Senate Standing Committee on Budget and Fiscal Review

The Committee on Budget and Fiscal Review will come to order. We are holding our committee hearing here at 1021 O Street, Room 2100. I ask all members of the committee to be present. The Insurance Committee is long gone, so come and join us here at the Budget Committee in Room 21. I want to note that this is an informational hearing.

We're not taking any votes today, but public comment will be heard after the presentation and discussion. And even though we're not taking any votes, if we do establish a quorum, I will call the roll and establish a quorum. So today, we're having an informational hearing on ACA 20, the Save for California's Future Act, that was introduced on 06/22/2026. Senators, you will recall that we had an informational hearing on February 18 on the state's budget stabilization account, also known as the rainy day fund.

The ACA we are reviewing today builds upon those discussions from earlier this year, which have continued through the budget process.

California's revenues are volatile, and we know that strong years don't last forever. This proposal would strengthen the rainy day fund by increasing reserves, capturing more revenue during boom years, and helping the state pay down long-term obligations. The idea is to save more during good times so we're better prepared for difficult times. That's how we protect essential services and maintain long-term fiscal stability. I should observe that it would be politically difficult to lower taxes on the wealthy and increase them on the middle class.

And since that is very unlikely to happen, it makes the item that is in front of us even more important. Doubling the amount we place in the rainy day fund is a strong step to deal with the volatility, and not counting deposits against the Gann limit, but counting withdrawals, will incentivize savings. This is a very good concept. This is an informational hearing today.

We will not vote on it, but we anticipate that ACA 20 will be voted on tomorrow, June 25, on the Senate floor. And so it is important that we have a discussion among ourselves to at least understand what's there and ask any questions. I want to thank the Assembly and the Administration for working to put this together, and also my Vice Chair, Senator Niello, for his engagement on this issue. But before we begin, let me ask my Vice Chair if he has any opening comments.

Yeah, I do. I'm looking forward to a more detailed presentation. What I know of it so far is probably superficial. I have to say, though, with all due respect, I'm not overly excited. It's kind of like washing your hands with gloves on.

If I could make that comparison.

Think about that one for a while.

Yeah. You don't get your hands clean. My point is it's just not exciting enough.

It's just not a particularly exciting proposal for what we really need for a reserve. I continue to believe that the only approach that would keep us from the feast and famine that we continue to experience over the years that we have all experienced is to limit spending based upon a rolling average of revenues over a five to seven year period. We can't change the tax base, but we can change how we use it to make it equivalent to that.

And if we had had a system like that in 2020-21 and 2021-22, we would have built up significantly more reserves, and we would be nowhere near the difficult position that we are in right now.

And I continue to believe, although I don't get much traction on it, that that's the only approach that would really permanently keep us from the intense feast and famine that we continue to experience. Thank you.

Thank you very much. Then we will move to our panel, and I will just reemphasize, we'll have a chance for public comment when we're done with the panel and questions from the committee members. So today we have Carolyn Chu, who's the Chief Deputy Legislative Analyst. And we have Lisa Mierczynski, Assistant Program Budget Manager in the Department of Finance. And we will begin with the Legislative Analyst's Office. Welcome.

Thank you, Chair, Vice Chair, and members. My name is Carolyn Chu from the LAO. This afternoon, I've been asked to give an overview of Proposition 2 to set the context for the changes that would be made under ACA 20. So you should have a handout in front of you that I will walk through. The first two pages of this handout should be pretty familiar to this committee.

The first one just lays out how reserves work and what reserves are intended to achieve, which both the Chair and Vice Chair have highlighted. California's revenues are volatile, and reserves allow the state to sustain a level of core spending over time by capturing surging revenues when they are high and then using those resources when revenues decline again. On the second page of my handout, it goes through a little bit of the history of state reserves.

The bottom line essentially being that since the 1980s, the state did not have very significant reserves until the passage of Proposition 2 in 2014. So you can see on the right-hand side of the figure, tracking the line for the special fund for economic uncertainties, there really was not very much set aside in terms of state budget reserves.

And then once Proposition 2 passed in 2014, the state has built up pretty good-sized reserves over the last decade or so. Turning to page three, this figure lays out how Proposition 2 works. And essentially Proposition 2, if you look at the constitutional provisions, they are really laying out a set of formulas that set aside a pot of money.

And that pot of money is split in two between putting money away in the budget stabilization account and paying down additional debts, particularly pension and state retiree health liabilities. Proposition 2, I should note, also has provisions as they relate to school reserves.

However, the measure does not directly affect anything on school reserves, so I won't highlight those components unless there are questions about them. So quickly walking through that formula in Proposition 2, what it says is that 1.5% of all general fund revenues are put into that set-aside pot. And then in addition, when revenues are performing pretty well, the state sets aside any amount above 8% of capital gains taxes, when capital gains tax revenues exceed 8% of general fund revenues.

So that's generally when revenues are performing pretty well, and we call this amount the amount of excess capital gains. So the state puts those two pieces together, divides them in half, and half goes into the budget stabilization account.

