Proposition G - Rainy Day Fund

What it does

This Charter amendment would create a “Rainy Day” Reserve in the City’s budget. Revenue growth in excess of five percent would be allocated as follows: 50% of the excess to the Reserve, 25% to capital and other one-time expenditures, and 25% to general government needs. During lean fiscal times, the City would be able to withdraw up to 50% of the Reserve funds in a given year, but no more than the budget decline from the previous year. The Reserve would be capped at 10% of General Fund revenues. Prop. G allows appropriation of the Reserve for the School District if per-pupil revenues are projected to decline and the District has given notice of a significant number of layoffs.

Why it is on the ballot

Periodically, the City’s fiscal condition is rocked by boom and busts cycles. During the boom, politicians are seemingly unable to resist interest-group pressure to create or expand programs, labor-organization demands for higher compensation, and their own desire to fund new projects. There is a tendency to spend every available dollar.

When an economic recession or other fiscal shocks end the good times, the City is confronted with cutting services and increasing fees. Fiscal Year 2003–2004’s anticipated $347 million budget deficit showed what happens in the bust cycle. The budget was ultimately balanced with spending cuts, labor union concessions, one-time deferrals, fee increases, layoffs, and deferred maintenance.

In May 2003, SPUR recommended (Crisis and Opportunity in the City Budget [PDF 60Kb, 19 pages], SPUR Report 416) that the City establish a revenue-stabilization fund to protect some funds in flush years to cushion the budget in crunch times. Supervisor Tom Ammiano, working with Controller Ed Harrington, developed Prop. G to do just that.

According to the Controller, a rainy day fund would have slowed spending in four of the last seven fiscal years. It would have left Supervisors with more than $165 million to cushion budget cuts over the last two fiscal years and the 2003-2004 budget.

Forty-five states, with the notable exception of California, have some form of a rainy day fund. Fewer such funds exist at the municipal level.

Pros

Proponents state:

• The concept of having a Rainy Day Fund is a basic principle of sound public management. Prop. G enforces some fiscal discipline, forcing the Mayor and Board of Supervisors to say no to constituents and City workers who want to spend all the money which rolls in
• The Reserve reduces the City’s borrowing costs by maintaining strong bond ratings
• Because this measure will be in the Charter, it will have the teeth to be enacted
• Allowing the City to use a portion of the excess revenue over 5% for one-time expenses maintains the ability to try experiments and innovations, mitigating the fears of some that completely stable City budgets will increase the inertia and sclerosis that can creep into large bureaucracies

Cons

Opponents state:

• The Charter amendment dment does not explicitly define “other one-time spending” leaving a discretionary loophole for elected officials to interpret this clause liberally
• The Charter amendment does not sufficiently define “infrastructure.” While construction of a new building is clearly infrastructure, what about purchase of a new information system?
• Clearly, the triggers for contributions to the School District are less well defined and could have unintended consequences. For instance, some people have wondered whether the Supreme Court’s Serrano vs. Priest decision, which requires equal expenditures per pupil, statewide, might be triggered when the City funds the District. That could result in a reduction in State education financial aid and no net gain to the District

SPUR's analysis

Since 1932, the Charter requires the City to maintain a cash reserve. The reserve withholds 10% of the property tax revenues and can only be used for cash shortfalls within that year. It cannot be used to balance the budget, and must be repaid at the end of the year. In fact, this is a requirement almost unique to San Francisco. The City has adequate funding tools to maintain cash flow, so the cash-reserve policy of another era is no longer needed.

Prop. G eliminates the cash reserve and transfers $56 million from the cash reserve to the Rainy Day Reserve. It also restores provisions allowing transfers between City funds, reinforces the expiration of appropriations at the end of the fiscal year, and prevents withdrawals from the Treasury without an appropriation.

The City would put money into the Reserve whenever the Controller projects that total General Fund revenues for the upcoming budget year will be five percent higher than for the current year. Over the past twenty years, revenues have grown an average of 4.9% each year. The idea is that when revenue grows more than this amount, money is set aside; when revenue growth is less than this amount, the reserve fund is drawn down. During the last twenty years, the City’s annual revenue growth has exceeded the 5% trigger 11 times.

At any time, the Mayor and Board of Supervisors may appropriate the allocations earmarked for capital, one-time and general government spending.

The total amount of money in the Reserve is capped at 10% of prior year General Fund revenues. Any extraordinary revenue growth that would bring the Reserve Fund above the 10% cap will automatically be allocated for capital and other one-time expenditures.

The City will only be able to spend money from the Rainy Day portion of the Reserve in years when the Controller projects that the total General Fund revenues decline compared to the prior year. In those years, the City could withdraw up to the lost revenue (“the shortfall”) or 50% of the Reserve, whichever is smaller. In the second and subsequent years after the initial withdrawal, further Reserve withdrawals will be allowed if revenue growth is less than two percent and are again limited to the shortfall or 50% of the Reserve, whichever is lower.

In addition to the core uses of the Reserve Fund, the Mayor and Board of Supervisors may appropriate Reserve funds to offset the costs of maintaining public education during the upcoming year. The City could allocate money from the Reserve to assist the School District in years when the Controller projects that per-pupil revenues would decline and the District had already given notice of a “significant” number of employee layoffs. The appropriations may not exceed the dollar value of the total decline in inflation-adjusted per-pupil revenues for the year, or 25% of the Reserve balance, whichever is lower.

Provisions regarding the San Francisco Unified School District are necessarily different from those regarding the City budget. School District funding is tied to the State and the District itself, which is not a City agency. However, in fiscal year 2002-03, the City provided $4 million to the School District, largely for after school and sports activities. In FY 2003-04, the City provided $8 million. In difficult State budget times such as the present, it is likely that additional annual grants from the City to the District will be necessary. This measure builds in flexibility because formulas and timing of State funding are more complicated than can be demonstrated in the rather direct indicators set in this measure for the City budget.

SPUR’s May 2003 report on the City Budget called for just such a measure. We believe Prop. G has been drafted responsibly and will fulfill its stated purpose. While funding for infrastructure investment, one-time expenses, and the School District are not as clearly defined as we would like, it fundamentally make sense.

SPUR recommends a "Yes" vote on Prop. G.