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The AI-driven stock market rally has bolstered California’s coffers, sending revenue soaring. Now lawmakers are asking voters to overhaul the state’s financial reserves to capture more of any future windfall.
A November ballot measure seeks to give California more of a cushion during economic downturns by increasing the share of revenue the state steers into reserves during flush years and exempting deposits from a limit on government spending.
RELATED: What is Proposition 2 before California voters in the 2026 election?
The state has already built its main reserve fund, or rainy day fund, far above pre-pandemic levels but budget analysts have warned that growing spending and California’s progressive tax system — which relies heavily on high earners for income and capital gain tax revenue — leave it vulnerable to market slumps.
Backers of the proposed law, including Governor Gavin Newsom, argue the new measure will expand the state’s rainy day fund at a time when highly anticipated stock offerings by homegrown artificial-intelligence companies offer potential riches.
“California’s revenues are volatile, and we know that strong years don’t last forever,” state Senator John Laird, a Democrat and one of the measure’s co-authors, said in a statement.
A newly approved state budget projects $237 billion in revenue this fiscal year that leaves $15.1 billion in the state’s rainy day fund. The budget has $28.8 billion in total reserves this year, when counting other savings accounts.
SpaceX’s recent initial public offerings along with the highly anticipated debuts of AI darlings OpenAI and Anthropic stand to further augment revenue stemming from California’s largest tech companies — including Apple Inc. and Nvidia Corp. The state can benefit from a company going public because employees’ restricted stock units, their compensation, become taxable upon an IPO.
State officials haven’t projected how much money it expects to gain from upcoming IPOs, noting any estimate would depend on the size, timing and terms of each deal. Projections for Meta Platforms Inc.’s (then known as Facebook) blockbuster 2012 IPO, for instance, fell short after the stock slumped, the state’s Legislative Analyst’s Office, a nonpartisan research bureau, said.
Lawmakers hope the proposed law, which will appear on the November ballot as Proposition 2, would give the state a bigger buffer in the event of a budget shortfall.
The California constitution requires the state to make deposits into its rainy day fund until the balance reaches 10% of general fund tax revenue. The state can set aside more money, but the main reserve is governed by constitutional rules limiting how and when it can be used.
Under the current cap, the state’s rainy day fund would only cover one-third of budget shortfalls over the next 50 years, according to the LAO.
The new measure would raise the current cap by requiring the state to make deposits into the main reserve account until the balance reaches 20% of general fund taxes. It would also exempt these deposits from a limit on government spending.
Those two changes would allow California to cover half of funding shortfalls over the next 50 years, the LAO said.
Additionally, since the state has hit or neared the existing deposit limit several times, had the cap not been in place California would have deposited about $2 billion more in reserves in recent years, according to a 2025 LAO report.
Some conservative lawmakers counter that the ballot measure would undercut provisions in the state constitution meant to limit government spending and ensure excess tax revenue is steered to infrastructure or back to taxpayers as rebates.
Putting additional funds into reserves, they argue, would give appropriators more flexibility to increase spending that they argue the state already can’t afford.
“It’s really hard for me to believe that this is really rooted in trying to be fiscally accountable,” state Assemblymember Tom Lackey, a Republican, said during a June 24 hearing on the proposal. “It seems like it creates more opportunity to spend.”
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