The other half goes towards paying down those long-term liabilities. On page four, I'll highlight a couple of other features of Proposition 2. So those required deposits that I just walked through on the prior page are required until the budget stabilization account reaches 10% of general fund revenue. After that point, the state can make discretionary deposits, but required deposits no longer have to be made.

Proposition 2 also requires that there's a declaration of a budget emergency in order to withdraw funds from the BSA, and the Legislature must approve of those withdrawals with a majority vote.

Same thing goes for suspension. So suspending the deposits into the BSA requires a declaration of a budget emergency, as well as approval by the Legislature. And Proposition 2 lays out what constitutes a budget emergency, which I can go over if the committee has questions. And then lastly, on the reserves under the requirements of Proposition 4, or the Gann limit, deposits into the budget stabilization account count towards the Gann limit. However, when those monies are withdrawn, they do not count.

They are excluded from the Gann limit, or the state appropriations limit. On the debt requirements, the debt payments are required until 2030. So the state is approaching the expiration of those debt requirements, but the Legislature would have the option of continuing them if it so chose. And as I already mentioned, only certain kinds of debts are eligible.

In general, under Proposition 2, the debts that are being paid are over and above what the state is already required to pay each year against its outstanding debts.

And what essentially is required now are supplemental payments towards pension and retiree health liabilities. So turning to the last page, this lays out the changes that would be made under ACA 20, as was already highlighted by the Chair. Essentially, the changes made under ACA 20 would build more reserves, as well as require extra debt payments for an additional ten years. So how does it achieve the increase in reserves? There are two main facets.

The first of which is to create what we informally call super excess capital gains. So when capital gains exceed 10% of general fund revenues, the measure would require 150% of those revenues be deposited into the BSA, as well as maintain the existing excess capital gains revenue requirement of that 8% to 10%. So that would set aside more. And it would set aside more both for the budget stabilization account as well as the debt payments.

The other change it makes to reserves is to increase the threshold on the budget stabilization account to 20%.

So essentially doubling the size, and therefore requiring that the state make deposits into that account for a longer period of time. It would also change the treatment of deposits when it comes to the Gann limit. That is specifically essentially flip-flopping the way it works now, which is to exclude deposits from the state appropriations limit, but then to count those monies towards the Gann limit when they are withdrawn from the fund.

In terms of debt, as I already mentioned, the measure would extend the debt payment requirements through 2040. And then in addition, the measure expands the type of eligible debts. So it expands it to include Proposition 98 settle-up payments, budgetary borrowing, and payments towards the state's outstanding unemployment insurance liability with the federal government. The other allowed debt payments also would remain. Lastly, ACA 20 would also extend the change in treatment under the Gann limit to the temporary surplus holding account.

This committee will be familiar with that account, which was recreated in the last couple of years to set aside surplus funds.

And under the measure, deposits into the temporary surplus holding account would be excluded from the Gann limit on deposit, and then count towards the Gann limit when they were withdrawn. This exclusion, however, would be limited to 10% of general fund revenue. So it couldn't be an uncapped exclusion. So with that, I'm happy to answer questions.

Thank you very much. And we'll go to the Department of Finance, and then take any questions or comments after you've had a chance to present. Welcome to the committee.

Good afternoon. Lisa Mierczynski with the Department of Finance. I don't have much more to add than to give you an overview of that, but I do want to let you know that the Administration fully supports the provisions in this measure, and we believe it does a lot to improve Proposition 2 and correct some of the issues that we found we had in putting more money into the state reserve during 2021 and 2022. Thank you. I can answer questions.

Thank you very much. I'm just going to ask one question and then go to the members. The Assembly had a fairly confusing discussion about this. And one of the Assembly members asked if excluding deposits from the state appropriations limit means we can spend more, or even save more. And it's my understanding that this creates an incentive, and the Gann limit requires that something be counted everywhere, and this just would count it in a different place.

Would you have any comment on that, so that we just can sort of address that before somebody asks about it?

Sure. So our office has suggested that this change in the treatment of reserve deposits in terms of the state appropriations limit be considered. And to your point, stepping back, the state appropriations limit wants spending to be counted somewhere. So it requires that either the money is counted as spending at the state level or at the local level. So when the state gives money to local governments, it has to count there.

And similarly, with the treatment of reserves today, the state counts them against the deposit, but then doesn't count them when they are withdrawn. The state is really only likely to run up against the state appropriations limit when revenues are really surging. So even right now, when the state really has very healthy revenue collections, the state still has, I think, roughly $30 billion in room under the state appropriations limit. So it's not that the state appropriations limit isn't a constraint on spending.

It certainly wasn't in 2021-22, but it is not a common occurrence.

And by allowing the state to exclude those deposits when they are made, it does enable the state to potentially save more in those particularly revenue-surging years.

Okay. Thank you. I really appreciate that. Senator Archuleta and Senator Blakespear. Is there anybody else that wants to get in line?

Senator Richardson.

