California voters will decide this November whether the state should significantly increase the amount of money it can set aside for economic downturns.
Proposition 2 would change California’s budget rules by doubling the target for the state’s primary rainy day fund and extending requirements for the state to make additional debt payments.
The measure was placed on the ballot by the California Legislature and will appear before voters in the Nov. 3 general election.
Breaking it down
California already maintains a rainy-day fund, formally known as the Budget Stabilization Account, to help the state continue paying for programs when tax revenue falls.
Under current rules, required deposits generally stop once the fund reaches 10% of General Fund tax revenues.
Proposition 2 would increase that threshold to 20%, allowing the state to build a substantially larger financial cushion.
The measure would also require California to save more money during years when revenue from taxes on investment gains is particularly high.
Why does California have a rainy day fund?
California’s tax revenue can fluctuate considerably from year to year, in part because the state relies heavily on income taxes paid by higher-income residents whose earnings can be affected by the stock market and investment gains.
During recessions or major market declines, state revenue can fall sharply.
Money accumulated in reserves can then be used to help maintain funding for schools, health care, public safety and other government services without relying entirely on spending cuts, tax increases or additional borrowing.
California currently has approximately $20 billion in reserves that can be used for any public program, according to the Legislative Analyst’s Office.
What about California’s debt?
Proposition 2 would also change how California handles certain debt payments.
Current rules require the state to make additional payments toward pension and retiree health obligations through 2030.
Proposition 2 would extend the requirement through 2040 and broaden how some of that money could be used.
Those payments could also go toward obligations involving schools and community colleges, borrowing from other state funds and certain federal loans.
What could it mean?
Unlike some of the other propositions on the November ballot, Proposition 2 would not create a new program specifically targeted at Irvine or Orange County.
Its local impact would instead be indirect.
A larger state reserve could give California more flexibility to maintain funding for programs that affect Irvine residents during future economic downturns, including education, health care and other state-supported services.
However, putting additional money into reserves also means those dollars would generally not be available for other state spending when they are being saved.
What voters should watch
The central question for Irvine voters is how much money California should set aside during stronger financial years to prepare for weaker ones.
Proposition 2 would increase the rainy day fund target from 10% to 20% of General Fund tax revenues.
It would also change how deposits into certain reserves are treated under California’s constitutional spending limit.
Supporters argue the changes would help protect state services when revenues decline. Opponents argue the measure’s changes to the spending limit could reduce the likelihood that excess revenues trigger taxpayer rebates and say the measure does not itself provide new funding for public services.
The Legislative Analyst’s Office concludes that the clearest fiscal effect would be higher state budget reserves over time.
What happens next?
Proposition 2 will appear on California ballots in the Nov. 3 general election.
A “yes” vote would change the rules governing California’s budget reserves and require the state to continue making additional debt payments for a longer period.
A “no” vote would leave the existing reserve and debt-payment rules in place.
