California Assembly committee weighs raising rainy day fund cap, broadening deposit rules

The California Assembly Budget Committee on Accountability and Oversight held a public hearing to consider proposals to change the state's Budget Stabilization Account (BSA), commonly called the Rainy Day Fund, including Assemblymember Valencia's ACA 1 and the governor's proposal to raise the BSA cap from 10% to 20% of general fund tax revenue.

The hearing featured witnesses from the Legislative Analyst's Office (LAO), the Department of Finance (DOF), policy groups and labor and taxpayer organizations. Analysts told lawmakers the current constitutional framework (Proposition 2 and the Gann limit, tied to the state appropriations limit) constrains California's ability to save during boom years and that raising the cap and changing deposit rules would materially improve the state's capacity to cover budget shortfalls in future recessions.

Why it matters: California's revenue is unusually volatile and a small share of taxpayers account for a large share of income-tax receipts. LAO modeling presented at the hearing estimated the current rules would let the BSA cover roughly one-third of a modeled set of future shortfalls; the governor's proposal to raise the cap to 20% would raise that coverage to about half, and a more aggressive LAO scenario (phasing to a 50% cap by 2055 and changing deposit rules) would improve preparedness further. Lawmakers repeatedly said any change will need voter approval and must consider trade-offs with near-term public investments.

Most important details: The LAO explained three mechanics of Proposition 2: an annual base deposit equal to 1.5% of general fund tax revenues (split 50/50 between BSA deposits and allowable debt payments) and a more complex excess-capital-gains calculation (capital gains above an 8% threshold are partially treated as required deposits, then split between debt and BSA). Anne Hollingshead of the LAO said, "Proposition 2 really led to the state again building much more in reserves," and walked members through how the base deposit and excess-capital-gains rules function.

The Department of Finance, represented by Lisa Brzezinski, described the governor's January proposal as narrowly focused: raise the constitutional cap on the BSA from 10% to 20% and exclude deposits to the BSA from counting toward the state appropriations (Gann) limit so the state could set aside more revenue without triggering the limit.

Stakeholders offered a range of perspectives. Brian Brennan of the 21stCentury Alliance and Scott Graves of the California Budget & Policy Center both supported stronger reserves but emphasized communication to voters and balance with current needs. Graves said the governor's plan "would facilitate greater savings without being overly rigid and hindering spending to meet Californians' needs." Some speakers urged broader or simpler deposit rules that capture more revenue volatility than the current capital-gains-focused formulas. Others, including the Howard Jarvis Taxpayers Association, warned against exempting deposits if withdrawals or permitted uses were broadened without constraints.

Technical and policy clarifications offered at the hearing: LAO staff said debt payments currently eligible under Proposition 2 have narrowed over time to primarily pension prefunding (CalPERS and CalSTRS) and retiree health prefunding. LAO modeling suggested that historically about 65% of BSA growth over the last decade came from excess capital-gains deposits and 35% from base deposits. Witnesses also noted that some voluntary (statutory) reserve accounts exist, including a new projected-surplus temporary holding account and a safety-net reserve, which can be used alongside the BSA.

Public commenters including labor, anti-poverty and business groups urged different mixes of restraint and spending: some urged stronger BSA protections to avoid deep cuts in downturns; others asked that increased savings not displace investments aimed at poverty, housing and health services. Several speakers also urged pairing any additional debt repayments (for example, using BSA mechanics to pay down federal UI loans) with structural reforms to those programs.

Looking ahead: Committee members discussed how to package reforms for voters, the difficulty of simplifying complex deposit formulas for a ballot measure, and how to balance mandatory constitutional rules against statutory discretionary reserves. No formal vote or motion was recorded at the hearing; members and staff said the measure will continue to be refined before any legislation is finalized and before a voter measure would be placed on the ballot.

The hearing combined technical analysis from LAO and DOF with stakeholder views and public comment, and lawmakers signaled continuing bipartisan interest in enlarging California's rainy day capacity while weighing near-term spending needs and political feasibility.