I think we've got to explain all of this to our constituents. And if there's anything that's difficult to explain to constituents, it's our budget, our spending. And of course now we're talking about the rainy day fund. But my question is, is it mandated?

Is that what we're trying to do? Because I think anyone who's running a household, they need to pay their bills. They need to pay the requirements, tuition, and whatever is on the list of items in your home. Right? Whether it be groceries, car payments, tuition, whatever it is.

And whatever is left over, a family should wisely say, well, let's put this into the future of the kids because of tuition and college. Let's put this into an account just in case the car breaks down or the roof leaks, and so this is maintenance and the overall situation. But it's usually up to the family to make that decision.

Are we going to be mandated that we need to have this budget go from 10 to 20%, and that's what we do first and then we pay our bills? How is that looking for the future?

Sure. So under the existing requirements of Proposition 2, the state is required to set aside a certain amount of money every year unless the Legislature suspends the deposit. So the Legislature can suspend making that savings deposit under certain conditions. Generally, that's when resources are lower than they have been in the past couple of years. So less money coming in than the last couple of years.

What this measure would change is that those deposits would be required until the fund is larger. So right now, the fund under the required deposits just grows until it reaches 10% of general fund revenues. And now the state would be required to keep making those deposits until it reaches 20% of general fund revenues. So essentially requiring double the savings, but over time, because the measure is only increasing the amount saved in years when revenues are really surging.

That kind of super excess capital gains years, which really only occur towards the peak of economic cycles.

So our hands aren't tied if there are issues, fires, floods, whatever it might be, that we can meet those expenditures and that demand. You know, the National Guard, as an example, is called out for something and keeping those troops on salary for three consecutive months. That's an abundance of money, but it's necessary for the emergency. And if we've had the fund in the past, we can dip into that for that sort of thing. If we didn't have it, it'd be nothing to get.

So it would be difficult. So this prepares us for anything. But again, the question is, do we need to mandate the fact that we have to make that deposit? But if there's a difference on this, does the emergency or the deposit, does the emergency outweigh the deposit?

Yes. A declaration of a disaster is also a reason to suspend the deposit under the rules of Proposition 2.

Much better with that. Thank you, Mr. Chair.

Thank you. Hope that works with everybody that asked questions.

Thank you. We'll go to Senator Blakespear, and Senator Richardson is on deck.

Okay. Thank you. Well, I do really appreciate this. It seems to me like ACA 20 is a responsible fiscal measure that's building on the intent of the rainy day fund, which is that we save more during strong years and then we're better prepared during downturns. So I just wanted to, I'm really happy to see the part about being able to use some of these funds for the unemployment insurance federal debt, and I wanted to just ask about that.

How much will this realistically contribute to that? I mean, what is the outstanding debt and how much will we be using, or able to use?

So in terms of how much would be paid down, that is a decision for the Legislature and the Governor in the future to make if the proposition is approved. What the measure simply says is that the unemployment insurance loan is an allowed use of the debt payment. So under the current rules of Proposition 2, the debt payments range from, usually they're around $2 billion per year. And right now, they're typically paying down outstanding unfunded liabilities for the state's CalPERS obligations and state retiree health.

And so if the measure passes, the Legislature would have additional choices to make about what debts to pay down with those monies, and the UI loan could be one of them. So it would be a budget decision ultimately. I believe the outstanding debt to the federal government is around $20 billion.

Okay. So right now, we're making annual decisions about the CalPERS debt that you just referred to.

Correct. So in every budget act, there is an allocation of the Proposition 2 debt payments among the allowable uses. And really, the two remaining allowable uses are predominantly making supplemental payments to the state's unfunded CalPERS liability and paying down the state's retiree health liability. And so that is where the preponderance of those payments in recent years have gone.

When the measure first passed, budgetary debt that had been accumulated during the Great Recession was an eligible debt, and that is where the money largely went in the early years of these debt payments.

Okay. And so the cap has been 10%, but now it will be 20%. And so how did we settle on 20%? How did we come up with that being the right amount?

I would defer to my Department of Finance colleague.

I think with all the hearings and the discussions, there's no magic number. It was really a balance, because this is an additional constraint. Right? We have to make these deposits, and so you have to kind of balance the needs of current taxpayers and what they need versus setting aside for the future. So there is no magic number, and it was just a number that was negotiated and discussed for several years now as being the right balance.

Okay. So when you were answering the Chair's question and you ended with, you said this will allow us to, I think it was to spend more, but I think the question was on to save more. And wasn't your question, you used both words. Right? Spend and save. What you ended with wasn't what I expected. So I wanted to circle back to that.

So the measure... The state... The way the state, if I could step back, and I apologize if I get too far in the weeds. So please interrupt me if I do that. The state appropriations limit is a little bit of an apples and oranges calculation. Because what it says is tally up all the tax revenues that the state collects and then subtract from it categories of excluded spending. So it's comparing tax revenues and spending categories.

