The Question

Should the state increase the Budget Stabilization Account (BSA) cap from 10% to 20% of General Fund tax revenue and exclude deposits into the BSA from the state appropriations limit?

The Situation

The General Fund is the account the state uses to pay for most public services like education and health care. Most of the money in the General Fund comes from income, sales, and corporate taxes. Because it is so dependent on taxes, revenue in the General Fund goes up and down a lot depending on how the economy and stock market are doing. 

California has several budget reserves or “rainy day” funds that help to protect public services when the state faces a budget emergency. The state’s largest reserve is the Budget Stabilization Account (BSA). Voters approved two propositions (Prop 58 in 2004 and Prop 2 in 2014) that established this fund and a set of formulas that determine how much the state must deposit into the BSA. Those propositions also determined how much must be used for debt payments each year. When the economy is strong, state revenues rise and more funds can be saved and used to pay off debts. When the economy is weak, the legislature can authorize transfer of funds out of the BSA if the Governor declares a budget emergency.

The 2014 proposition specified the state must set aside 1.5% of the estimated amount of General Fund tax revenues each year. For 15 years – from 2015 to 2030 – half of these funds would be deposited into the BSA, and the other half would be used to reduce certain state debt. (After 2030, the funds could just be deposited into BSA.) In years when tax revenues are high, the state can save even more in the BSA. However, the balance of the BSA is limited to 10% of the total General Fund tax revenue for that fiscal year. Prior to 2026, the BSA balance reached the 10% limit twice — in 2022-23 and 2023-24 — but then dropped as state leaders withdrew funds in subsequent years to address budget shortfalls. 

Also, deposits into the BSA count towards the state appropriations limit whereas withdrawals do not. This means that the amount that is deposited in the BSA is counted towards state spending. 

This was put on the ballot by the legislature. If passed, it would change the California Constitution.

The Proposal

If approved, Prop 2 would raise the limit on the BSA balance from 10% to 20% of General Fund tax revenues, thus allowing the state to build a larger rainy day fund. Proposition 2 would also require the state to make debt payments through 2040 (instead of through 2030). These debt payments would remain equal to the amount deposited into the BSA each year. In addition, the amount set aside for extra debt payments could be used for an expanded set of purposes. 

The measure also changes how reserve deposits and withdrawals are treated relative to the state appropriations limit in that deposits would not count towards the appropriations limit, but withdrawals would.

Fiscal Effects

By continuing to require deposits into the rainy day fund until the balance reaches 20% of General Fund tax revenues, the state would save more over time and reserves would increase. By requiring the state to make extra debt payments through 2040, the state might make more debt payments than it would without Prop 2. 

Supporters Say

• Prop 2 forces more savings rather than spending when tax revenues spike.
• Prop 2 ensures that funding for schools, healthcare, and public safety continues during economic downturns.

Opponents Say

• Prop 2 guarantees more spending not less.
• Tax revenues that exceed spending limits can now be placed in the BSA rather than returned to taxpayers as rebates.