California Budget Reserves: BSA, Deposits, and Withdrawals

California budget reserves are held in four separate accounts rather than a single rainy day fund, and together they totaled roughly $23 billion under the 2026-27 Governor’s Budget proposal. Each account has its own rules for deposits and withdrawals, and the largest one, the Budget Stabilization Account, can only be tapped after the Governor formally declares a budget emergency. The structure exists because California’s revenue leans heavily on personal income taxes and capital gains, both of which swing sharply with the economy.

The Four Reserve Accounts

The four accounts serve different purposes and operate under different rules.

The Budget Stabilization Account (BSA) is the largest reserve and the one most people mean by “rainy day fund.” Voters created it through Proposition 58 in 2004 and overhauled it with Proposition 2 in 2014. It carries the strictest access rules.¹
The Special Fund for Economic Uncertainties (SFEU) is the state’s general operating reserve, representing the unreserved balance of the General Fund. The Legislature can tap it at any time with a majority vote, and the Department of Finance can draw on it without legislative approval to cover disaster response after the Governor issues an emergency proclamation.²
The Public School System Stabilization Account (PSSSA) is dedicated to K-14 education funding under the Proposition 98 guarantee. Its deposits and withdrawals follow their own constitutional formulas.³
The Safety Net Reserve is a statutory account meant to protect social services like Medi-Cal and CalWORKs during recessions. There is no required annual deposit, and the Legislature can withdraw funds by majority vote at any time.²

How Money Gets Into the BSA

Proposition 2 set two formulas that together determine the mandatory annual deposit. The first is a flat transfer equal to 1.5 percent of estimated General Fund revenues each fiscal year.⁴ The second kicks in when capital gains tax revenues exceed 8 percent of total General Fund tax proceeds; the excess above that threshold generates an additional required transfer.¹

The 50/50 Split With Debt Repayment

Through the 2029-30 fiscal year, only half of the amount generated by those formulas actually goes into the BSA. The other half must be spent paying down designated state debts, including unfunded pension liabilities, budgetary loans, and outstanding mandate costs.⁴ This was a deliberate choice in Proposition 2: build savings and reduce accumulated obligations at the same time.

After 2029-30 the mandatory debt payments become optional. Any amounts not spent on debt must instead be deposited into the BSA.⁵

The 10 Percent Cap

The BSA cannot exceed 10 percent of General Fund tax proceeds for the fiscal year. Any deposit that would push it above that ceiling is redirected to infrastructure spending, including deferred maintenance on state facilities.⁴ Because the cap is pegged to estimated tax revenues, it rises in strong years and shrinks in weak ones.

How Money Gets Into the Education Reserve

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

Several conditions can suspend PSSSA deposits entirely. 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 the Proposition 98 minimum funding guarantee.⁶ As a result, the PSSSA doesn’t grow steadily the way the BSA is designed to.

How Money Comes Out

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

BSA Withdrawals Require a Budget Emergency

Money can only leave the BSA after the Governor formally declares a budget emergency. The declaration is limited to two scenarios: a natural or man-made disaster, or estimated resources for the current or upcoming fiscal year that 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 an emergency declared, the amount that can come out is capped. In a fiscal emergency (as distinct from a disaster), the Legislature may only withdraw the lesser of two amounts: what’s needed to close the gap, or 50 percent of the BSA balance.¹ This prevents the state from draining the account in a single bad year. If a withdrawal was also made in the immediately preceding fiscal year, however, the 50 percent limit is waived and the remaining balance becomes fully accessible.

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

One exception matters. The Legislature can add discretionary deposits to the BSA beyond what Proposition 2 requires, and those discretionary balances can be withdrawn at any time without an emergency declaration, according to the Legislative Analyst’s Office.²

The Other Accounts

The SFEU is the easiest reserve to access. The Legislature appropriates it by majority vote, and the Department of Finance can tap it unilaterally for disaster response after an emergency proclamation.² The Safety Net Reserve works the same way for the Legislature: a majority vote, no emergency declaration required. Together these two accounts form the first line of defense for routine shortfalls and immediate operational needs.

Where Balances Stand Now

California drew down reserves significantly over consecutive shortfall years. 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 continued with a scheduled $7.1 billion BSA withdrawal, bringing combined reserves to about $15.7 billion, with $11.2 billion remaining in the BSA and $4.5 billion in the SFEU.⁹

The Governor’s 2026-27 proposal projects a recovery. It includes a $3 billion BSA deposit covering two previously suspended payments, bringing 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 approximately $23 billion. The Safety Net Reserve remains at zero.¹⁰

Why Reserve Levels Matter Beyond the Budget

Reserve levels directly influence what California pays to borrow. Fitch Ratings, which rates California’s bonds at AA with a stable outlook, has identified rebuilding reserves as “an important rating consideration going forward.” Its framework includes specific thresholds: combined dedicated reserves below 10 percent of revenues on a sustained basis create downgrade pressure, while reserves at or above 20 percent of revenues could support an upgrade.¹¹

Reserves also interact with the state’s constitutional spending limit under Article XIII B, commonly called the Gann Limit. When state revenues exceed this limit over a two-year period, the excess must be split between taxpayer rebates and K-14 education. The complication is that excess revenues must simultaneously satisfy three separate constitutional requirements: 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, approaching the Gann Limit can force cuts to programs outside K-14 education, including health care, child care, and the state university systems, even as overall revenue grows.¹²

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