Extreme revenue swings are a feature of California’s state budget, not a bug. In 2022, the state had a staggering surplus of $97.5 billion; by the next year, it was in the hole for $32 billion.
This is not a new trend. California’s highly progressive income tax system relies heavily on revenue from the rich, exposing it to the stock market’s boom-and-bust cycles and forcing lawmakers to slash programs during financial hardship. This volatility was the reason voters in 2014 agreed to strengthen the much smaller rainy day fund started 10 years prior, requiring the state to put aside money during flush years to help with periodic financial famines.
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But its maximum size – 10% of the state’s general fund tax revenue – hasn’t been enough to completely stabilize state budgets, and now voters are being asked to expand it by passing Proposition 2 on the Nov. 3 ballot. Proposition 2 would increase the savings cap to 20% and, importantly, exempt deposits from counting toward the so-called Gann Limit, the 1979 constitutional spending ceiling that holds the budget in line with economic and population growth. It would also allow larger deposits in especially good budget years, hastening the reserve fund fill-up.
The measure comes after the state’s nonpartisan Legislative Analyst’s Office last year recommended lifting the rainy-day fund cap to 20% immediately and to 50% over the next three decades as a way to avoid significant cuts to core services or tax increases in the future.
In a state with exceptional wealth alongside rampant poverty, this kind of prudent budgeting make sense to me. Those benefiting from new or augmented programs – such as universal transitional kindergarten, established in 2021 – shouldn’t have to face sudden, devastating cuts when the stock market tanks and revenues retreat.
As the LAO noted, California ranks in the top five states for revenue volatility but lags behind the national average for the portion of its budget kept in reserve. Currently, the state automatically sets aside 1.5% of said revenue annually – though deposits can be suspended or reduced in budget emergencies – to pay down certain debts and top up the fund until it’s considered full. Proposition 2 would keep the 1.5% automatic set-aside but allow for more money to flow into the fund in years when capital-gains tax revenue is high.
Golden State staff
Proposition 2 is opposed by some of the legislative Republicans who voted against the bill that put it on the ballot. They argue that the budget has grown wildly out of line with the population and the economy (they’re right about that – it’s up more than 60% since 2019) and that lawmakers should control spending, not stash away more money in a “slush fund.”
They also object to the spending-limit sidestep and say rainy-fund deposits should count as spending because, as Assemblymember David Tangipa (R-Fresno) told me, “the government is not supposed to hoard money.” Revenue beyond what is needed for current spending should be returned to voters, as the Gann limit requires.
“It's very misleading to me to tell people that this is a savings measure when it's not,” said Tangipa, who signed the ballot argument against Proposition 2 and believes expanding the rainy day fund gives Democrats an excuse to avoid making needed cuts. “It is actually to help the Legislature spend more money.”
But Proposition 2 isn’t being sold as a budget panacea. In its report supporting a rainy-day fund increase, the LAO estimated Proposition 2 would cover half of projected deficits in the future – and about three-quarters with additional expansions to the rainy-day fund.
Robert Greene
That would still mean cutting funding for existing programs in some years, but not anything close to the lacerating reductions in the 2000s after the dot-com bubble burst and during the global economic downturn, before the state had a useful reserve. Assemblymember Jesse Gabriel (D-Encino), who sponsored the bill putting Proposition 2 on the ballot, said former legislators who served during the Great Recession told him they had to consider cuts far more catastrophic than the current Legislature has had to deal with thanks to healthier reserves.
The rainy-day fund has put California in a better position to weather deficits. But as the LAO warned last year, the state is headed for deep cuts or more tax increases if it isn’t allowed to save much more. If Proposition 2 gives me the chance to help California avoid the worst of that, I’m happy to take it.
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