California weighs reserves it needs to withstand a recession

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California Legislative Analyst's Office is offering guidance to lawmakers on how much of a budget reserve would be needed if a recession hits.

Its report comes as California Gov. Jerry Brown and lawmakers wrangle over how much of a $6.1 billion surplus to put into reserves.

Brown has proposed stashing most of it in reserves, while many lawmakers want to use some of the money to tackle the state’s homelessness crisis.

Brown’s budget proposal released in January would direct $3.5 billion into the rainy day fund in addition to the $1.5 billion constitutionally required through legislation that created the fund in 2014. That proposal would result in a $13.5 billion rainy day fund and a grand total of $15.7 billion in reserves, because the governor’s budget also puts $2.3 billion in the Special Fund for Economic Uncertainties.

Though it would represent the highest amount the state has had in reserves in its history, it still falls short of what would be needed in a moderate recession, according to the LAO's report.

If the state faced a moderate recession, similar to the 2001 tech crash, the LAO said, it could face a $40 billion shortfall, which would mean coming up with an additional $25 billion through other means.

It also brings the rainy fund close to the cap that would trigger any additional surplus monies be diverted to pay for infrastructure projects, said the LAO’s report.

“Reserves are of critical importance to the health of the state’s budget, but there is no such thing as an objectively right level of budget reserves,” said Ann Hollingshead, a senior fiscal and policy analyst with the LAO.

The LAO report provides a framework, with a set of factors, to help the Legislature determine its target, Hollingshead said.

The report called the governor’s proposal for the reserve fund a “good minimum.”

If the legislature wants to build reserves beyond the $16 billion proposed in the governor’s budget, the report laid out other options, Hollingshead said. It could amend the rules for the fund for economic uncertainties to raise the cap. Or, it could create another reserve fund and deposit $3.5 billion. Lawmakers could also take other actions that would have the same impact as putting money in reserve like pre-paying future pension costs, which would reduce future costs, she said.

Hollingshead stressed that the report is not outlining recommendations, just providing a framework for the Legislature to discuss what a good reserve target would be.

Mayors from California’s eleven largest cities and state lawmakers introduced separate measures in February that would designate $1.5 billion to $2 billion from the anticipated surplus to deal with the growing homelessness crisis.

Assembly Bill 3171 was introduced by State Assemblymember Phil Ting, D-San Francisco and State Sen. Ricardo Lara, D-Bell Gardens, in concert with the mayors.

AB 3171 calls for one-time funds to be allocated to cities on a matching basis for homeless shelters, rent vouchers and permanent supportive housing. State senators Jim Beall, D-San Jose, and Nancy Skinner, D-Berkeley, introduced Senate Bill 912 that would direct $2 billion out of the surplus to help cities and counties combat homelessness.

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State budgets State and local finance State of California California