So it's sort of doing two sides of the equation but by using them together. And so it says take the difference from that amount and compare it to the state appropriations limit. And the state appropriations limit is essentially the size of government from 1979 grown for inflation and population over time. And so if the state, if the difference from that formula is greater than the state appropriations limit, the state constitution says the state has to take certain actions.

And there are different choices the legislature can take to address that. One of the choices is to spend more on excluded types of spending. Because going back to the first equation, you take tax revenue, you take away excluded spending, and then you make the comparison to those two levels. So if you spend more on excluded spending, you bring down the amount you're comparing to the state appropriations limit.

So by excluding deposits into the reserve when revenues are really surging, which is when the legislature would likely have a state, state appropriations limit constraint, there is some incentive to put more in reserves because it is a category of excluded spending. The issue the state runs into when it comes to spending, which is a little bit of what the morning's conversation was getting at, is that the state has a significant amount of spending categories that are not excluded but also somewhat fixed.

Right? So spending on safety net programs and spending on schools and community colleges. Those are all not excluded areas of spending. And so a constraint the legislature can face in the face of the state appropriations limit is how to fit the categories of not excluded spending into the limit when it's running up against the state appropriations limit.

Okay. So that all leads back to the question of the concern about the appropriations limit will lead us to spend more?

I don't think.... It depends. It really fundamentally depends on the choices of a future legislature. Because the state appropriations limit already allows for excluded spending. Already allows a number of categories like capital improvements and debt service and other things to be excluded from the state appropriations limit. The state appropriations limit inherently allows for spending above the limit, if that makes sense. So it by making reserves an excluded category, it creates an incentive to potentially put more reserves into the BSA when revenues are growing quickly.

Right. So just one last thing, Chair, if you don't mind. So I think one of my interests is in the state budget when we do have surging revenues that we don't expand our programs that are ongoing in such a way that it's unsustainable and we end up over promising and then having to make painful cuts.

And so the idea of basically living within our means that and so when we do have surging revenue, the idea that we would put it in a rainy day fund makes a lot of sense. But and so can you just address how you think this is gonna help achieve that goal? Because it's a requirement that it go into the rainy day fund instead of it being discretionary that we can expand to such a in such a way that we wouldn't be able to sustain that when the revenues come back down.

Thank you for that clarifying question. So the formula is under Proposition 2 require certain amounts of deposits in each year and require those deposits until the fund reaches 20% of general fund revenue. But there is no limit on discretionary deposits. So the legislature was surging revenues could put an extra $5 billion into the BSA at its discretion. The legislature did do that in I believe 19-20. There was a pretty sizable discretionary deposit in that year. So when revenue...

You meant 2020?

2019. I'm sorry. 2019-20. Yes. Yes. 2019-20.

My spouse is at Washington. He'd say you were there. You can correct her.

I'm glad you clarified because I was thinking a hundred years ago. We are, we operate so differently.

Right before the pandemic.

Something we all could grasp. Now, keep going.

Right before the, before the pandemic, there was a sizable discretionary deposit. There were also a few smaller discretionary deposits in a couple of other years before that time as well. So it is a choice the legislature can make in any year to make a discretionary deposit into the BSA or a different reserve like the safety net reserve.

Does that complete your questions? Thank you. And we'll go to Senator Richardson.

Thank you, Mr. Chairman. If I could follow-up on what you were discussing, would the deposit that we now have made this year be considered an extra discretionary deposit?

The deposit scheduled for 2026-27 is a what we call mandatory deposit. So driven by the formulas.

So we didn't put more in. We just met the need of what we were supposed to do. Okay. And then I have a question. I had a little mini debate discussion with the Vice Chair, and he was stating, you know, we have a spending problem. And I'll let him make his own comments, which I'm sure he's prepared to do.

He did already. Don't invite them again.

Not more. So I wanna build on what you were saying with the state appropriations limit. And you said, or the state appropriations, what we spend. And you said it's based upon inflation and population.

Yes. From 1979 grown for inflation and population.

Okay. And so what happens when now we are beginning in California, I've thought I'd heard this due to redistricting that our actual our population is decreasing, but the type of our population is changing. And that was the argument I was making with Mr. Niello that even though our population may decrease, if we have more seniors who normally with an older age comes in increased cost of health care. That's just one example of how our population is changing. Does the current formula adapt for that? Because at some point, I would think our population, isn't our population currently decreasing or no?

It's pretty flat. The formula does not incorporate the composition of the population. It's just the change in the population in numbers.

Do you think at some point we should, given the influx of what we anticipate with the baby boomers and what that cost will be?

It's a question for the voters. Again, the state appropriations limit was created by the voters and is in the constitution and would need to be changed by the voters.

Okay. My next question is, could you repeat again what were the things currently we pay for in the debt payments?

The remaining liabilities that the debt payments can pay for are largely pension liabilities. So predominantly the state's CalPERS unfunded liabilities. So that's payments over and above what the state is required to pay each year for state workers. The state could pay for supplemental payments into the state share of the CalSTRS liability if it wished also. The state has not opted to use the fund in that way.

