Should California's Rainy Day Fund Be Used Even When There's No Recession?

When California voters approved a new state budget reserve two years ago, Democrats and Republicans urged its passage to help avoid steep cuts during the next recession.

Now, Democratic legislative leaders are suggesting the “Rainy Day Fund” could help alleviate what Gov. Jerry Brown's administration projects will be a $4 billion budget deficit in 2019 – even if there is no recession.

“What we would do would be to help prohibit more draconian cuts that we would be making anyway,” Assembly Speaker Anthony Rendon told reporters moments after the Legislature approved the budget deal earlier this month. He said that the Rainy Day Fund was created specifically for that purpose.

Senate President pro Tem Kevin de León expressed a similar sentiment to reporters earlier that same day when asked about the potential deficit: “We have healthy reserves, as well as going back to the Rainy Day Fund.”

Yet that $4 billion deficit projection assumes California’s economy continues to grow – in other words, no recession. So the upshot is that Rendon and De León are open to using the Rainy Day Fund to help erase a deficit created not by an economic downturn – but by spending decisions made by the governor and legislative Democrats.

De León's office declined comment on this story. A spokesman for Rendon said Assembly Democrats “are proud that this year’s budget contains the largest budgeted reserves in at least the last 30 years“ but did not clarify whether the speaker would support tapping the Rainy Day Fund outside of a recession.

“Because of the context of when this was passed, because of the way it was sold, most voters really did think we will only use this in case of an economic downturn,” says Loyola Law School political analyst Jessica Levinson.

“So what we have here is the decision that we are going to essentially spend ourselves into a deficit,“ she says, “but that it will be okay because we have this other account, the Rainy Day Fund.”

Turns out that’s actually legal: There's nothing in Proposition 2, approved by voters in November 2014, that bars use of the Rainy Day Fund unless there is a recession. As long as the governor declares a fiscal emergency, lawmakers can dip into the reserve with a simple majority vote in each house of the Legislature.

And to be fair, that $4 billion deficit is just one projection. Others believe the state is on track for a surplus – and a lot can change by 2019 anyway.

Nevertheless, Republicans say turning to the Rainy Day Fund outside of a recession is a bad idea.

“In using it to shore up our spending, instead of really using it to compensate for a decline in revenue, I think we’re missing the opportunity to protect California for when we really need that money,” says Assembly Budget Committee vice-chair Jay Obernolte.

On the other hand, Levinson says, Democrats and progressives have been pushing the Legislature to spend more money to help the most vulnerable Californians – so they might very well support using the Rainy Day Fund this way.