California Budget Reserves: BSA Rules, Deposits, and Withdrawals

California’s budget reserves are held across four separate accounts that together totaled roughly $23 billion under the 2026-27 Governor’s Budget proposal. Each account has its own rules for how money goes in and how money comes out, and those rules exist because the state’s revenue base leans heavily on personal income taxes and capital gains that swing sharply with the economy. A single tech-heavy year can flood the treasury; a downturn can open a multi-billion-dollar hole almost overnight.

The Four Reserve Accounts

California doesn’t keep one rainy day fund. It keeps four, and they don’t work the same way.

The Budget Stabilization Account (BSA) is the largest and the hardest to access. Voters created it through Proposition 58 in 2004 and rewrote its rules through Proposition 2 in 2014. It’s the account most people mean when they say “rainy day fund,” and the Governor must formally declare a budget emergency before any money comes out.¹

The Special Fund for Economic Uncertainties (SFEU) is the state’s general operating reserve. It holds the unreserved balance of the General Fund, and the Legislature can tap it at any time with a majority vote. The Department of Finance can also draw from it without legislative approval to cover disaster response costs after the Governor issues an emergency proclamation.²

The Public School System Stabilization Account (PSSSA) is a reserve for K-14 education under the Proposition 98 guarantee. Its deposits and withdrawals follow their own constitutional formulas and don’t directly affect the General Fund balance in any given year.³

The Safety Net Reserve was established in state law to protect social services such as Medi-Cal and CalWORKs during recessions. Unlike the BSA, no annual deposit is required, and the Legislature can withdraw funds by majority vote at any time.²

How BSA Deposits Are Calculated

Proposition 2 set up two formulas that together determine each year’s mandatory BSA deposit. The first is a flat transfer: the Controller moves an amount equal to 1.5 percent of estimated General Fund revenues into the account every fiscal year.⁴ The second kicks in when capital gains tax revenues exceed 8 percent of total General Fund tax proceeds. Anything above that 8 percent threshold triggers an additional required transfer.¹

The 50/50 Split With Debt Repayment

Through the 2029-30 fiscal year, the amount produced by those two formulas doesn’t all land in the BSA. Half goes to the reserve. The other half must be spent paying down designated state debts, including unfunded pension liabilities, budgetary loans, and outstanding mandate costs.⁴ Voters wrote it this way in Proposition 2 so the state would build savings and reduce accumulated obligations at the same time.

After 2029-30, the debt payments become optional. Any amount not spent on debt repayment must instead be deposited into the BSA.⁵ If the economy cooperates, that shift could accelerate BSA growth in the early 2030s.

The 10 Percent Cap

The BSA has a constitutional ceiling. Its balance cannot exceed 10 percent of General Fund tax proceeds for that fiscal year, and any deposit that would push it over gets redirected to infrastructure spending, including deferred maintenance on state facilities.⁴ Because the cap is pegged to estimated tax revenues, it moves with the economy. Strong revenue growth lifts the cap and makes room for larger deposits; a downturn can shrink it precisely when reserves matter most.

How Education Reserve Deposits Work

The PSSSA follows its own constitutional formulas under Article XVI, Section 21. Deposits track Proposition 98 funding levels: when state support for schools and community colleges exceeds certain adjusted baselines, the surplus flows into the account. Like the BSA, the PSSSA is capped at 10 percent, measured against total General Fund allocations to school and community college districts.⁶

Deposits stop under several conditions. No transfer is made in years when the state owes a “maintenance factor,” which is essentially a catch-up obligation from prior years when Proposition 98 was underfunded. Deposits are also blocked whenever the Legislature suspends Proposition 98’s minimum funding guarantee.⁶ For those reasons, the PSSSA doesn’t grow every year the way the BSA is designed to.

When the State Can Spend Reserves

The BSA is deliberately hard to tap. The other three accounts are not. That asymmetry is the point: the BSA is reserved for genuine emergencies, while the SFEU, Safety Net Reserve, and PSSSA give the Legislature more flexible cushions for routine budget management.

BSA Withdrawals Require an Emergency Declaration

Money can only leave the BSA after the Governor formally declares a “budget emergency.” Two scenarios qualify: a natural or man-made disaster, or estimated resources for the current or upcoming fiscal year are insufficient to maintain General Fund spending at the highest level of the prior three enacted budgets, adjusted for inflation and population growth.¹ Governor Newsom used this process in 2024 to access BSA funds during a multi-billion-dollar shortfall.⁷

Even with a declared emergency, the withdrawal amount is capped. In a fiscal emergency (as opposed to a disaster), the Legislature may withdraw only the lesser of two amounts: what’s needed to close the gap, or 50 percent of the BSA balance.¹ That prevents the state from draining the account in a single bad year. If a withdrawal was also made in the immediately preceding fiscal year, the 50 percent limit is waived and the remaining balance becomes fully accessible.

