Thanks to state voters and a strong economy, California’s rainy day fund has grown to around $20 (B) billion dollars in just a few years. We’ve never had to use it, but that could change if the coronavirus outbreak keeps getting worse and takes a bite out of the state economy. Zocalo Public Square commentator Joe Mathews says the rainy day fund makes us better prepared for trouble than we were at the start of the Great Recession, but it’s also no panacea for hard economic times.
Read Joe Mathew's Connecting California column below:
The Rainy Day Fund
I’m ready for my close-up, Ms. Gerwig!
OK, as a budget fund without acting credits, I shouldn’t expect Greta Gerwig to put me in her next film—even if both she and I are Sacramento natives. But the time is coming when I, California’s humble Rainy Day Fund, will stand at the center of our state’s civic stage, and my fellow Californians will finally have to pay me the attention I deserve.
I’ve been on the sidelines for a decade while Californians enjoyed a long economic expansion. This expansion made me a billionaire many times over—if I were human, I’d rank right between Elon Musk and Laurene Powell Jobs on those billionaire lists. But my real time is the bad times.
And look what we have here? The coronavirus and a market crash! Do I smell recession and huge drops in state revenues? Because that’s my cue!
My role is to be the adult fund in the room, holding onto my cash instead of spending it. I must be stable because you Californians are so volatile. Your incomes, your business receipts, and your investment earnings go up like rockets and down like, mmm, bad rockets, which then open up giant holes in the state budget. It’s my job to plug those holes.
But I must confess to being nervous about the hole-plugging, because I’ve never done this before.
Yes, Prop 58 created me in 2004, but back then I was so empty that the state couldn’t tap me when the Great Recession hit. In 2014, voters enhanced me via Prop 2, and ever since, I’ve been filling up with money.
But I’ve never had my funds drawn down in an economic downturn. I’ve been sitting on the shelf so long—like an old soup can or a two-term vice president—that no one knows if I can prevent teacher layoffs, shore up Medi-Cal, or fund pandemic response.
In fact, few people really understand me. Like so much else in California, I’m governed by formulas. The gist: I get 1.5 percent of the state’s general revenues each year, as well as some extra capital gains taxes. And while I’m called the Rainy Day Fund, I actually encmpass four funds: the Budget Stabilization Account, the Special Fund for Economic Uncertainties, the Safety Net Reserve, and the Public School System Stabilization Account.
My success at storing money has really surprised the state. The original estimate was that I would be small, gathering maybe $1 billion a year. But I’ve grown at three times that rate, making me as swole as Schwarzenegger was before he went into politics. Today I’m worth around $20 billion.
How’d I get so big? Governor Brown and Governor Newsom put more money into me than required. Governors love the fact that the legislature has little power to access my funds. For the state to get my money, the governor must declare an emergency. So the bigger I am, the more leverage a governor has over the legislature!
Until recently, the biggest controversy about me was whether I’m too big—and should be tapped for urgent needs like homelessness. But, as the economy takes a bad turn, I’m steeling myself for fights. I fear that, as huge as I am, I can’t handle a bigger recession, which could cost $100 billion-plus in revenue over four years.
Even if the recession is tiny, the rules for tapping my dollars are untested. If revenues collapse over a coronavirus cliff and drop $20 billion this year, my rules suggest that only half my money—$10 billion maybe—could be tapped to fill the hole in one budget year.
One reason I’m writing this is to manage expectations and warn you that I can’t be the only star of California’s response to budget crisis. I’ll need a supporting cast of Californians, who should start making plans for a recession right now.
Joe Mathews writes the Connecting California column for Zócalo Public Square.