Prop 2: Supersizing California's Slush Fund

By James Fenkner, CFA

Proposition 2 Doubles California’s Already Bloated Slush Fund

Like all good political deception, the case for Proposition 2, formally known as the Budget Stabilization Account Cap Increase and Gann Limit Changes Amendment, includes a note of truth. California’s tax revenues do swing wildly.

That truth has been twisted by supporters of Prop 2 into a call for the doubling of the amount put aside for “emergencies” or other “unexpected” occurrences. “It’s just a sensible ‘rainy day’ measure,” they say. But if one looks into the proposal, they’ll find that description holds no water.

The real score?

Proposition 2’s passage would create a supersized slush fund out of which billions of unaccountable spending will pour. Its passage will amend the state’s constitution and allow legislators to spend an additional $20 to $25 billion however, whenever, and on whomever they see fit.

Proposition 2 would raise the cap on California’s Budget Stabilization Account from 10 per cent to 20 per cent of General Fund revenues. In boom years, this would create an extra $20 billion to $25 billion of taxpayer funds which sits outside the usual spending constraints. Prop 2’s architecture is that of a huge discretionary reserve under the control of the same people who have spent the past decade treating every surplus as permanent and every shortfall as a reason for additional taxation.

“It’s a Fiscal Emergency!” Really?

The coalition of big spenders advancing Proposition 2 includes Governor Gavin Newsom, Assembly Speaker Robert Rivas, Senate President pro Tem Monique Limón and Assembly member Jesse Gabriel. None are fiscal conservatives who have recently discovered the virtues of restraint. They are counting on a simple marketing strategy to float this idea in November and hope that most voters won’t read the deadly boring small print. Or have forgotten how Sacramento works.

If this constitutional amendment passes, don’t be surprised to find an increase in California’s “Rainy Days.” The process for accessing these funds is easy: the governor simply cries out “emergency” and a simple majority of votes in the legislature releases the money into the general fund.

In the 2024/25 fiscal year, $5 Billion poured out. In the 2025/2026 fiscal year, another $7.1 Billion was drained. A “fiscal emergency” were the governor’s magic words to unlock billions.

Anyone recall the emergency?

California already has mechanisms intended to capture surplus revenue. Proposition 98’s education guarantee and the Gann Limit already impose a degree of discipline on budget spending. Proposition 2 provides the wiggle room to sidestep this established framework by placing enormous sums outside those mandated spending limits. The practical effect of Prop 2 would be less voter influence over a much larger pot of money, rather than tighter control.

Under Prop 2, every time a “rainy day” occurs, California taxpayers will get soaked.

Recurring “Inconveniences”

The scale of the additional slush fund capacity is worthy of perspective. During COVID, the Employment Development Department is estimated to have lost around $20 billion to unemployment fraud. Problems in Medi-Cal provider fraud, In-Home Supportive Services, and homelessness programs, have produced documented losses with estimates of ongoing leakage that run into the billions each year. The state has, on more than one occasion, found itself unable to track outcomes for tens of billions spent on homelessness. Rather than address these billion-dollar leaks with any great urgency, Sacramento politicians are hoping to divert more taxpayer funds under their own control and less public scrutiny.

If the genuine goal were budget stability, one might expect at least some attention to the tax structure that produces the swings or addressing the administrative failures that allow so much of the money to escape once collected.

Large-scale fraud should not be treated as a recurring inconvenience, Yet no structural repair of the budget process appears anywhere in the current Prop 2 proposal.

What Prop 2 does feature is a larger claim on future capital-gains receipts and unencumbered freedom in their subsequent (mis)use.

Way back in 1972 Albert Hammond channeled California’s rainy days as a way to contrast deceptive marketing with the hidden, grim reality beneath it:

“It never rains in California,

But girl, don’t they warn ya?

It pours. Man, it pours.“

Proposition 2 doesn’t fix the plumbing or repair California’s leaky financial roof. It simply pours billions of unaccountable dollars into the hands of the same spend-happy politicians who’ve squandered it before.

Vote NO on Proposition 2.