Existing law provides that under an open policy, the measure of indemnity in fire insurance is the expense to the insured of replacing the thing lost or injured in its condition at the time of the injury, with the expense being computed as of the time of the commencement of the fire. Existing law also provides that under an open policy that requires payment of actual cash value, the measure of the actual cash value recovery, in whole or partial settlement of the claim, is, in the case of a total loss to the structure, the policy limit or the fair market value of the structure, whichever is less, and, in the case of a partial loss to the structure or loss to its contents, the amount it would cost the insured to repair, rebuild, or replace the thing lost or injured less a fair and reasonable deduction for physical depreciation based upon its condition at the time of the injury or the policy limit, whichever is less.

This bill would delete the provisions regarding the actual cash value of the claim of total loss to the structure and would instead require that the actual cash value of the claim, for either a total or partial loss to the structure or its contents, be the amount it would cost the insured to repair, rebuild, or replace the thing lost or injured less a fair and reasonable deduction for physical depreciation based upon its condition at the time of the injury or the policy limit, whichever is less.

Date of Hearing: May 3, 2018

ASSEMBLY COMMITTEE ON BUDGET

Philip Y. Ting, Chair

ABPCA Bill Id:AB 1740 (

Author:Daly) – As Amended Ver:April 17, 2018

SUBJECT: Budget Deficit Savings Account

SUMMARY: Establishes the Budget Deficit Savings Account and sets certain statutory terms for its use. Specifically, this bill:

1. Creates a new account, called the Budget Deficit Savings Account that shall receive a deposit every October 1^st from revenue that is not designated for Proposition 98 purposes.
2. Stipulates that funds deposited in this account can only be transferred to the General Fund in a year with a budget deficit.
   1. Defines a budget deficit as estimated resources are inadequate to fund General Fund expenditures for the current or ensuing fiscal year, after setting accounting or encumbrances and adjusting for population growth and inflation.
   2. Requires the Governor to make the determination of deficit.
   3. Limits transfer in one year to half of the balance of the Budget Deficit Savings Account.
3. States that funds in the Budget Deficit Savings Account are not considered General Fund for purpose of the sales tax reduction triggers in Government Code.

EXISTING LAW: Proposition 58 of 2002 created the Budget Stabilization Account (BSA), a restricted special fund reserve. The rules of the deposits and withdraws for this fund were changed significantly by Proposition 2 of 2014. Under the requirements of Proposition 2, the State was required to deposit 1.5 percent of General Fund revenues into the rainy day fund, plus certain capital gains revenues. These deposits could only be suspended during a fiscal emergency, as declared by the Governor and agreed to by the Legislature. Deposits continue into the BSA until the fund reaches 10 percent of General Fund. Funds can only be withdrawn from the BSA during a budget deficit, and only half of the funds may be withdrawn from the account in a single fiscal year.

The 1980‑81 Budget Act established within the General Fund the Reserve for Economic Uncertainties. In 1985, the fund was renamed the Special Fund for Economic Uncertainties (SFEU). This fund is the main reserve fund for the state budget. Government code has two statutes that trigger reductions in the state’s sales tax rate if balances in the SFEU reach a certain threshold. Under either statute, the state’s sales tax rate would automatically decline by one‑quarter cent for one calendar year reducing the SFEU by the same amount. Under the first statute, the trigger would occur if the Director of Finance projects the SFEU to exceed about 4 percent of General Fund revenues in the prior and current year. Under the second statute, the trigger would occur if (1) the “General Fund reserve” exceeds about 3 percent of revenues and (2) actual General Fund revenues between May 1st and September 30th exceed the administration’s forecasted amounts.

FISCAL EFFECT: Creation of this account does not have any cost, however, to the extent funds are deposited in the account these funds would only be available during a budget deficit.

COMMENTS: On March 7, 2018, the Legislative Analyst’s Office released a report entitled Building Reserves to Prepare for a Recession which discussed the State’s financial reserve levels and compared them to simulations of a projected economic contraction. The report noted that the proposed combined reserve balance of the SFEU and the BSA of $15.7 billion in the Governor’s 2018 budget proposal was on par with the level of reserves maintained by other States. However, the report noted the State would need far more than that to weather a mild to moderate recession without cut or revenue increases, which could result in a net shortfall of between $20 to $40 billion over a number of years. The current cap on the BSA of 10 percent, combined with the sale tax reductions triggers in the SFEU mean that the State could only set aside a maximum of somewhere between $17.5 billion to $18.9 billion. The report suggested the Legislature contemplate creating a new reserve account to allow the State to save more than the BSA and SFEU caps.

The author of this bill argue that AB 1740 provides a mechanism to address the gap in savings. The Budget Deficit Savings Account would provide the Legislature with an additional mechanism to set funding aside beyond the current caps.

Since the rules for withdrawing funds from the Budget Deficit Savings Account and the Budget Stabilization Account are identical, this proposal doubles down on a reserve mechanism that has yet to be tested in a downturn. The committee may wish to consider if the State would benefit from some differentiation between the two funds—perhaps allowing the Budget Deficit Savings Account to be more of a “first line of defense” in a downturn or conversely a “reserve of last resort” to compliment the large rainy day fund. In addition, if the uses of this fund were broader, for example, for use for natural disasters as well as downturns, it could be more responsive to risk to California beyond economic downturns.

Since this proposal intends to create a fund that will accrue a large balance over several years, the State will want the ability to use this balance for cash management purposes as part of the Pooled Money Investment system within the State. This proposal does not specify how cash balances are treated for cash management purposes, while Government Code 16310 states that all funds are cash borrowable unless explicitly prohibited, it is normal practice to declare the intent when created a new special fund.

The author’s offices states that the hope is that this new fund will be part of the 2018-19 budget plan. Since that could not occur before this bill could be chaptered, the committee may wish to refer this issue to Subcommittee 4 for consideration in the budget package. Acceptance of such a referral would result in incorporating this concept in the Assembly’s 2018-19 budget plan in lieu of advancing this bill.

REGISTERED SUPPORT / OPPOSITION:

None on file.

Analysis Prepared by: Christian Griffith / BUDGET / (916) 319-2099