Should Voters Approve Proposition 2? How California’s Rainy Day Fund Would Be Updated

What Would Proposition 2 Do?

Prop. 2 would amend the state Constitution to change several of the rules that govern California’s rainy day fund — the state’s primary budget reserve, known as the Budget Stabilization Account (BSA).¹California voters created the BSA in 2004 by passing Prop. 58 and reformed the BSA a decade later by approving Prop. 2 of 2014. For an analysis of Prop. 2 of 2014, see California Budget & Policy Center, Proposition 2: Should California Prioritize Paying Down Debt and Significantly Change State Budget Reserve Policies? (September 2014). In addition, Prop. 2 would modestly change the interaction between state reserves and the state spending cap, commonly called the Gann Limit. This section highlights the key changes that Prop. 2 would make if approved by voters in November.

Increases the Maximum Size of the Rainy Day Fund (BSA) to 20% of General Fund Revenues

Current Law

The state Constitution limits the size of the BSA to 10% of estimated General Fund tax revenues.²Specifically, the amount transferred to the BSA in any fiscal year may not result in a balance that exceeds 10% of estimated General Fund “proceeds of taxes.” Proceeds of taxes are estimated for the purpose of calculating the State Appropriations Limit (or Gann Limit) and tend to differ slightly from total General Fund revenues and transfers. When this limit is reached, any dollars that otherwise would go into the BSA must be spent on infrastructure.

Proposition 2

Prop. 2 would double the BSA cap to 20% of estimated General Fund tax revenues. If the 20% cap were ever reached, the dollars that would otherwise be deposited into the BSA would instead be spent on infrastructure, as under current law.

Changes How “Excess” Capital Gains Revenues Are Calculated to Save More in Strong Revenue Years

Current Law

The state Constitution requires some General Fund revenues to be set aside annually and requires additional General Fund revenues to be set aside when certain conditions are met. Generally speaking, 50% of these set-aside revenues are deposited into the rainy day fund, and the other 50% are used to pay down certain state debts.³As noted below, some set-aside revenues are owed to TK-14 education through the Prop. 98 minimum funding guarantee. This portion of set-aside revenues is governed by different rules and does not go toward the rainy day fund or state debt payments. These set-aside revenues are determined in two ways:

• 1.5% of General Fund revenues are automatically set aside every year. For example, if General Fund tax revenues were estimated to total $250 billion for a fiscal year, the state would need to set aside a total of $3.75 billion (1.5%), with half deposited into the rainy day fund (BSA) and the other half used to pay down certain state debts. Prop. 2 would not change this required annual transfer.
• In addition to this fixed annual transfer, the state is required to set aside “excess” capital gains revenues. This requirement is triggered in years when estimated General Fund tax revenues that come from personal income taxes on capital gains exceed a specified target: 8% of total General Fund tax revenues.⁴Capital gains are the profits realized from selling assets that have increased in value, such as stock shares or real estate. Revenues from capital gains can be volatile from year to year depending on market conditions. When this occurs, a portion of these “excess” capital gains revenues — specifically, the share that is not owed to TK-14 education through the Proposition 98 minimum funding guarantee — is split equally between building the BSA balance and paying down certain state debts.⁵The share of “excess” capital gains revenues that are owed to TK-14 education via Prop. 98 is subject to a different set of rules. See California Budget & Policy Center, Proposition 2: Should California Prioritize Paying Down Debt and Significantly Change State Budget Reserve Policies? (September 2014), p. 2.

Proposition 2

Prop. 2 would change how “excess” capital gains revenues are calculated in order to set aside more revenue for the rainy day fund and state debt payments. Under Prop. 2, there would be two categories of “excess” capital gains revenues, as follows:

• The first category of “excess” revenues would include capital gains revenues that total between 8% and 10% of General Fund tax revenues.
• The second category of “excess” revenues would equal 1.5 times the portion of capital gains revenues that are above 10% of General Fund tax revenues. For example, if there are $2 billion in capital gains revenues above the 10% threshold, the state would have to set aside a total of $3 billion ($2.0 billion * 1.5) — $1 billion more than is required under current law.

As under current law, the portion of these “excess” revenues that are not owed to TK-14 education through Prop. 98 would be split equally between the rainy day fund and certain state debt payments.

