California Proposition 2 seeks to increase Rainy Day Fund deposit cap by 10%

By Dean Fioresi

California voters will determine whether to approve Proposition 2, a constitutional amendment that would increase the state’s Rainy Day Fund deposit cap from 10% to 20% of its General Fund tax revenue. 

The proposition, dubbed the “Save for California’s Future Act,” was placed on the ballot by California legislators who said it would help them invest in the future of healthcare, education and public safety in the state. Along with raising the maximum deposit amount, it would also authorize the state to spend some tax revenue to pay down $20 billion in federal unemployment insurance debt.

“California’s economy is among the largest and most dynamic in the world, but it is also subject to economic cycles, fluctuations in revenue, natural disasters, public health emergencies, and other unforeseen events that can place significant strain on the state budget,” the proposed law says. “It is therefore the intent of the Legislature to strengthen the state’s commitment to responsible budgeting, long-term financial planning, and prudent savings by enhancing California’s budget reserves and ensuring that the state is better prepared for future economic challenges.”

Proponents say that raising the ceiling would allow the state to save more when the economy is thriving, and build a stronger reserve for down periods, while opponents believe the state’s reserves are used by politicians as a “slush fund” and allows for more wasteful spending, according to California’s Official Voter Information Guide.

In 2014, California voters approved the state’s Rainy Day Fund, formally known as the Budget Stabilization Account, creating a reserve to help the state navigate through various economic trends. If Proposition 2 passes, the previously approved limit of 10% would be doubled, allowing more money to go into savings while also creating an option for legislators to avoid triggering rebates to taxpayers in the event of a surplus. 

The deposits would not count toward the Gann Limit, which was voter-approved in 1979 and limits the amount of tax revenue that politicians can spend and appropriate annually. The number is determined by a formula based on tax proceeds, population changes and cost of living.

Tax revenue above the Gann Limit is divided between schools and refunds to taxpayers. Under the proposed changes, deposits from the state appropriations limit would be exempted into the rainy day fund and a short-term reserve called the Projected Surplus Temporary Holding Account. 

Supporters argue that approval of Proposition 2 would stop politicians from overspending, guarantee education funding is protected in the state’s constitution and increase financial security. Those in opposition believe the amendment would cancel California’s tax rebates and make the state’s budget more volatile.

According to the California Democratic Party, notable supporters of the amendment include Gov. Gavin Newsom, gubernatorial candidate Xavier Becerra and legislative Democrats, while opponents include legislative Republicans and Reform California.