Prop 2: Strengthening California's Rainy Day Fund

Ericka Cruz Guevarra: Let’s go back to 2014 for a second. Pharrell Williams’ ‘Happy’ was making its way up the billboard charts. Jerry Brown was governor and California was going through a really tough budget time.

Olivia Allen-Price: Brown had come back into office in the midst of the Great Recession and he was kind of obsessed with being resourceful and careful with money.

Jerry Brown: Boom and bust is our lot, and we must follow the ancient advice recounted in the book of Genesis that Joseph gave to the Pharaoh. Put away your surplus during the years are great plenty, so you’ll be ready for the lean years which are sure to follow.

Ericka Cruz Guevarra: In 2014, Brown persuaded voters to strengthen the state’s Rainy Day Fund: The pot of money created to make sure that California is saving when the good times are good, while also paying down its debts.

Olivia Allen-Price: Now fast forward to today and Proposition 2, which asks voters to make that Rainy Day Fund even bigger.

Ericka Cruz Guevarra: I’m Ericka Cruz Guevarra, host of The Bay.

Olivia Allen-Price: And I’m Olivia Allen-Price, host of Bay Curious. Welcome to Prop Fest, a collaboration between the Bay and Bay Curious. We’re here to break down each of the propositions on the California ballot so you can vote with confidence in the November election.

Ericka Cruz Guevarra: Today, we’re discussing proposition two. It reads like this on your ballot.

Voice Over: Prop 2 increases state’s rainy day fund.

Ericka Cruz Guevarra: Here to walk us through all this is our politics and government correspondent, Guy Marzorati. Hey, Guy.

Guy Marzorati: Hey Ericka.

Ericka Cruz Guevarra: So to dive into proposition two here, first of all, there’s just a lot of, I feel like, big jargony words in here. Can you walk us through just what proposition two is all about?

Guy Marzorati: Yeah, Proposition 2 is all about California’s Rainy Day Fund. So this is a fund that’s officially known as the budget stabilization account, but it’s basically where state lawmakers store our tax revenue in good times in order to save for bad budget times. Proposition two would change the laws around that rainy day fund to allow the legislature and the governor to save even more money in the rainy day fund in future years.

Ericka Cruz Guevarra: And what exactly is a rainy day fund? Like what are the kinds of things the state might use rainy day funds for?

Guy Marzorati: It just flows from this thing saving for a rainy day. But the general idea is, you know, California’s tax revenue is not going to be the exact same year to year. How much people pay in taxes is based on how much they make. And in any given year, if the economy is going well, if their stock market is going well or it’s going poorly, the amount of money that California brings in is going to fluctuate. And that’s actually even more acute in California because we have a progressive tax system, which means people who earn more income pay a higher rate of income tax. And those high earners in California, the money they’re making year to year is volatile because it really has to do in many cases with how the stock market is doing. So California, more than many other states, sees this kind of big fluctuation in year to year and how much revenue is coming in.

And so the idea of a rainy day fund is to say, look, in years where the money is just flowing in from taxpayers, let’s set some of it aside because we know there could very quickly be years coming where we don’t have enough money to meet all of the state’s spending commitments.

Just for some context, in the last five years in California, we’ve both had a budget surplus that’s reached around $100 billion and also a budget deficit around $50 billion. It makes it really difficult year to year to project how much money is going to come in to California. Because it’s difficult to project, it can often be difficult for state lawmakers to really have a clear picture of the budget when they’re enacting it. And so Proposition 2, which would grow the rainy day fund, really offers more of kind of a safety net for state legislators as we see tax revenue fluctuate up and down.

Ericka Cruz Guevarra: Yeah, let’s talk a little bit more about how Proposition 2 would actually change how the rainy day fund works. How much more money could it allow California to put away?

Guy Marzorati: Yeah, so it’s really two big changes that Proposition 2 makes around the rainy day fund. One is just growing the maximum size of the fund. Right now, the max that lawmakers can put into the rainy-day fund in any given year is 10% of general fund tax revenue. Proposition two would double that. So they’d be allowed to put in up to 20% of general-fund tax revenue in a given year. The second big change it makes is it would count saving i.e. putting money in the rainy day fund, it would not count that as spending. And that’s a really important distinction and change around the state spending limit with the effect that lawmakers would be able to save more in those kind of big budget years.

Ericka Cruz Guevarra: So you mentioned spending limits just now and you’re talking about something called the Gann limit, which is actually in the actual title of this proposition. So what is the Gann limit and what does it have to do with prop two?

Guy Marzorati: Yeah, so the Gann limit was approved by California voters in the late 70s.

Archival Footage: California was the epicenter of the tax quake of ‘78, and they were the shakers, Howard Jarvis and Paul Gann.

