SF Standard: Newsom drained billions from the Rainy Day Fund. Prop 2 won’t stop the next governor

A bigger reserve sounds prudent. But Prop 2 leaves intact the exact rule that lets governors raid it to cover shortfalls of their own making.

When Gavin Newsom took office as governor in January 2019, he inherited a budget signed into law the previous June by Jerry Brown that had $138 billion in general-fund tax revenue. Brown deposited $4.4 billion of that into California’s Rainy Day Fund — money set aside in good years to cover the state in bad ones.

Five years later, Newsom signed a fiscal 2024-25 budget with $207 billion of general-fund tax revenue — 50% more than in his first budget. (The general fund is the state’s main pool of flexible spending money, mostly income and sales tax.)

But instead of making a deposit, Newsom’s budget took $4.9 billion from the Rainy Day Fund.

Why would Newsom and the state Legislature take from the Rainy Day Fund when revenue was up 50% in five years? The answer is that spending had grown even faster than revenue. The same thing happened the next year. Newsom signed a 2025-26 budget with even greater tax revenue ($209 billion) that took $7.1 billion from the Rainy Day Fund because spending had continued to grow faster than revenue.

Since those two budgets were enacted, the Department of Finance has reported that spending grew even faster than those budgets expected. Spending in 2024-25 and 2025-26 was 65% and 75% higher than spending in the year Newsom took office, well above the 50% and 51% growth in tax revenue.

Newsom was able to tap the Rainy Day Fund to cover spending that grew faster than revenue simply by declaring a “budget emergency” and having that declaration ratified by a majority vote of the state Legislature. Under California law, a governor may call a budget emergency if estimated resources in the current or upcoming fiscal year are insufficient to keep spending at the level of the highest of the prior three budgets, adjusted for inflation and population, or in the event of a disaster. In other words, under law — and as Newsom and the Legislature twice demonstrated — the Rainy Day Fund can be invaded even when it’s not raining, simply because spending isn’t as high as it was within the prior three years.

Now there is a proposed amendment to that law on the November ballot — Proposition 2 — that would raise the cap on the Rainy Day Fund from 10% to 20% of the state’s tax revenue while leaving those withdrawal rules essentially untouched.

What good would that do?

Nothing about having more money banked tends to reduce the appetite of lawmakers to spend a windfall — if anything, a fatter cushion often makes elected officials more comfortable committing to new spending, since they can point to the reserve as insurance against a downturn. That’s what Newsom and the Legislature did in 2022, when they authorized the largest single-year increase in general-fund spending ever recorded by the Department of Finance. The 33.7% increase far outpaced the 13% growth in spending in the second-fastest year (1984-85). After enacting the 2021-22 budget, including that explosion in spending, Newsom and legislative leaders issued a statement saying, “With these smart investments and the highest level of reserves in state history, this is a budget that reflects California’s shared values and priorities — and it does so in a sound and fiscally sustainable manner.” Yet just two years later, they were draining reserves to cover much of that spending growth.

On its face, a measure to save more tax revenue might seem appealing. But because Proposition 2 doesn’t change withdrawal rules, a future governor could do exactly as Newsom did: dip into reserves simply because revenue didn’t turn out to be as high as hoped. Unless the withdrawal rules change, a larger reserve just lets governors bake in spending based on optimistic forecasts, knowing they can always dip into reserves if revenue falls short.

The measure also leaves untouched a related mechanism that earmarks a share of surplus revenue for a separate account that pays down pension shortfalls — dollars pension systems can count on even though they created that debt.

Proposition 2 should be rejected and replaced with a measure that limits the ability of governors and legislators to draw from the state’s Rainy Day Fund except for when it’s actually raining.

Originally published in The San Francisco Standard – Opinion on September 14 2026