I don't think, maybe in one year, but not regularly. As well as paying for the state retiree health care funding plan. So for a long time, the state paid for state retiree healthcare on a pay go basis. So kind of as the bills come in basis. And a few years ago, there was a plan developed to pre fund that benefit. And the state share of that pre funding is has typically been funded through Proposition 2.

Okay. And now, we're going to be adding some things that could be paid. So how do we compare to other states when it comes to, you know, paying, you know, outstanding debt and our reserve fund? How would you rate us with comparable cities like New York, or I know New York is comparable in size.

In terms of our reserves as a share of state spending, as measured as a share of state spending, California is below average compared to other states. Some states have particularly high reserve levels. Typically states with significant natural resources tend to have very high reserve levels. In terms of our debt level and debt pay down, I'd have to get back to you on that one.

And could you, so Mr. Niello doesn't use that. Could you clarify though, are those states that are comparable to us? Because I'm sure some states, you know, you know, Rhode Island, I mean, or something. They might, I mean, but that's very different from California.

Well, I was gonna ask a follow-up question. It might address that. And it's one thing to look at comparing the reserves to states. It's another thing to look at their underlying revenue system and how it requires certain reserves. And given Proposition 13 and the limit on property taxes that many other states do not have or differing levels of income tax or differing levels of sales tax, those differences in the revenue system would mitigate for a different kind of reserve system, wouldn't it?

Yes. And California has a relatively large state budget when it comes to sort of this collection of state tax revenue and then the support at the state level for a lot of expenditure. Particularly things like education, which in some other states is funded more at the local level. To your question more directly, New York is notably below California in terms of its reserve policy.

I'm trying to find Texas. If you wanted to compare to Texas, some people do. They are above California relative to their share of expenditures for their reserves, but it's a bit all over the map. And I'm not familiar with a state having a formula quite like California's when it comes to the reserve policy.

Which was the Chairman's point.

And one other follow-up that's really random. You said some of the states that really rely on resource extraction have a whole different thing. And I know when I represented the governor at Western Governors and went to Wyoming, 70% of their revenue comes from I think oil and coal extraction.

And they want us to know that every single school had been built because of revenues from that. Do they have to be careful because of the fluctuating market for those resources and that's why they have to do a reserve because gas prices might tank and therefore their revenues tank equivalently?

I don't know specifically the intent of their reserve policy, but, you know, looking at my chart, the top two are Wyoming and Alaska, both with significant natural resource extraction. And intuitively, one would think that that is the fluctuation in the prices of those commodities would be a reason that they retain reserves.

Thank you for indulging me. Did you have a further question?

I just had one comment and one question. Am I understanding correctly that Prop 2 is being extended to 2040?

Only the debt payments. Proposition 2 is in terms of reserve deposits is indefinite. What is being extended to 2040 are the required debt payments. So under current law, the debt payments would be optional after 2030 and instead the full amount of that set aside I walked through would go into the BSA.

Okay. I have one comment and one question left. My comment to the Chair in this committee. I'm very encouraged to see that this will allow us to begin to make payments to the UI, which is a very serious issue. I know I have read the LAO reports on potential solutions that we could consider.

So I just want to commend the Chairman with the negotiations, the third party negotiations, that at least we're beginning to put the state's UI situation on the table of paying more or figuring out something that we need to begin to do. And I think that's really a challenge of us over these next couple years is to really figure out that it's, you know, I realize it's the debate of whether we just keep paying, you know, interest and all of that.

But I think at some point, we really do need to seriously think about a strategy to address that. The 20 billion that is our outstanding debt. So I'm encouraged to see that it's now in this section. The last thing I would say is this is called ACA 20. And for those of us who are legislators, if you were to describe what this does in a couple sentences.

Could you, could you help us with some talking points for Members that, you know, I'll take a stab at it. ACA 20 can assist us in being more fiscally responsible, you know, helping us to pay down our debt, which in turn, you know, makes our state more, you know, stronger and whatever.

But if you could just take a stab at helping us of how would you describe it because I think it would be very helpful to us as Members. When we get questions from our colleagues, when we get questions from the committee to be able to really articulate how monumental this is, how important it is, and how it really is setting a new direction for us.

Well, so importantly not taking a position on the ACA. But we will be tasked with writing the ballot materials for it should it make it to the ballot. But I think we would describe it as building more reserves over time and expanding and extending debt, additional debt payment requirements for the state.

Which ultimately helps us to become more fiscally, ideally, more fiscally responsible.

More resources available when revenues decline, certainly.

Okay. Thank you. That's it.

Thank you. Before I go to Senator Smallwood-Cuevas who got in line, Senator Archuleta had a follow-up question.

Just to follow-up. Infrastructure. Because our schools, you know, we have a set budget, 98. It has to, we have to adhere to that cost and so on. But then there's deterioration in some and so infrastructure in our roads and this and the other. Is that going to be affected that we will again have to fill that mandatory 20%, up to 20% versus taking care of infrastructure or hospitals and everything else?