The 50/50 logic that governs deposits also applies to withdrawals through the 2029-30 fiscal year. Half of withdrawn funds must address the budget deficit, while the other half must go toward paying down specified state debts and unfunded liabilities.⁴

There is one softer path. The Legislature can make discretionary deposits to the BSA above what Proposition 2 requires, and according to the Legislative Analyst’s Office those discretionary balances can be withdrawn at any time without a budget emergency declaration.²

The Other Reserves Are Easier to Reach

The SFEU is the most accessible. The Legislature appropriates it by majority vote, and the Department of Finance can tap it unilaterally for disaster response after the Governor issues an emergency proclamation.² The Safety Net Reserve works the same way legislatively: a majority vote suffices, with no emergency declaration required. Both accounts function as the first line of defense for ordinary shortfalls and immediate operational needs.

Where the Balances Stand Now

California drew down its reserves heavily over the past few years to close consecutive shortfalls. The 2024-25 enacted budget projected total reserves of about $22.2 billion, including $17.6 billion in the BSA, $3.5 billion in the SFEU, and $1.1 billion in the PSSSA. That same budget withdrew $900 million from the Safety Net Reserve, fully depleting it, and scheduled $12.2 billion in BSA withdrawals across two fiscal years.⁸

The 2025-26 enacted budget carried out a scheduled $7.1 billion BSA withdrawal, bringing combined reserves to about $15.7 billion, with $11.2 billion left in the BSA and $4.5 billion in the SFEU.⁹

The Governor’s 2026-27 budget proposal points toward recovery. It includes a $3 billion BSA deposit covering two fiscal years of previously suspended payments, which would bring the BSA to an estimated $14.4 billion. Combined with $4.5 billion in the SFEU and $4.1 billion in the PSSSA, total reserves would reach roughly $23 billion. The Safety Net Reserve stays at zero.¹⁰

Why the Reserve Level Matters Beyond Emergencies

Reserve balances shape two other pieces of California’s fiscal picture. The first is the state’s constitutional spending limit, commonly called the Gann Limit, under Article XIII B. When state revenues exceed the limit over a two-year period, the excess must be split: half returns to taxpayers, half goes to K-14 education. Those excess revenues have to satisfy three constitutional requirements at once: the Gann Limit’s return-to-taxpayers rule, Proposition 98’s education funding minimum, and Proposition 2’s reserve deposit and debt repayment mandates. Because each dollar over the limit can trigger obligations under all three, the combined cost of a single “excess” dollar can exceed one dollar. Approaching the limit can force cuts to programs outside K-14 education, such as health care, child care, and the state university systems, even while overall revenue is growing.¹¹

The second is borrowing cost. Rating agencies watch reserves closely, and their assessments affect interest rates on California’s general obligation bonds. Fitch Ratings, which rates California’s bonds at AA with a stable outlook, has identified rebuilding reserves as “an important rating consideration going forward.” Fitch’s framework sets specific thresholds. Combined dedicated reserves falling below 10 percent of revenues on a sustained basis would generate downgrade pressure. Reserves closer to or above 20 percent of revenues could support an upgrade.¹² After several years of heavy withdrawals, the pace at which the state rebuilds those balances carries real financial stakes over the next few budget cycles.

1
Legislative Analyst’s Office. Evolution of the Balance of the Budget Stabilization Account
2
California Budget & Policy Center. California’s State Budget Reserves Explained
3
California State Senate. California State Senate Committee on Budget and Fiscal Review – Review of California’s Reserve Policy: Looking to the Future
4
Justia. California Constitution Article XVI Section 20 – Public Finance
5
Legislative Analyst’s Office. The 2024-25 Budget: Proposition 2 Debt Payment Proposals
6
Justia. California Constitution Article XVI Section 21 – Public Finance
7
Office of the Governor of California. Executive Department State of California Budget Emergency Proclamation
8
California Department of Finance. California State Budget 2024-25 – Budget Summary
9
California Department of Finance. California State Budget 2025-26 – Budget Summary
10
California State Senate. Summary of the Governor’s Proposed 2026-27 Budget
11
California Budget & Policy Center. How the Gann Limit Threatens Ongoing Investments for Californians
12
Fitch Ratings. Fitch Rates California’s $2.3B GOs ‘AA’; Outlook Stable