Your guide to Proposition 2: Lets leaders fatten ‘rainy day’ fund, reduces likelihood of taxpayer rebates

Gov. Gavin Newsom and Democrats in the state Legislature placed Proposition 2 on the November ballot to give government the ability to put more money into savings and create another option for leaders to avoid triggering taxpayer rebates during future budget surpluses.

The measure exempts deposits into state savings accounts from a spending limit that voters previously adopted through a series of ballot measures dating to the late 1970s, and increases the share of general fund tax revenue that can be put aside in reserves.

California

Voter guide to the 2026 California general election

California’s general election takes place on Novemer 3. Learn about L.A.’s city and county races as well races for state office.

Oct. 1, 2026

Under an existing state appropriations restraint, also known as the Gann Limit, lawmakers cannot spend more in the state budget than an amount determined by a formula that takes annual tax proceeds, changes to the population and cost of living into consideration.

Tax revenue above the limit must be divided between schools and refunds to taxpayers. More recent carve-outs in the law also allow leaders to direct excess funds to infrastructure and local government.

The limit applies to most other appropriations of tax revenue, including money that lawmakers tuck away into the “rainy day” fund and other reserves.

California voters also have capped the amount of money lawmakers can set aside in the rainy day fund at 10% of general fund proceeds in a given year.

The proposed changes would exempt deposits into the rainy day fund and a short-term reserve, called the Projected Surplus Temporary Holding Account, from the state appropriations limit. The cap on the rainy day fund would grow from 10% of general fund tax revenue to 20%.

In effect, the measure would allow the governor and the Legislature to put more money into budget reserves, creating another option to avoid triggering rebates.

For example, if the spending limit is $400 billion for the year, and revenue hits $410 billion, the measure would give lawmakers the option to deposit the $10 billion above the spending limit into the rainy day fund, direct the money to infrastructure or give it to local governments, instead of returning the funding to taxpayers and increasing funding for schools.

Newsom, legislative Democrats and the California Democratic Party say the changes will allow the state to save more when the economy is growing and use the funds to lessen cuts to vital programs during a recession or stock market crash.

Reform California, a political action committee started by state Sen. Carl DeMaio (R-San Diego), and legislative Republicans argue the proposal will allow Democrats to spend more money and hold on to revenue that otherwise would go back to taxpayers.

Since taking office, Newsom has argued that it doesn’t make sense for deposits into a savings account to count as spending under state law.

California’s budget revenue also is vulnerable to dramatic and at times unpredictable swings from year to year based on stock market activity. Newsom has said the state should have more flexibility during times of surplus to deposit money into the reserve accounts that lawmakers could then use during deficits to prevent big cuts to social services.

Statewide voters originally adopted the constitutional spending limit during an antitax wave in the late 1970s. Subsequent changes weakened the measure with exemptions to the limit for different kinds of appropriations, such as spending on infrastructure, and made it easier for lawmakers to avoid exceeding the limit and triggering rebates.

Revenue last exceeded the Gann Limit in 2021 when the pandemic left California with a predicted tax surplus of about $75 billion. As he campaigned against a failed recall, the governor set aside about $11.8 billion in cash rebates for middle class and low-income residents under a program he called the “Golden State Stimulus.” The Newsom administration predicted a historic surplus of nearly $100 billion the next year.

But the boom ended up smaller than anticipated and was followed by a predictable bust when federal stimulus dried up. Democrats have continued a pattern of spending more than the state brings in, leaving California with perennial budget shortfalls.

Proposition 2, Democrats say, seeks to even out the ups and downs.