In the second installment of this look at the 14 propositions on California’s November 2026 ballot, we turn to Proposition 2, a proposed state constitutional amendment aimed at expanding California’s “rainy day fund.” Part one examined a bond measure intended to raise money for veterans’ housing. Before we get into the details of Proposition 2, however, the estate of Albert Hammond would like a word.
Some background is useful. California’s state budget must be balanced each year, a requirement that can make spending decisions especially difficult for lawmakers. The state’s revenue rises and falls with the private-sector economy, while legislators continue looking for ways to fund programs and satisfy constituents. There is, however, an important qualification to the spending rules. As the current voter pamphlet explains:
Certain kinds of spending — like infrastructure — do not count toward the limit.
That caveat appears to complicate the very spending-limit concept it is supposed to support.
When state officials want additional money to spend, raising taxes is generally the remaining option. Even in a state led by Democrats, the basic budgetary reality is clear: tax collections fluctuate, making them an unreliable foundation for long-term spending commitments. California’s high tax burden has also contributed to an exodus of residents and businesses, further complicating the state’s fiscal outlook.
California voters approved the creation of a “rainy day fund” in 2014. The reserve was designed to help maintain state services when revenues weaken, including services for low-income residents and the broader population. Those obligations include transportation, wildfire and mudslide prevention, and other basic government functions.
The rainy day fund currently must maintain a minimum balance equal to 10 percent of the General Fund, the central account used to build the state budget. Proposition 2 would double that minimum to 20 percent.
The measure also includes several technical changes, so the relevant sections of the voter guide are worth examining.
Save More in the Rainy Day Fund. Proposition 2 requires the state to make deposits into the rainy day fund until it reaches 20 percent of General Fund taxes (instead of 10 percent of General Fund taxes). In addition, the state would make even larger deposits in years when revenues from taxes on investment gains are very high, like when the stock market is booming.
Extend and Expand Extra Debt Payments. Proposition 2 would require California to continue making additional debt payments through 2040, rather than ending them in 2030. Each year, those payments would equal the amount initially deposited into the rainy day fund. The money could also be used for a broader range of obligations, including required payments to schools and community colleges, repayment of borrowing from other state funds, and repayment of certain federal loans.
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Change How Rainy Day Fund Deposits Count Toward the State Appropriations Limit. Deposits into the rainy day fund would no longer count toward the state appropriations limit when they are made. Instead, they would count against the limit when the money is withdrawn.
Change How Other Deposits Count Toward the State Appropriations Limit. California also maintains an account for setting aside revenue during periods of unusually strong collections. That practice is intended to reduce the risk of overspending when revenue forecasts are uncertain. Under Proposition 2, deposits into this account likewise would not count toward the appropriations limit until withdrawn. The excluded amount could not exceed 10 percent of General Fund tax revenue in any year.
Fortunately, there will be no test on this material tomorrow morning.
The basic budgeting principle is fairly straightforward: money saved and money spent are both parts of the same overall financial plan. Setting funds aside for future needs does not create new money; it simply makes some money less immediately available. Consider a household with both checking and savings accounts. If money is transferred from savings to checking, the household has not gained additional funds. It has only moved existing money into a form that can be spent more readily.
Proposition 2, which has the support of Governor Gavin Newsom and Democratic gubernatorial candidate Xavier Becerra, therefore looks to critics like a bookkeeping maneuver funded by taxpayers. No one disputes the value of maintaining reserves during an economic downturn. The concern is how the proposed accounting change would treat those reserves. Money deposited into the rainy day fund would not count as an expenditure until it was withdrawn. For households, by contrast, setting aside income for savings immediately reduces the amount available for current spending. There is only one pool of income, even when it comes from several sources. Critics argue that California’s approach obscures that reality and could encourage the state to spend more aggressively, leaving residents to bear the consequences through higher taxes, reduced services, or continued outmigration.
One final provision deserves attention. Proposition 2 would authorize—but would not require—California to use the rainy day fund to repay some or all of the roughly $20 billion the state borrowed from the federal government during the pandemic. That money would still come from the state’s existing reserves; it would not represent a new source of funds.
Editor’s Note: The 2026 Midterms will determine the fate of President Trump’s America First agenda. Republicans must maintain control of both chambers of Congress.
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