I think that's a question of sort of an annual budget question in terms of how much the legislature wants to set aside towards those particular types of projects. It is the case that under ACA 20, the state very likely would be making deposits. It would take longer to reach the 20% threshold and therefore the state would be making deposits in more years than might otherwise be the case on a mandatory basis.

So potentially some more resources would come off the top and therefore not be available for other purposes. But again, that would be to mitigate the need to make spending reductions or tax increases when revenues decline. And then the choices with the rest of the available resources would be up to the legislator.

So it may not be all at once. That's my point.

Yes. It's not all at once. It's overtime.

Okay. Thank you, Mr. Chair.

Thank you. Senator Smallwood-Cuevas. And Senator Niello is on deck.

Thank you, Mr. Chair and I appreciate the the conversation and discussion. And I do appreciate the efforts to strengthen our reserves to better prepare our state for downturn and moments like these when we're facing national hostilities and having to figure out ways to cover all of our bills. I am wondering about the proposal, especially in this moment.

Because one of the things that I've sort of experienced being here these last few years is the fluctuation in our revenue and our projections and what we think is coming in and then what doesn't come in or then what does come in and suddenly we, you know, we have a deficit and then we have revenue. And I feel this is a moment where we could see a huge fluctuation as we just saw what happened with Elon Musk and his public offerings. Anthropic, I think is next on deck, OpenAI.

I'm just curious how we're looking at these targeted valuations and what is the potential opportunity for California as these IPOs could hit before the end of the year. And to me, I just wonder, do we think that the doubling of the rainy day fund cap is truly sufficient for what we could expect to be happening over the next few months in the state. And I support savings. I you know, I just my question is, and I support the fiscal discipline, but we have so many challenges too that we're facing. So I'm just curious how we think, how we're preparing for that.

So I think your question maybe has two parts. One is sort of like how the changes under ACA 20 would work in the, in the event the state receives more revenue from the IPO's. And then the second part of your question is about how much the state might receive. I'll let my colleague Brian talk about how much the state might receive.

But in terms of the effect on the reserve, when I walked through how the amounts are calculated on page three under Proposition 2. Under ACA 20, you essentially just need to add this kind of super excess capital gain component, which is that 150% when it's over 10% of revenue. Often, we don't get the revenue estimate right the first year. But under Proposition 2, and as would be the case under ACA 20, the state does two what are called true ups.

So we fix the estimate for the prior year and we say, okay, actually we should have put this much into the reserve in that year and we make that additional deposit in the first year of the re-estimate and then the second year. So there would be an opportunity to true up the deposit relative to what the state actually experiences in terms of a revenue surge. But I'll let my colleague Brian talk to what we might expect and...

Yeah. I think, unfortunately...

If you would please...

Oh, yes. I'm sorry. Yes. Brian Uhler with the Legislative Analyst's Office. I think, unfortunately, we don't have a very satisfying answer really on what kind of revenue to expect from the forthcoming IPOs. I mean, I think what we can say is that, you know, historically, these major IPOs, you know, in California, primarily associated with these large tech companies, have resulted in significant state tax revenue in the past.

You know, the example that's most often brought up is is Facebook, and the state did receive a few billion dollars in revenue from that IPO. And there's certainly the potential that these, or the SpaceX IPO happened, Anthropic and OpenAI. Similarly, there's potential for significant revenue gains, you know, in line with those, you know, Facebook and some of those past tech IPOs.

A challenge with these IPOs is that the sort of the specifics of how those IPOs work and how the, you know, the stock options and stock awards that have been provided to the employees and early investors are different than with some of those past IPOs and in a way that makes it much more unpredictable for us to determine beforehand or in real time how much the state is gonna benefit.

So there's a lot of potential there, but it really depends a lot on just sort of behavioral decisions by those employees and early investors and executives who are holding those stock in terms of when they decide to sell or when they decide to exercise some of their options on stock options that they have. And so those things are, you know, very hard for us to predict beforehand. We'll be able to see it when it does come in the tax data, but that, you know, that won't be for for months or years. So there is a lot of potential there, but it's just it's too unpredictable for us at this moment.

And I have a sneaking suspicion Finance might have a comment.

Thank you. Colby White, Department of Finance. So just briefly, when we're talking about in the context of ACA 20 here, I think really part of what it's trying to do is improve upon Proposition 2. And one of the ways it will improve upon it is by, my colleagues referenced the super excess capital gains, and those are the types of things that potentially can occur when you do have these supersized IPOs.

They're very unpredictable, and how it plays out this time is not known, as my colleague mentioned. But there is the potential there if, you know, Anthropic follows and OpenAI and these are large. And then if there is those windfall type capital gains, ACA 20, by having the changes that are made in ACA 20, the improvements over Proposition 2 will better enable the state to just to reserve some of the additional gains and not commit those to ongoing purposes.