Expands the Types of State Debt That May Be Paid with Set-Aside Revenues

Current Law

The state Constitution requires that half of General Fund revenues set aside each year be used to repay certain state debts.⁶The revenues used to calculate this 50% requirement exclude set-aside revenues that are owed to TK-14 education through California’s Prop. 98 minimum funding guarantee. Currently, the state may only use these set-aside revenues to 1) prefund state retiree health benefits and/or 2) pay down unfunded liabilities associated with state‑level pension plans. In prior years, the state was allowed to use these set-aside revenues to pay down certain types of budgetary debt. This included payments owed to K-12 schools and community colleges as of July 1, 2014.⁷These payments went toward unfunded prior-year Prop. 98 obligations, including so-called “settle-up” obligations, which reflect the reconciliation of estimates of the annual Prop. 98 minimum funding level and the actual Prop. 98 guarantee. However, by 2019-20, the state had repaid all of the outstanding budgetary debt.

Proposition 2

Prop. 2 would update and expand the list of state debts that could be paid with set-aside revenues. Specifically, these funds could be used to:

• Repay federal unemployment insurance (UI) loans. Under Prop. 2, revenues set aside for state debt could be used to repay “federal loans made to the Unemployment Fund.” The measure does not specify whether Prop. 2 funds could be used to pay the interest as well as the principal on federal UI loans.
• Repay certain TK-14 education obligations. Under Prop. 2, the state could once again use set-aside revenues, during any fiscal year, to make certain payments owed to TK-12 schools and community colleges.⁸Specifically, Prop. 2 would allow revenues set aside for state debt payments to be used for “unfunded prior fiscal year General Fund obligations” pursuant to the Prop. 98 minimum funding guarantee. These include so-called “settle-up” obligations, which reflect the reconciliation of estimates of the annual Prop. 98 minimum funding level and the actual Prop. 98 guarantee. Under the original Prop. 2 (2014), the state was allowed to use set-aside revenues to pay down unfunded prior fiscal year General Fund obligations pursuant to Prop. 98, but only for debt accrued prior to July 1, 2014. That debt was repaid by the 2019-20 fiscal year. In addition, set-aside revenues could be used to help accelerate the phase-out of an outstanding debt tied to an accounting maneuver that state leaders adopted in the 2023-24 budget to address an issue related to the Prop. 98 minimum funding guarantee.⁹For a discussion of this accounting maneuver, see Legislative Analyst’s Office, The 2024-25 Budget: The Governor’s Proposition 98 Funding Maneuver (February 15, 2024).
• Repay General Fund loans to the Medi-Cal program. The 2025-26 budget transferred $4.4 billion from the state General Fund to the Medical Providers Interim Payment Fund to help cover higher-than-expected Medi-Cal costs. The budget delayed repayment of this loan, with payments starting in 2027-28 and potentially continuing for several years. Under Prop. 2, revenues set aside for state debt could be used to accelerate the paydown of the 2025-26 Medi-Cal loan or other Medi-Cal loans.

Extends the Debt-Paydown Requirement by 10 Years, to 2039-40

Current Law

The state Constitution requires 50% of set-aside revenues to be used to pay down certain state debts through the 2029-30 state fiscal year.¹⁰The revenues used to calculate this 50% requirement exclude set-aside revenues that are owed to TK-14 education through California’s Prop. 98 minimum funding guarantee. Starting in 2030-31, these payments become optional, and any set-aside revenues that are not used to pay down debt must be deposited into the rainy day fund.

Proposition 2

Prop. 2 would require 50% of set-aside revenues to go toward paying down state debts for an additional 10 years ending in 2039-40.¹¹The revenues that would be used to calculate this 50% requirement would continue to exclude set-aside revenues that are owed to TK-14 education through California’s Prop. 98 minimum funding guarantee. Starting in 2040-41, these payments would become optional, and any set-aside revenues that were not used to pay down debt would have to be deposited into the rainy day fund.

Changes the Relationship Between Deposits/Withdrawals and the Gann Limit

Current Law

The state Constitution requires that deposits into state reserves be counted as spending for the purpose of calculations required by California’s spending cap. This is the case even though tax dollars transferred to a reserve clearly will not immediately be spent through the budget. This rule was put in place by Prop. 4 of 1979, which created the state spending cap.¹²For simplicity, this discussion uses the word “spending.” However, Prop. 4 uses the technical phrase “appropriations subject to limitation.” See California Constitution, Article XIIIB, Section 5. This cap is formally known as the State Appropriations Limit, but is more commonly called the Gann Limit.¹³The spending cap applies to the state as well as to local governments.

