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California Governor Brown wants rainy-day fund in constitution

California Governor Jerry Brown announces emergency drought legislation at the CalO ES State Operations Center in Mather, California, Februa
California Governor Jerry Brown announces emergency drought legislation at the CalO ES State Operations Center in Mather, California, Februa

By Sharon Bernstein

SACRAMENTO, California (Reuters) - California Governor Jerry Brown on Wednesday stepped up his efforts to enshrine a rainy day fund in the state's constitution, stealing some thunder from Republicans backing a similar measure as he seeks an unprecedented fourth term.

Brown, a Democrat who has followed a path of fiscal restraint since returning as governor in 2011 from two previous terms of office in the 1970s and '80s, is widely credited with restoring stability to California's battered budget after years of multibillion-dollar deficits.

"We simply must prevent the massive deficits of the last decade, and we can only do that by paying down our debts and creating a solid rainy day fund," Brown said.

On Wednesday, he called a special session of the Legislature for next week to discuss his plan for requiring the state to set aside money earned from volatile investments such as those in the stock market in flush years for use later during lean times.

"The reason you have a rainy day fund is to put money away in good times, so that in those bad times when they come - and we know they will come - we'll have more money," Michael Cohen, Brown's chief financial adviser, said in a briefing with reporters.

Cohen said pushing a state constitutional amendment for a rainy day fund would be a top priority in advance of spending negotiations with the Legislature for next year.

Brown's plan would require approval of two-thirds of state lawmakers and ratification by voters in November. If passed by the Legislature during the special session, it would knock a similar proposal, backed by Republicans, off the ballot.

In a nod to concerns raised by more liberal Democrats, whose votes he needs to reach a two-thirds majority, Brown's plan allows more flexibility in spending than the Republican-backed measure already on the ballot, and preserves a portion of the fund for spending on education.

Democrats in California control both houses of the Legislature as well as all statewide offices. But a recent series of scandals has cost the party its two-thirds majority in the state Senate, so Brown will also have to reach out to Republicans if he wants his proposal to pass.

On Wednesday, Republicans in the Legislature applauded Brown's call for the special session but said they were skeptical of provisions giving lawmakers more flexibility to spend the money than their proposal would allow.

"It's just common sense for California to put away money during the 'boom' years to avoid future tax increases and spending reductions in the 'bust' years," said Senate Republican leader Bob Huff. "However, we are mindful that legislative Democrats have undermined similar efforts in the recent past."

Left on the sidelines when the Democrats held a two-thirds super-majority that allowed new taxes and proposed constitutional amendments to be passed without consulting them, Republican lawmakers said they were pleased that Brown would have to work with them to get his measure through.

"We are certainly open to talking about this with the governor," said Huff's spokesman, Peter DeMarco.

The Republican-backed plan, drawn up during the administration of Arnold Schwarzenegger as part of a compromise with Democrats, would require the state to set aside a portion of its overall revenues in a fund that could only be touched during a natural disaster or fiscal emergency.

Brown's plan, by contrast, only requires the state to set aside money for the fund during years when income spikes from investments - so-called capital gains - amounts to more than 6.5 percent of its revenue. Such investments are projected to make up about 7.7 percent of the state's general fund revenue this year.

California set up a rainy day fund in 2004, but contributions were not enshrined in the constitution, and the state has not contributed to it since 2007.

(Additional reporting by Robin Respaut; Editing by Steve Gorman and Ken Wills)

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