Yeah. And I and I'm appreciating that and just, you know, and it sounds like we now have a new tool to sort of address these super, I forget the the wonderful term that you call them, excess capital gains. I guess and it sounds like this is two, three. We don't know when those dollar, when do we actually, I don't know if there's a sense of when we actually do capture them in terms of the state actually being able to say, we have these resources.

But I do think there's that balance between saving and there's that balance between making sure that, you know, we are doing all of the things to stand behind the values of making sure that we're providing health care, that we're in standing up and fortifying our education systems, our workforce development programs.

So I absolutely agree with the savings. I'm glad to see that our unemployment insurance is a part of this strategy. I am a little bit curious about what we think this new process, this new model of savings that we're improving on the past practice. How quickly does it help us accelerate the down payment on those extending outstanding loans? Is it just a way of managing some of the interest that we have?

I'm just curious sort of what's the end game with that. And then also, I just wanna say part of our challenge as Labor Chair is that we just have some of the lowest unemployment insurance rates, you know, in the country, tax rates in the country. We are rivaling Arkansas and Florida. And part of the reason why we're in this mess is that we have not really caught up with what the cost is of actually supporting our constituents through unemployment. And our tax base just can't keep up with the cost. So anyway, I just wanted to get a better sense of what is the strategy for that fund.

So anyway, I just wanted to get a a better sense of what is the strategy for that fund.

So the debt payments under the changes for ACA 20 would be larger in the years of super excess capital gains. They would be larger than they are today. So they fluctuate today, but they're often around $2 billion. And they would be larger than that in those super excess capital gains years. The relative savings associated with making those extra payments through the debt payments would really depend on which liabilities the legislature opted to pay down. So different liabilities have different interest rates.

So budgetary loans typically are incurring an interest rate equivalent to the pooled money investment account rate, which is, you know, hovers around 3-ish. The pension liabilities have a discount rate of closer to 7%. So paying those down, while there is less immediate benefit to the state budget, there is a longer term savings. And then when it comes to the unemployment insurance loan, the state is paying the interest on that loan, which I think is also around 3%. But the state is not paying down the principal. As I'm sure you are aware, that is the employers that are paying down the principal.

Thank you.

Senator Niello.

Thank you very much, Chair Laird. I have just a couple of things to say. The second one somewhat reluctantly. First of all, Senator Archuleta sort of speculated how we would describe this to our constituents. And Senator Richardson asked if it could be summed up in a couple of sentences. And I with my mic off said, as Leonard Nimoy used to say on in Star Trek, can't be done. No. That wasn't Leonard Nimoy.

That was Arnold Schwarzenegger playing Leonard Nimoy.

But it was a guy that spoke with a English accent. At any rate, my point is your description of it is in the eye of the beholder. Whether somebody agrees with the description you made, I'm not criticizing it, and I know what you're getting at. But there are some people that would look at this proposal and not agree with that simple expression and there are others that would agree. With regard to Senator Archuleta's point, I would love to see one of my colleagues host a town hall with the sole purpose of explaining this budget reserve proposal and to see exactly how it could be done. Because here, this is very complicated. Proposition 2 was very complicated.

I happen to like the KISS principle, and that's why I continue to say to very little success that the only way that we're going to over time recover from our feast and famine because of our revenue stream. Again, we're not gonna change that. We're not gonna lower taxes on the upper income people and raise them on the lower income people. That is politically obviously not possible.

But we can do it on the use side and that is to limit spending based upon a rolling five to seven years average of revenue. And I say five to seven years cause that's about the time frame we go from feast to famine and back again. And there could be some additional qualifications in there in terms of a base amount, maybe some limitation of uses.

But it would really allow much more flexibility for budget writers. All of the excess would go to revenues and when the revenues drop down, all of the reserve would come back in. That's pretty simple and easy to understand. So that's the first point I wanted to make. The other point I want to make, I've and I've been sitting here saying, do I really want to do this.

Because I'm going to correct something that you said, and I'm loathed to correct the LAO. I don't really feel that my knowledge or intellect rises to that level, but nonetheless, I have to. Because I've had some other conversations about the Gann Limit and there continues to be misunderstanding on that. The original Gann Limit was Proposition 4, I think, in 1979.

And it did establish the limit at population growth and inflation defined as the CPI, Consumer Price Index. And it set the base limit at that year. But during the 1980s, people discovered that really is a limit. That's gonna, we're not gonna be able to spend as much money as we wanna spend. We gotta change that. So they did. Proposition 111, I think it was in 1990.

And it changed the definition of inflation, if I understand the wording of it correctly. Because I think you're right to say it's inflation, but it changed the definition of inflation to the change in personal income. And also reset the base year to 1986-87 or something like that. So it ratcheted up the base year to a decade later. Now, the thing that's ironic about personal income as a limitation on the ability to spend the revenue you make is almost nonsensical because it's personal income that's driving the increase in revenue.

So I have maintained for years the Gann Limit, not because of Paul Gann, but because of those that discovered that what Paul Gann did really was a limitation on the ability to spend money, they made the Gann Limit virtually meaningless, which is why we haven't talked about it ever since then until just recently. And even at this point, it's not a significant factor on our, on our, on our budget setting.

