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Governor proposes rebuilding Proposition 98 stabilization reserve; LAO endorses cautious approach
Summary
DOF and the LAO told the committee the governor’s budget anticipates mandatory and discretionary deposits to the Proposition 98 Reserve; both offices said rebuilding the reserve helps manage future volatility tied to capital gains revenue.
The Department of Finance told the Assembly Budget Subcommittee that higher capital gains forecasts and other revenue growth would allow a discretionary rebuild of the Proposition 98 Reserve — the state’s K–14 stabilization account — in the governor’s budget.
Alex Shope said the 2024 Budget Act anticipated a mandatory withdrawal in 2023–24 followed by a discretionary deposit of about $1.1 billion in 2024–25. The governor’s January update reflects higher capital gains and projects a mandatory deposit of about $1.2 billion in 2024–25, plus additional discretionary deposits that would bring the reserve to roughly $1.5 billion by the end of 2025–26, the department said.
Ken Capone of the Legislative Analyst’s Office supported rebuilding the reserve as a tool for managing Prop 98 volatility. The LAO noted the reserve is designed to smooth the portion of school funding attributable to volatile capital gains revenue and cautioned that required deposits themselves can swing significantly year to year.
Why it matters: A larger stabilization reserve lets the state smooth spending across economic cycles and reduce the need for abrupt program cuts or deferrals if revenues decline. The LAO said the reserve was a major factor preventing program reductions during the last downturn.
The committee asked technical questions about how discretionary deposits would be recorded and how they would affect school district reserve caps. Finance said updated deposit estimates would be finalized as revenues are revised.