In contrast, withdrawals from state reserves as well as expenditures of withdrawn funds do not count as spending for the purpose of the Gann Limit.¹⁴California Constitution, Article XIIIB, Section 5. In other words, under current constitutional rules, tax dollars count toward the spending cap when they go into a reserve, but do not count toward the cap when they come out.

As a result, in years when state revenues are growing rapidly and the state is at risk of exceeding the spending cap, state leaders cannot bolster California’s fiscal resilience by further building up reserves, because doing so would put the state over the spending limit.¹⁵Revenues that are projected to exceed the spending limit can only be used in a few narrow ways if state leaders want to avoid going over the cap. If the state exceeds the cap for two consecutive years, half must go to taxpayers and the other half must go to TK-14 education on a per-pupil basis.

Proposition 2

Prop. 2 would alter the relationship between deposits/withdrawals and the Gann Limit for two state reserves: the rainy day fund (BSA) and the Projected Surplus Temporary Holding Account.

• Prop. 2 would change the interaction between the BSA and the Gann Limit. Under Prop. 2, revenues would not count toward the state spending cap when they go into the rainy day fund, but would count when they are withdrawn.
• Prop. 2 would change the interaction between the Projected Surplus Temporary Holding Account and the Gann Limit. The holding account is used to temporarily set aside anticipated surplus revenues for up to one year. Under Prop. 2, revenues deposited into the holding account — up to a cap — would not count toward the Gann Limit, but they would count when they come out. This cap would be equal to 10% of total General Fund tax revenues in the year the transfer is made. For example, if General Fund tax revenues were estimated to total $250 billion, then up to $25 billion could go into the holding account without counting toward the Gann Limit (but would count toward the Gann Limit when withdrawn). However, if the holding account deposit exceeded $25 billion, then the excess amount would count toward the Gann Limit (but would not count when withdrawn).

Changes How a Budget Emergency May Be Declared

Current Law

The state Constitution requires the governor to declare a budget emergency in order to:

• Suspend or reduce a required deposit into the rainy day fund (BSA) or the Public Schools System Stabilization Account (PSSSA), or
• Withdraw funds from the BSA or the PSSSA.¹⁶For a description of the PSSSA, or schools reserve, see California Budget & Policy Center, California’s Rainy Day Fund and Other Budget Reserves Overview (April 2026).

To declare a budget emergency, the governor signs a proclamation. It may be signed very late in the fiscal year, including after the June 15 constitutional deadline for the Legislature to pass the budget. For example, in 2025, Governor Newsom issued a budget emergency proclamation on June 27 — well after the Legislature passed the budget and just three days before the end of the 2024-25 fiscal year.

This misaligned timing puts the Legislature in the awkward position of passing a budget that assumes a budget emergency before the governor has made it official.

Proposition 2

Prop. 2 would create a simplified pathway for declaring a budget emergency. This alternative pathway is intended to prevent a situation where the governor suggests a budget emergency will be declared, but then fails to issue a proclamation before the Legislature’s June 15 constitutional deadline to pass the budget.

Prop. 2 would allow the governor’s May Revision, which is due out by May 14, to constitute the proclamation of a budget emergency if two conditions were met:

• First, the conditions required for a budget emergency would have to exist.
• Second, the May Revision would have to propose suspending or reducing a required transfer to the BSA or PSSSA and/or withdrawing funds from one or both of these reserves.

In other words, if voters approve Prop. 2, the governor would no longer have to issue a formal proclamation in order for a budget emergency to be operative.

What Would Proposition 2 Not Do?