So it, another thing it did too is it imposed a two year average on that, which virtually eliminated, that made it even less meaningful. So, we basically neutered the Gann Limit. And I think it's important to make that point because it really is not a limitation on spending. So my two points are simplicity. I wish we could be much more simple. I would hate to have a town hall and try to... I'd have you come and do it.

We're happy to do so.

Oh, that's a mistake.

We serve the legislature.

And then and then also the simplicity of the way I would rather look at this myself.

Okay. Before we go to public comment, I just have three comments on some of the debate. The first is is I inadvertently have responded to the Vice Chair's challenge. Every two years for twenty years, I have a town hall meeting in my hometown and go through every single proposition and explain it to the public. I have done that continuously.

What it does, who supports it and oppose it, who's contributing money, you know, etcetera. So I will, I've already set the date. I will make sure I don't let the Vice Chair know. So he does not drive to Santa Cruz and attend. And then in response to Senator Richardson's question, I would say something like we have a very volatile revenue system and we need to save more in good times and not spend it in order to not have to cut more in bad times.

And that's what this does. I would be clear about that. And then the third thing to note is that Paul Gann, the very Paul Gann, supported publicly while he was still alive excluding deposits and counting withdrawals from the rainy day fund. So he actually supported the general principle that we are going at with ACA 20.

So those three comments. Now, this is the opportunity for public comment. It would not be... Yeah. This does not surprise. Irwin, please move to the microphone. Welcome to the committee. Welcome back to the Senate. And if there's anybody else, you can be ready to speak after Irwin.

Alright. First off, I...

Even though I called you by the first name, you should...

Irwin Nowick, everyone knows who I am. I was here for all those...

I'm not sure everybody at home knows who you are. So thank you for doing that.

Alright. I was here in 1986 through 2019. I remember Prop 111. The reason for Prop 111 in 1990, which was supported by Pete Wilson and George Deukmejian and the predecessors to our friends at Finance, was because the effect of the Gann Limit at that time was to force spending on exempt activities. Then what happened is that the voters started exempting additional activities from Gann and that has the perverse effect of not, of encouraging spending, not encouraging savings.

So then in 2003 when Governor Schwarzenegger came in, we did Prop 57 and Prop 58. I wrote Prop 58 with Rick Simpson and whoever was at Finance at that time. I think it was Mike Genest. And what we started was the process of having mandatory deposits into reserves. At that time, I said that we should exempt from Gann what Mr. Gann himself proposed in 1988, which was to have the monies going into the reserve not count towards Gann, but when it comes out to count towards Gann.

So this is true that it started with him. Then what happened is the voters approved that and then we built upon it with Prop 2, which was a major league success. Prop 2, in fact, is the reason why PERS now is at 84% funding through various reforms and everything, but the idea was to get rid of the wall of debt and do some other things.

This proposal, besides doing what Gann wanted to do in 1988, deals with the crisis that the Senators up here talked about with the UI fund. If that is not dealt with, it is gonna skyrocket into an even bigger problem. So we have to use the monies as these other mandate payments are going down because of the responsible budgeting that Governor Brown start, to start dealing and chipping away with the UI fund. Because if you don't deal with the UI fund, you're going to have the same problems that we had with the wall of debt.

And that is why this is important. The last point I would make is that we have a perverse incentive now under the Gann Limit to the extent it exists, which is still existing not as much as it used to, is to spend money, expand programs, and then when the crisis comes, we don't have the money to keep things on an even keel and then you have to cut back.

So what you wanna do is save the money now and be responsible with the budgeting and that way you have an even keel. And that's why this is proposal is totally consistent with what we've tried to do in 2002, 2003 under the late Keith Richmond and the other people who were involved in that effort who were primarily members of Senator Niello's party. And I'm done.

Well, actually you're done for now. But thank you everyone. We appreciate your comments. Is there anybody else that wish to address the committee and public comment? Seeing none. Normally, we bring it back and we have a debate over a motion, but we're not taking action today. And I believe that we had a good conversation with everybody and that, except for Senator Ochoa Bogh who got here late, everybody had a chance to talk or ask a question. Yes.

I promise to be brief. I just wanted to defend Ms. Chu?

Well, let me recognize you. Senator Richardson.

Thank you, sir. I just wanted to defend Ms. Chu. She reluctantly answered my question and tried to do what she's supposed to do which is not, you know, advise us. But she was kind enough to give me an idea, and I just wanted to, for the record, defend that she made all attempts to avoid and did her best to help to help us. So thank you very much.

My comment was not in any way meant a criticism.

I acknowledge the changes by Proposition 111. Yes. I just didn't dive into them.

Well, thank you. Well, let me appreciate everybody for participating in this hearing. I think it was a good airing of the situation. We will consider this on the floor of the Senate tomorrow. And seeing no further business, the Committee on Budget and Fiscal Review will stand adjourned.