Guy Marzorati: So that was a time, it was also when Proposition 13, which dramatically cut property tax rates, was passed. It was really this era of citizen initiatives really cutting back state taxation and state spending.

Archival Footage: We’ve just about had a belly full of the growth of government, the cost of government the waste.

Guy Marzorati: So the Gann limit was approved by California voters. It sets the state spending limit. And if the amount of tax revenue that comes into the state in any given year exceeds that spending limit, then some of that money needs to actually be just returned directly to taxpayers. So right now with the rainy day funds, money that gets placed into the fund is counted as state spending. So if you’re counting that as state-spending, it also limits how much the state can save. And the way that Proposition 2 would change that is basically saying anytime lawmakers set aside money in the rainy day fund, it won’t count as an act of spending. So therefore, they’re gonna be able to save more.

Ericka Cruz Guevarra: Hmm. So, I mean, one big part of Prop 2 is about getting the state to save more when times are good. And another big part is how they use their money to pay off debts. Can you walk me through that part?

Guy Marzorati: Yeah, so that’s right. So basically, the state every year has to set aside money, about 1.5% of general fund revenue, half of that goes into the rainy day fund, half of those goes into paying down debts. So right now though, the debt that the state can pay down with that money is kind of limited. It either has to be the state’s unfunded pension liability, so pensions for retired state employees, or what the state will owe in the future to state employees for their health care.

What Proposition 2 does is say that money that you’re setting aside to pay down debts, you can pay more different kinds of debts with that money. So for example, paying the federal government back for state unemployment loans. During the COVID pandemic, California borrowed more than $20 billion from the federal Government in order to pay unemployment because we had this sudden spike in unemployment. And the state still hasn’t paid back that money in full. And what Proposition two would allow is, when the state sets aside money to pay down debts, one of the ways it can use that is to pay the federal government back.

Ericka Cruz Guevarra: We’ll have more with KQED’s Guy Marzorati right after this break. By the way, if you appreciate the work we’re doing here on Prop Fest, consider becoming a sustaining KQED member. We can’t do this work without you. Just go to donate.kqed.org/podcasts. We’ll be right back.

Ericka Cruz Guevarra: I guess one big question I have is why is this something that me, a voter, is being asked to decide on? Like it kind of feels like the kind of work that I might imagine our state legislature sort of deciding on.

Guy Marzorati: Yeah, no, that’s a that’s a great question. And this ballot measure, Proposition 2, was actually placed on the ballot by the state legislature. It was necessary to do that because Proposition 2 makes changes to laws that were passed by California voters. So not only that the rainy day fund that California voters enacted, but it also changes rules around the state’s spending limit, which was also set by California voters back in the 70s. So since voters put those rules into law, the legislature has to go back to voters to ask them for changes to those laws.

Ericka Cruz Guevarra: Well, we talked about some of the changes Prop 2 would make to how we spend and save in California, but who exactly is for this and what is their rationale for putting this on the ballot and for making these changes?

Guy Marzorati: Yeah, so the big proponent of this idea is Governor Gavin Newsom, who has wanted, has talked about this idea for a few years of expanding the size of the rainy day fund. And Newsom has kind of talked about his idea through the lens of regret. He wished he had done this exact reform earlier to grow the rainy-day fund, so that yes, when the state had a budget surplus of about $100 billion after the pandemic, when the stock market had surged and all these tech companies were doing incredibly well and tax revenue was just flowing into the state, Newsom was like, I wish at that time I could have set aside more of that money because right around the corner, just a couple years later, the state was dealing with a huge deficit.

Gavin Newsom: So there are a lot of those things that we can look back, but again, you had political capital today, you didn’t have that. You have different legislative leadership, you have different public consciousness and opinion, you have a different president, different way, you know. So all those things, you now, I don’t wallow in that…

Guy Marzorati: And so he’s really pushed this idea and is backing it on the ballot. And in addition to the governor, we’ve seen kind of broad support amongst Democrats. The California Democratic Party is supporting Proposition two. And when this measure was placed on the ballot, it was almost entirely a party-line vote. So Democrats supported it. There was only one Republican in the legislature who supported putting it on a ballot. And here’s Bakersfield Senator Melissa Hurtado talking about why this is necessary.

Melissa Hurtado: Our job here as legislators, as senators, is to protect Californians. And I believe ACA 20 will do that. It will make us more disciplined, not just in saving, but also in spending.

Ericka Cruz Guevarra: What about who is against this proposition, Guy, and what’s the rationale on that side of things?

