CA Proposition 2: Amendment To Increase The State's Rainy Day Fund

SACRAMENTO, CA — Voters will consider whether to amend the state constitution to strengthen its rainy day fund, allowing the state government to squirrel away up to 10 percent more savings each year for lean years.

Propposition 2 would also give lawmakers greater flexibility to manage reserves and debt. Proposition 2, formally called the Save for California’s Future Act, was placed on the Nov. 3 statewide ballot by the legislature. It is a constitutional amendment that would change rules governing California’s Budget Stabilization Account, the state’s primary rainy day fund.

The measure comes as California faces the challenge of managing a budget heavily dependent on volatile revenues, particularly personal income taxes paid by high-income residents. Supporters say the changes would help the state build a larger financial cushion before the next recession.

Critics, on the other hand, contend that Sacramento politicians could use the savings as a slush fund instead of refunding excess revenue to taxpayers.

A bigger rainy day fund

Under current rules, California's rainy day fund can hold reserves equal to 10 percent of General Fund taxes. Proposition 2 would increase that ceiling to 20 percent. The state would continue making required deposits until the reserve reached the higher limit.

The measure also would change how some deposits interact with California's constitutional spending limit, commonly known as the Gann Limit. It limits how much the government can spend before having to issue refunds to taxpayers. Supporters argue that the change would make it easier for the state to save money in years when revenues are unusually strong rather than forcing those funds into other spending categories.

Why reserves matter

California's budget can swing sharply from year to year because a significant portion of state revenue comes from personal income taxes, including taxes on capital gains. During periods of economic growth and rising stock markets, those revenues can surge. But they can fall quickly when financial markets decline or the economy enters a recession.

A larger reserve would give the state more money to maintain programs during an economic downturn without immediately resorting to tax increases or spending cuts.

The Legislative Analyst's Office notes that California currently plans to spend roughly $250 billion from the General Fund on public services. About half goes to schools, community colleges and public universities, while roughly one-third supports health and human services programs, including Medi-Cal.

Changes to debt payments

Proposition 2 would also affect how California handles certain debt payments. Under current constitutional rules, the state makes additional payments toward long-term pension and retiree health liabilities based in part on the amount deposited into the rainy day fund. That additional-payment requirement is scheduled to end in 2030.

After that point, Proposition 2 would give lawmakers and the governor more options for directing money toward reserves or debt payments, depending on the state's fiscal circumstances.

The proposal also would broaden the types of state debt that could be repaid using General Fund revenues that otherwise must be set aside under the existing rules.

Potential safeguard against downturns

Supporters of Proposition 2 argue that California should save more during prosperous years because the state's revenue system can produce large surpluses that disappear when the economy weakens.

The California Budget & Policy Center, while presenting arguments for voters to consider rather than endorsing the measure, said Proposition 2 would allow California to build a larger reserve and better protect core public services during budget emergencies.

The proposal reflects a broader effort to make California's budget less vulnerable to economic swings. The state's existing Budget Stabilization Account was created by voters in 2004 and significantly revised through another Proposition 2 in 2014.