While Prop. 2 would make a few changes to California’s rainy day fund as well as modestly revise how the Gann Limit works, the measure would largely leave the current rules in place. In addition, Prop. 2 would not touch the state’s constitutional funding requirement for TK-14 schools and community colleges, known as Prop. 98. For example, Prop. 2:

• Maintains the requirement to set aside 1.5% of state General Fund tax revenues each year. Half of these revenues would continue to go into the rainy day fund (BSA), and the other half would continue to be used to pay down certain state debts.
• Continues to allow state leaders to reduce or suspend deposits into the rainy day fund to address a budget emergency, and maintains the current definition of “emergency.” BSA deposits could continue to be reduced or suspended in the event of a budget emergency, which would continue to be defined as 1) a disaster or extreme peril or 2) insufficient General Fund revenues to meet a prior-year spending level.
• Continues to limit the amount of money that may be withdrawn from the rainy day fund to address a budget emergency. State leaders could continue to withdraw only the amount needed to address a budget emergency, and no more than half of the funds could be taken out in the first year of an emergency.
• Continues to prohibit state leaders from suspending debt payments to address a budget emergency. State leaders would continue to be prevented from reducing or canceling required debt payments, even if the state faced a disaster or a severe budget shortfall.
• Does not make any changes to the Prop. 98 minimum funding guarantee for TK-14 education. Under the state Constitution, the state is required to set aside a portion of revenues for schools and community colleges each year based on various inputs and formulas. Prop. 2 does not make any changes to the formulas or inputs that determine the annual minimum guarantee calculation.
• Maintains the current rules for California’s TK-14 education reserve. Prop. 2  does not change the rules governing the PSSSA, the state’s reserve for TK-12 schools and community colleges. For example, all of the conditions required to trigger a deposit into the PSSSA would remain intact. This includes strong capital gains-related income tax revenue, General Fund revenue growth that translates to strong growth in the Prop. 98 minimum funding guarantee, and no legislative suspension of the guarantee. 
• Leaves California’s arbitrary spending cap largely untouched. Other than modestly changing the relationship between two state reserves and the Gann Limit, Prop. 2 leaves in place the complex rules that structure California’s spending cap. This cap hinders state leaders’ ability to respond to the needs of Californians even as these needs have changed dramatically since the Gann Limit was created in 1979.

What Would Proposition 2 Mean for California?

This section explores the implications of several key provisions of Prop. 2, specifically:

• Raising the rainy day fund cap to from 10% to 20% of General Fund tax revenues,
• Setting aside more General Fund revenues during “boom” years,
• Expanding the types of state debt that may be paid down with set-aside revenues, including unemployment insurance loans and certain TK-14 education obligations, and
• Changing the relationship between two state reserves and the state spending cap (the Gann Limit).

This section also considers the implications of maintaining two current rainy day fund provisions that Prop. 2 would leave in place, specifically:

• Continuing to prohibit state leaders from reducing or suspending required debt payments during a budget emergency, and
• Maintaining the current definition of what qualifies as a budget emergency.

What Are the Implications of Raising the Rainy Day Fund (BSA) Cap to 20% of General Fund Tax Revenues?

Under Prop. 2, the maximum size of the rainy day fund would double, rising from 10% to 20% of General Fund tax revenues. With a higher cap, the rainy day fund would have the potential to grow substantially larger. This, in turn, would provide a larger “cushion” for the state budget, helping state leaders to better protect vital services when revenues drop during economic downturns and reducing the need for draconian spending cuts that harm Californians.

If the BSA balance were ever to reach the higher 20% cap, the annual General Fund revenues that would otherwise be deposited into the fund (“spillover” revenue) would instead be spent on infrastructure, as under current law. However, with a higher cap, the state would reach the BSA limit less frequently than is currently the case with a 10% cap. Consequently, over time there would be less spillover revenue available for infrastructure investments. On the other hand, the rainy day fund would likely hold a larger balance to help address a budget emergency.

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What Are the Implications of Setting Aside More Revenue in “Boom” Years?

Prop. 2 would require the state to set aside more revenue in years when capital gains revenues spike. This change would allow the state to build up the rainy day fund and pay down certain debts faster, reducing future General Fund cost pressures, while modestly curtailing General Fund revenue available for immediate spending needs.

If Prop 2’s “excess” capital gains provisions had been in place between 2010-11 and 2023-24, California would have had to set aside more General Fund revenue in six of those 14 years. This additional set-aside would have amounted to less than 1% or 2% of total General Fund revenue in each of those six years. Capital gains revenue is difficult to project. However, if a similar pattern held going forward, Prop. 2 could take hundreds of millions of dollars — or even more than $1 billion — in revenue “off the table” in some years. This would reduce resources available to address urgent needs that arise, but would also help to pay down additional state debt and further build reserves to address future emergencies.