Guy Marzorati: Yeah, so we did see opposition from Republicans in the legislature to putting this on the ballot. And we’ve seen opposition from anti-tax groups to Proposition two as well. And their argument is that this measure would make it less likely for Californians to get a refund when there’s a lot of tax revenue coming in. And that happened back in 1987, and the state refunded more than a billion dollars to taxpayers. Right now, we have that state spending limit. If the state is bringing in more money than it can spend, it has to give some of that money back to taxpayers. If Proposition two passes, the state can instead set more of that money aside into the rainy day fund. And so you’ve seen opponents of Proposition two say, look, the point of this state spending limit that voters enacted in the late 70s was if more money is coming into the state, voters, taxpayers, residents should get it back. If Proposition two passes, less of that money in that situation will go back to taxpayers.

Joe Patterson: We don’t have a rainy day fund in California. The voters thought they were passing a rainy-day fund, but they didn’t get a rainy–day fund.

Guy Marzorati: And here’s what Republican Assemblymember Joe Patterson had to say about this idea, this rainy day fund measure on the ballot back when it was being debated in the legislature in June.

Joe Patterson: All this does is create a bigger slush fund for money to be used the following years instead of returning money to the taxpayer, it just creates a bigger slash fund…

Ericka Cruz Guevarra: And looking at campaign spending on this measure so far, Guy, what are we seeing there? Is any group pouring any kind of money into this?

Guy Marzorati: So yeah, we’re really not seeing any spending on either side with Prop two. There is Reform California, which is a conservative group headed by Republican Assemblymember, Carl DeMaio. They’re opposing kind of a suite of ballot measures, including Prop two and Prop three, which a taxation measure. And so they’re actively trying to get the word out in opposition to Proposition two, but we really haven’t seen any kind of big spending really on either side of this.

Ericka Cruz Guevarra: I mean, as we’ve just been talking about, this is sort of a wonky, confusing, very jargony feeling proposition. I’m curious from what you’ve seen. Is this proposition popular among voters so far, or do you think it’ll pass?

Guy Marzorati: It does pose a couple interesting questions, I think, to California voters, where you kind of see this like collision of eras at play in this measure. Again, a lot of the the ballot measures that limited state spending and limited state taxes, those date back to the 1970s, where you did see this kind of citizen uprising against taxation and spending. But those rules are still on the books today. And some of them, supporters of Prop two would make it harder to save. And then you come to this area that we’re in. In California budgeting right now where we have these huge volatility swings because we’re relying so much on top earners. And I think the idea behind Proposition two is adapt to that new reality by being able to save more, although opponents would say it’s kind of betraying a lot of the promises that voters wanted in the 70s.

Ericka Cruz Guevarra: Well, Guy, thank you so much as always for breaking this one down. Appreciate it.

Guy Marzorati: Yeah, thanks for having me.

Ericka Cruz Guevarra: In a nutshell, a yes vote on this measure means rules for building state budget reserves and paying down extra state debts would change. As a result, state budget reserve would be higher. A no vote on the measure means rules for building State budget reserves and paying extra state debt would not change.

Olivia Allen-Price: That’s it for our latest episode of PropFest, a collaboration between The Bay and Bay Curious. We’re breaking down every single statewide ballot proposition from now until October 9th. Subscribe to The Bay and Bay Curious so you don’t miss out on the next ones, and don’t forget to share them with your friends and family.

Ericka Cruz Guevarra: Prop Fest is made possible thanks to Alan Montecillo, Gabriela Glueck, Pauline Bartolone, Katrina Schwartz, Olivia Allen-Price, Christopher Beale, Anna Casalme, and me, Ericka Cruz Guevarra.

Olivia Allen-Price: We get extra support from Katie Springer, Jen Chien, Maha Sanad, Ethan Tovan Lindsey and everyone on Team KQED.

Ericka Cruz Guevarra: You can find audio and transcripts for this series at kqed.org/prop fest.

Olivia Allen-Price: Our show is made in San Francisco at member-supported KQED. If you value podcasts like this one, please consider becoming a sustaining member of KQED. Learn more at donate.kqed.org/podcasts.

Ericka Cruz Guevarra: Support for The Bay is provided in part by the Osher Production Fund. Some members of the KQED podcast team are represented by the Screen Actors Guild, American Federation of Television and Radio Artists, San Francisco, Northern California Local. I’m Ericka Cruz Guevarra.

Olivia Allen-Price: And I’m Olivia Allen Price. We’ll be back tomorrow with an explainer on Proposition 3, which makes an existing tax on high incomes permanent.

Ericka Cruz Guevarra: We’ll talk then.

Some members of the KQED podcast team are represented by The Screen Actors Guild, American Federation of Television and Radio Artists, San Francisco-Northern California Local.