Yes. California’s constitution contains a balanced budget requirement that binds both the Governor and the Legislature: the Governor must propose a balanced budget each January, and the Legislature cannot pass a budget bill that spends more from the General Fund than the revenue estimate written into that same bill.1Justia Law. California Constitution Article IV – Legislative – Section 12 What the requirement does not do is guarantee a healthy budget. “Balanced” in California has a specific accounting meaning that allows the state to close multi-billion-dollar gaps using reserve withdrawals, internal borrowing, deferrals, and revenue forecasts that may not hold up.
What the Constitution Actually Requires
The rule lives in Article IV, Section 12 of the California Constitution, strengthened by Proposition 58 in 2004. Before Prop 58, only the Governor’s January proposal had to balance. Prop 58 extended the obligation to the enacted budget itself: the combined total of all General Fund appropriations, plus any transfer into the Budget Stabilization Account, cannot exceed the General Fund revenue estimate set forth in the budget bill.1Justia Law. California Constitution Article IV – Legislative – Section 12
Two features of that language do a lot of work. First, the comparison is to the revenue estimate written into the bill itself, which the Legislature and Governor control. No independent body certifies the forecast as realistic. If revenues come in below projection after the budget is signed, the budget was still balanced at the moment of adoption. That is how California can enact a balanced budget in June and face a multi-billion-dollar shortfall by the following January.
Second, the Governor’s January proposal must also be balanced on its face. If recommended spending exceeds projected revenue, the Governor has to identify where the additional money will come from.2California Department of Finance. Governor’s Budget
What “Balanced” Means in California
For budget purposes, balance means that total financial resources available for the fiscal year — the fund balance carried over from the prior year, current-year revenues, and authorized transfers — equal or exceed total planned expenditures. California tracks this on what it calls a “budgetary legal basis,” an accounting method unique to the state that recognizes expenditures when funds are encumbered, such as when a contract is signed, rather than when goods or services are actually delivered.3Open FI$Cal Learning Center. Accounting Basis
That is not full accrual accounting. Long-term obligations like unfunded pension liabilities and retiree healthcare costs do not have to be fully reflected in the current year’s balance calculation. California can adopt a balanced budget while carrying hundreds of billions of dollars in long-term debt, and it routinely does. The budget balances the way a household balances its monthly bills while setting the mortgage aside.
The June 15 Deadline and Legislator Pay
The requirement has teeth because of a hard deadline. The Legislature must pass the budget bill by midnight on June 15. If it misses, lawmakers forfeit their salary and expense reimbursements for every day the budget is late, with no retroactive pay allowed.1Justia Law. California Constitution Article IV – Legislative – Section 12 That penalty came from Proposition 25 in 2010, which also lowered the vote threshold for passing a budget from a two-thirds supermajority to a simple majority in each house.4Legislative Analyst’s Office. Proposition 25 – Changes Legislative Vote Requirement to Pass a Budget From Two Thirds to a Simple Majority Since Prop 25 took effect, California has consistently met the June 15 deadline.
The budget process also includes a mid-cycle checkpoint. By May 14 each year, the Governor releases a “May Revision” that updates revenue forecasts and spending estimates based on more recent economic data and actual tax collections.5California Department of Finance. California’s Budget Process In volatile revenue years, the May Revision can reshape the entire picture before the June 15 vote.
When the Budget Falls Out of Balance Mid-Year
A budget that balanced in June may not still balance by December. For that situation, Proposition 58 gives the Governor authority to declare a fiscal emergency, propose legislation to close the gap, and call the Legislature into special session. If lawmakers fail to pass a solution within 45 days, they are barred from acting on any other bills or adjourning until they do.6Legislative Analyst’s Office. Proposition 58 – The California Balanced Budget Act
Short of a formal fiscal emergency, recent budgets have built in “trigger” provisions that automatically cut specific programs if revenues fall below set thresholds.7California Department of Finance. Governor’s Budget Summary 2026-27 The Department of Finance can also adjust appropriations by executive order, and the Governor can direct agencies to freeze hiring, defer contracts, or trim operations. In practice, the budget is a living document that gets revised throughout the year.
Why Balance Is Fragile: Volatile Revenue
The constitutional requirement sits on top of one of the most volatile revenue structures of any state. The personal income tax provides more than 67 percent of General Fund revenues, and a large share of that comes from capital gains and stock-based compensation concentrated among the highest earners.8California Department of Finance. 2025-26 Budget Summary – Revenue Estimates When markets surge, revenue floods in. When they drop, it can disappear quickly.
Capital gains realizations jumped 72 percent from 2020 to 2021, then fell 55 percent from 2021 to 2022. The tax liability of the top one percent of earners dropped 40 percent in a single year while the broader state economy barely moved.8California Department of Finance. 2025-26 Budget Summary – Revenue Estimates That kind of swing can push a budget from surplus to deficit based largely on stock market performance and a handful of very wealthy taxpayers.
The Rainy Day Fund
To absorb that volatility, California maintains the Budget Stabilization Account, commonly called the Rainy Day Fund. Proposition 2, approved in 2014, rewrote the rules and tied the fund directly to the state’s most volatile revenue source.
Two deposit streams feed the account. The state Controller transfers 1.5 percent of estimated General Fund revenues each year, and when capital gains tax revenue exceeds 8 percent of total General Fund tax proceeds, the excess triggers additional required savings. The second stream forces the state to save more during boom years. Half of BSA-related deposits must go toward paying down specified long-term debts, including unfunded pension liabilities, outstanding budgetary loans, and unpaid mandated-cost claims.9Justia Law. California Constitution Article XVI – Public Finance – Section 20 The total balance is capped at 10 percent of General Fund tax proceeds.
The fund is one of the main tools the state uses to meet the balanced budget requirement in bad years. The 2024–25 budget authorized $12.2 billion in BSA withdrawals spread over two fiscal years to help close a $46.8 billion shortfall.10California Department of Finance. California State Budget 2024-25 – Budget Summary The 2025–26 budget solved an $11.8 billion gap in part by continuing a scheduled $7.1 billion BSA withdrawal while keeping combined reserves near $15.7 billion.11California Department of Finance. California State Budget 2025-26 – Budget Summary
What the Requirement Does Not Cover
The balanced budget requirement applies to the annual General Fund budget. It does not require the state to fully fund its long-term obligations. The largest of those are unfunded pension liabilities for the California Public Employees’ Retirement System and the California State Teachers’ Retirement System. The combined unfunded liability across state and local pension systems is estimated in the range of $265 billion to $269 billion. Annual pension contributions appear as line items in the budget, but the total debt owed to future retirees is far larger than anything a single year’s budget addresses.
The Proposition 2 requirement that half of certain BSA deposits go toward debt repayment was designed to chip away at these obligations over time. When the state suspends BSA deposits during deficit years, that debt repayment also gets deferred. The Legislative Analyst’s Office projects annual deficits of $20 billion to $35 billion over the next several years, driven largely by ongoing program costs in areas like Medi-Cal and the structural mismatch between volatile revenue and relatively fixed spending commitments.12Legislative Analyst’s Office. The 2026-27 Budget: Overview of the Governor’s Budget Each of those budgets will be balanced when adopted. The constitutional requirement guarantees that this year’s appropriations match this year’s revenue estimate. It does not guarantee the state is on solid financial ground.