Although “excess” capital gains revenue, by definition, is not a predictable and reliable revenue source and cannot be counted on to fund ongoing services, it could be reasonable to use it to temporarily meet critical needs. For example, the state could provide more funding for food banks in the wake of federal food assistance cuts, boost support for local governments to address homelessness, and pay child care providers before or at the time of service delivery (rather than after) — a change that would increase providers’ financial solvency.

In certain years, Prop. 2 would modestly reduce revenue that could otherwise be used to support vital services as communities across the state are reeling from deep federal cuts and mounting affordability pressures that are compounding long-standing unmet needs.

However, meaningfully addressing Californians’ needs requires significant and sustained new revenue — well beyond the relatively modest revenue that Prop. 2 would occasionally divert to reserves and debt payments. This underscores the need to reform California’s outdated tax base whether or not voters approve Prop. 2.

What Are the Implications of Expanding the Types of Debt That May Be Paid Down with Set-Aside Revenues?

The state Constitution requires a portion of General Fund revenues to be set aside each year for certain debt payments (unfunded pension and state retiree health liabilities). This requirement cannot be reduced or suspended even in a budget emergency — a provision that Prop. 2 would leave in place. In recent years, for example, roughly $1 billion to $2 billion in General Fund revenues each year remained “off the table” and were not available to support urgent spending needs.

Prop. 2 would broaden the allowable uses of set-aside revenues to include unemployment insurance (UI) debt. If policymakers were to use these debt-paydown funds to repay the principal on the state’s federal UI loans, then a cost currently borne by businesses would be shifted to the state.

Prop. 2 would also allow set-aside revenues to be used to pay down certain obligations related to TK-14 education and Medi-Cal that otherwise would be paid out of the General Fund. If policymakers were to use debt-paydown funds for these purposes, then General Fund revenue would be freed up for other purposes.

However, set-aside revenues are limited. If state leaders were to use more of these debt-paydown funds for the new purposes allowed by Prop. 2, then fewer (or no) funds would be available to reduce unfunded pension and state retiree health liabilities — costs that would eventually be borne by the General Fund.

What Are the Implications of Using Set-Aside Revenues to Repay Unemployment Insurance Loans?

Prop. 2 would allow state leaders to use set-aside revenues for “federal loans made to the Unemployment Fund.” California owes the federal government roughly $20 billion it borrowed to cover the cost of workers’ unemployment insurance (UI) benefits beginning during the COVID-19 pandemic, when unemployment spiked. Using debt-paydown funds to reduce the principal on California’s UI debt would shift a cost currently borne by businesses to the state and do nothing to fix California’s broken UI system.

Shifting a Cost Currently Borne by Businesses to the State

California’s state government is not required to repay the principal on federal UI loans. Instead, federal law requires businesses to repay the principal through automatic increases in their federal payroll taxes. This makes sense: California’s UI debt is the result of a broken system. For decades, state leaders have not required businesses to contribute enough to cover the true cost of the unemployment benefits their workers need.

Using set-aside revenues to repay the principal on California’s UI loans would shift a cost currently covered by businesses to the state. Moreover, this approach would reduce the amount of debt-paydown funds available for other purposes, such as reducing unfunded pension liabilities — costs that would eventually be borne by the General Fund. As a result, to the extent that state leaders were to use set-aside revenues to pay down UI debt, then more General Fund revenue would be needed to reduce other state debts, diverting dollars away from providing services to Californians.

Doing Nothing to Fix California’s Broken UI System

The UI system is chronically underfunded because California has failed to modernize the system’s financing to ensure that it generates sufficient revenue to cover the cost of the unemployment benefits workers need.

Consequently, federal loans are expected to become “a permanent feature” of the program, with significant implications for the state’s budget. California typically uses General Fund dollars to pay the interest on these loans, which could total around $1 billion annually in the coming years. Using state dollars to pay the interest on UI loans reduces resources that could otherwise be used to address Californians’ affordability challenges or other needs.

Using debt-paydown funds to reduce the principal on California’s UI debt could modestly reduce the state’s annual interest payments in the near term. However, until state leaders address the broken UI financing system, California is expected to remain locked in a perpetual cycle of debt, necessitating ongoing federal loans and putting constant pressure on the state’s General Fund to cover the annual interest owed.

