frequently unclear whether a spike in those collections is a one-time event or likely to become recurrent. But lawmakers may spend the extra revenue on programs or tax cuts with ongoing costs, which can be a problem in years when capital gains income is unexpectedly low. Under Gov. Brown’s plan, when capital gains receipts exceed 6.5 percent of general fund tax revenue—which has happened in eight of the past 10 years—the extra cash would be deposited into the rainy-day fund.

Brown’s plan, like the ballot measure, would double the maximum size of the rainy-day fund from 5 percent to 10 percent of general fund revenue. It also only allows the state to withdraw half the fund during the first year of a recession and permits some of it to be used to pay down long-term liabilities. The measure currently on the ballot ties the rainy-day fund to volatility in overall tax revenue, while Brown’s focuses more on a particular source of volatility. And if voters approve either, California would join a dozen states where rainy-day deposits are similarly tied to upticks in volatile tax streams.

And California could lead the way.

“If voters approve the plan to link rainy-day fund deposits to specific drivers of revenue volatility, California may point the way for other states that are considering redesigning their budget reserves,” Pew’s Mary Murphy and Stephen C. Fehr wrote.

The state’s not alone, however. As of fiscal 2013, states could only cover a median 30 days with their reserves—11 fewer than in 2007. And other states—Connecticut, Idaho, Minnesota, and Nebraska—are considering what the right size of their rainy-day funds should be, too.

Niraj Chokshi is a general assignment reporter for The Washington Post.

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