California can’t afford to put off Rainy Day Fund reform

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OPINION — More than a decade ago, California Forward (CA FWD) successfully led a voter approved ballot initiative to strengthen the state’s Rainy Day Fund and better prepare for economic downturns. Those reforms helped, but California’s financial safety net is still too small for the scale of the risks ahead.

The Save for California’s Future Act, which was recently approved by the Legislature and will now go before California voters in November, builds on that voter-approved framework and reflects Gov. Gavin Newsom’s longstanding commitment to responsible fiscal stewardship. By strengthening California’s ability to save during strong revenue years, the measure will better prepare the state for future fiscal challenges, including the growing threat of climate-related disasters.

Just as households need savings to manage after a job loss, during periods of high inflation or other financial crises, the Rainy Day Fund is California’s financial backstop during budget emergencies. These funds can be used to prevent cuts to critical services, cover deficits or respond to disasters. 

In 2026-2027, for example, the reserve funds may be needed to fill gaps left after massive cuts in federal funding for health care and essential social net services such as employment assistance, permanent housing and homelessness programs, foster youth and disability services, as well as law enforcement, firefighting services and disaster relief.

Budget volatility is a natural result of the state’s progressive tax system, surging and declining with the ups and downs of the stock market and the amount of taxes paid by the wealthiest Californians. Witness the swing from fiscal year 2021-2022, when California had a $100 billion surplus, to the $38 billion projected deficit in 2024-2025. The volatility baked into the system can lead to inconsistent allocations for programs in good budget years and abrupt cuts and calls for new taxes in tough times. 

Recent AI-driven revenue growth has helped bolster state finances, but California cannot assume those gains will continue forever — and we cannot afford to risk additional budget hits that could cripple disaster response and other vital public services. Given the reality of increasing climate-related natural disasters and political and economic forces beyond the state’s control, now is the time to reform the fund to build stability and resilience.

Policymakers and nonpartisan fiscal experts have consistently concluded that California’s fiscal reserve structure should be strengthened. 

Last year, Assemblymember Avelino Valencia proposed sensible reforms to strengthen the fund. They included increasing the cap on mandatory deposits to the fund from the current 10% of the General Fund to at least 20%, as well as exempting fund deposits from the state’s spending limit.

In 2025, the state Legislative Analyst’s Office (LAO) recommended an even more ambitious reform: Increasing the cap on constitutional reserve deposits to 50% of General Fund taxes, phased in over time until 2055. Deposits would be larger in surplus years. The LAO suggested that the changes would allow the state to enjoy the advantages of its current revenue structure while also protecting critical services for Californians.

The Legislature’s approval of the Save for California’s Future Act reflects the growing consensus around the need for fiscal stability and provides Californians with an opportunity to reinforce the state’s long-term financial stability at the ballot box. It’s a win-win formula as taxpayer advocates, public sector unions and social service providers support prudent reforms.

A robust budget reserve can temper calls for new taxes during economic downturns, while protecting public services and union jobs. Reforms can also prevent short-term budget decisions that degrade years of investments in reducing climate-related risks.

California voters now have the opportunity to strengthen the Rainy Day Fund and build on the fiscal reforms they approved more than a decade ago. California doesn’t get to choose when the next crisis hits, but we can choose whether we’re prepared when it does. 

Lenny Mendonca is co-chair of California Forward’s Board of Directors. Nuin-Tara Key is COO of California Forward.