What Are the Implications of Using Set-Aside Revenues to Repay Certain School and Community College (TK-14) Education Obligations?

Prop. 2 would give state leaders a new option to use set-aside revenues to repay certain TK-14 education obligations. Specifically, the measure would allow state leaders to use these funds to 1) cover Prop. 98 “settle up” payments, as needed, and 2) more quickly phase out an outstanding debt tied to an accounting maneuver that state leaders adopted in the 2023-24 budget to address an issue related to the Prop. 98 minimum funding guarantee. These new options mean that:

State Leaders Could Use Debt-Paydown Funds to Help Address Increases in Prop. 98 Funding Estimates

When state leaders enact a budget, they provide an estimate of the Prop. 98 minimum funding guarantee for that fiscal year. This initial estimate is updated in subsequent years to reflect changes in revenue estimates and other inputs. The updated inputs sometimes increase the Prop. 98 guarantee, which requires the state to provide additional funding through “settle-up” payments.

The state usually recognizes any increases to the Prop. 98 guarantee in subsequent years and provides the required settle-up payments from the state’s General Fund at that point. In some years, however, settle-up payments have been delayed, most recently for fiscal years 2024-25 and 2025-26, partly due to the state’s limited General Fund capacity to fund that growth.

Prop. 2 would allow set-aside revenues to be used to cover any current or future Prop. 98 settle-up obligations. This change would provide state leaders with an additional funding source for making these payments, which they could use at their discretion, potentially in combination with General Fund dollars. However, using debt-paydown funds for this purpose would compete with other allowable uses, such as prefunding state retiree health benefits.

In addition, using debt-paydown funds to make settle-up payments would not necessarily retire this obligation more quickly. Under current law, there is no required schedule for making settle-up payments, and Prop. 2 does not create one. If set-aside revenues were treated as the sole or primary source for settle-up payments, it could take longer to fully pay down these obligations because the amount of set-aside revenues may not align with the size of the obligation in a given year, especially when state revenues decline and the set-aside shrinks.

State Leaders Could Accelerate the State’s Recognition of $6.2 Billion in TK-14 Costs Incurred in 2022-23

In 2023, tax filing deadlines were extended due to winter storms, and state leaders overestimated the amount of tax revenue that would be received later in the year. As a result, the state provided $6.2 billion more to schools and community colleges than the Prop. 98 minimum funding guarantee actually required.

State leaders did not reduce the minimum guarantee to account for the lower revenues. Instead, they set up a schedule to recognize those dollars for accounting purposes in future budgets, starting in 2027-28 and ending in 2039-40. The annual cost is $500 million for the first 12 years, with a smaller amount in the 13th year.

Recognizing these costs will directly reduce General Fund revenues that would otherwise be available in those years for state funding priorities outside of the Prop. 98 guarantee. The sooner this $6.2 billion debt is recognized, the sooner the annual General Fund cost ends and those dollars become available for other purposes.

Prop. 2 would allow state leaders to use set-aside revenues to recognize this $6.2 billion debt, which would mitigate the General Fund impact as well as potentially clear the outstanding balance more quickly. However, using debt-paydown funds for this purpose would compete with other allowable uses, such as reducing state retiree pension liabilities.

What Are the Implications of Changing the Relationship Between Reserves and the State Spending Cap (Gann Limit)?

Prop. 2 would allow state policymakers to save more in strong revenue years to better protect vital public services during economic downturns. This is because deposits into two key reserves would no longer count as spending for the purpose of calculations required by California’s spending cap (the Gann Limit). Instead, these deposits would count toward the Gann Limit only when they are withdrawn.

This change would allow state leaders to build up reserves in years when revenues are strong and the state is close to reaching the spending cap, removing a key drawback of the Gann Limit. This change would also modestly increase “room” under the cap by up to a few billion dollars a year, potentially delaying how long it takes for the state to surpass the limit.

These changes are important. The Gann Limit is an arbitrary cap that hinders state leaders’ ability to respond to the needs of Californians, which have changed dramatically since late 1970s when the cap was established. Meeting the essential needs of residents and building up reserves to address future needs should not be hamstrung by an arbitrary spending cap approved by an earlier generation of voters. 

Prop. 2 would allow policymakers to keep the state under the Gann Limit by making deposits into two reserves — the BSA and the Projected Surplus Temporary Holding Account (“holding account”). Several factors, including which of these accounts were used for this purpose, would determine when the deposited funds could be withdrawn and how they could be spent. Specifically:

• For deposits into the holding account, state law currently requires the funds to be withdrawn within a year — a rule that could be changed by the Legislature.
  • If withdrawing funds from the holding account would cause the state to exceed the spending cap, then policymakers would lose flexibility over how the funds could be used (their use would be governed by the Gann Limit’s restrictive rules).
  • Otherwise, if withdrawing the funds would not cause the state to exceed the limit, policymakers would have full control over the funds.
• For deposits into the BSA, the portion that was constitutionally required to be deposited could not be withdrawn unless a budget emergency was operative. Any discretionary deposits, on the other hand, could be withdrawn at any time.
  • If withdrawing funds from the BSA would cause the state to exceed the spending limit, then policymakers would lose flexibility over how the funds could be used (their use would be governed by the Gann Limit’s restrictive rules).
  • Otherwise, if withdrawing the funds would not cause the state to exceed the limit, policymakers would have full control over the funds.

Although Prop. 2 would take a modest step toward loosening the constraints of the Gann Limit, the limit itself would remain in place and continue to artificially restrict policymakers’ ability to meet state residents’ needs and create an equitable California.

What Are the Implications of Continuing to Prohibit State Leaders from Reducing or Suspending Debt Payments During a Budget Emergency?

Prop. 2 would leave in place the rules that prevent state leaders from reducing or canceling required annual debt payments.¹⁷In contrast, under current law, required deposits into the rainy day fund can be reduced or suspended during a budget emergency — a flexibility that Prop. 2 would maintain. In other words, paying down debt would continue to be prioritized over using those funds to address a disaster or to meet Californians’ basic needs during tough budget years when state revenues are down.

Moreover, under Prop. 2, this prohibition on reducing or suspending debt payments would remain in place for an additional 10 years, through 2039-40, after which these payments would be optional. Under current law, debt payments are required through 2029-30, after which they become optional.

The current rules unreasonably constrain state leaders’ options when there is a budget deficit. As recently as 2025, for example, the state faced a $15 billion budget problem. However, state leaders could not pause the required debt payments, taking a potential budget-balancing tool off the table. As a result, additional budget “solutions,” like freezing Medi-Cal enrollment for certain immigrants and reducing payments to health care clinics, were enacted to close the budget gap, even as the debt payments went forward.

By failing to allow state leaders to reduce or suspend required debt payments, Prop. 2 misses an opportunity to create another budget-balancing tool that could help to close deficits without resorting to harmful cuts.

What Are the Implications of Maintaining the Current Definition of “Budget Emergency”?

Under Prop. 2, state leaders could continue to reduce or suspend a required deposit into the rainy day fund and/or withdraw funds to help address a budget emergency. Prop. 2 also maintains the current definition of a “budget emergency,” which reflects either 1) a disaster or extreme peril or 2) insufficient resources to meet a specified prior-year General Fund spending level.

The current definition of “budget emergency” leaves out federal funds. As such, it fails to recognize the impact of federal funding cuts on California’s ability to support vital public services. For example, H.R. 1, the 2025 federal budget reconciliation bill — the so-called “One Big Beautiful Bill Act” signed into law by President Trump — slashed federal funding for basic needs to help offset the cost of tax breaks for the wealthy and profitable corporations.

“One Big Beautiful Bill Act” signed into law by President Trump — slashed federal funding for basic needs to help offset the cost of tax breaks for the wealthy and profitable corporations.

Millions of Californians will lose health care and food assistance due to H.R. 1. Yet, these massive federal cuts to vital public services do not count as a “budget emergency.” As a result, state leaders cannot tap the rainy day fund to help mitigate — if only temporarily — the impact of these federal funding losses and reduce the harm that H.R. 1 is inflicting on Californians.

By failing to broaden the definition of a “budget emergency” to include federal funding losses, Prop. 2 misses an opportunity to help state leaders reduce the harm of substantial federal cuts to vital public services.

The California Budget & Policy Center is a nonpartisan research and analysis nonprofit and does not endorse or oppose ballot measures. This analysis reflects the institutional position of the Budget Center, developed and reviewed by our policy leadership team.