Q&A: California's balanced budget requirement

Responding to questions and comments on deficits, surpluses, and the Constitution

In advance of Friday’s release of Governor Newsom’s 2026-27 budget proposal, I have been discussing California’s budget-balancing requirements with several people. Below are some questions and answers on that topic.

Question: Do LAO and the administration calculate estimated deficits and surpluses the same way?

Answer: No. There are always methodological differences between the Legislative Analyst’s Office (LAO) and the administration in calculating the size of estimated deficits or surpluses. Methodological differences amplify any substantive differences that exist between the forecasts in projecting current-law revenues, spending, and reserve deposit requirements. The methodological differences often add up to billions of dollars per fiscal year.

Methodological differences generally do not affect whether a Governor’s budget proposal is balanced pursuant to the Constitution. Rather, they often reflect differences in assessing whether a budget estimate reflects current law or policy or, alternatively, a proposal requiring a change in law or policy. In fact, because governors often propose enough cuts and other actions to build a larger basic budget reserve (the Special Fund for Economic Uncertainties, or SFEU) than required, Governor’s budget proposals sometimes balance deficit budgets with billions of dollars to spare.

Question: Does the state have to fix the “structural,” or ongoing, projected deficit this year?

Answer: No. California has been a leader—led for more than 30 years by the LAO—in assessing ongoing, structural budget deficits or surpluses with robust multiyear forecasts. Proposition 2 (2014) formalized a constitutional requirement to project deficits or surpluses for the next four years annually. (Here is the most recent official multiyear budget projection summary, as required by Proposition 2.) But, there is no requirement in the Constitution for enactment of any annual budget that actually eliminates future years’ projected deficits. In reality, many, if not most, public entities forecast future deficits and routinely work to manage those deficits with permanent actions, temporary actions, and accounting tools. While the June 2026 budget for 2026-27 will be balanced pursuant to constitutional requirements, deficits for 2027-28, 2028-29, and 2029-30 may still be projected at that time.

Question: What is California’s budget balancing requirement?

Answer: The Legislature must enact a state General Fund budget that is balanced for a single fiscal year: for example, balancing the 2026-27 fiscal year for the budget to be passed in June 2026. In other words, the budget to be enacted in June 2026 will include actions to close any projected deficit for the 2026-27 fiscal year pursuant to constitutional requirements. These requirements were formalized in their current form with Proposition 58 (March 2004)—specifically the current Section 12(g) of Article IV in the Constitution.

Question: How will we know if the 2026-27 budget is balanced in June 2026 pursuant to Section 12(g)?

Answer: The Department of Finance (Finance) is the official “scorekeeper.” Finance—principally via its Schedule 8 and Schedule 9—keeps track of estimated spending and revenues appropriated in the annual budget act, other legislation, and existing law (including “continuous appropriations”). Schedule 1 and Schedule 10 in the January budget proposal sum up all this information, including whether the estimated SFEU reserve balance at the end of the fiscal year (in this case, the end of the 2026-27 fiscal year) is equal to or greater than zero. That summary information also is in Finance’s budget summaries in January, May, and July. For the budget to be balanced, the estimated SFEU balance at the end of the budget’s fiscal year must be at least zero. It cannot be negative.

The SFEU is the traditional General Fund budget reserve. It existed decades before the current main rainy day fund, which is known as the Budget Stabilization Account (BSA).

Question: Who estimates how much money the General Fund will have available?

Answer: Finance is the scorekeeper, but the budget bill itself largely makes this determination, paired with estimates developed by the administration and in the annual budget process. The budget bill must include a revenue estimate pursuant to Section 12(g) of Article IV. Section 35.50 of the annual budget act includes the General Fund revenue estimate required by Section 12(g). The revenue estimate for the 2025-26 budget act, for example, was in Section 248 of Assembly Bill 102.

Question: What happens if budget estimates prove too optimistic during the course of a fiscal year?

Answer: There is no firm constitutional requirement to address a “midyear” budget shortfall during the fiscal year after passage of the budget in June and the start of that fiscal year on July 1. Generally, it is up to the Legislature whether or not to respond to such midyear shortfalls. In 2008 and 2009, in the most extreme example, midyear budget balancing was necessary because the state literally was running out of cash and had limited access to borrow more from the bond market. Proposition 58 (2004)—in Section 10 of Article IV of the State Constitution—does create a mechanism for a fiscal emergency. Under Section 10, at a certain point after a fiscal emergency declaration by the Governor, the Legislature “may not act on any other bill, nor may the Legislature adjourn for a joint recess” until action is taken. That Proposition 58 requirement still defers greatly to the Legislature on how to respond to a midyear shortfall.

Question: What is the state’s cash situation now?

Answer: Despite the last few years of deficit-correcting actions in the budget and projected future deficits, California’s state government cash position has been very strong in recent years—perhaps the strongest cash position of any subnational government in history.

As of November 30, 2025, according to State Controller’s Office data, the General Fund’s cash balance was $11.6 billion, the SFEU’s cash balance was $3.5 billion, the BSA rainy day fund held $11.2 billion, and other accessible state accounts—principally the state’s many special funds—collectively held balances of more than $70 billion.

This roughly $100 billion of state resources—managed by the Treasurer’s Office in the state’s cash pool and invested in highly liquid, generally stable instruments—has been used by the state recently to help address budget deficits. (See Figure 2 and the accompanying LAO discussion of “the state’s new wall of debt” here.) But these balances generally provide only temporary General Fund budget relief and typically have to be paid back in some way or another within a few years.

The state’s accumulation of massive cash balances results in part from delayed expenditures of budgeted items and also an ethic of more conservative fiscal management, which emerged after the 2008-2009 cash crisis. Part of that change was the passage of Proposition 2, which created the current rainy day fund.

Question: Is the state’s budget balanced, given unfunded pension, retiree health, unemployment insurance, and other liabilities?

Answer: The state’s budget each year reflects current required General Fund and other funds’ costs for these liabilities. Federal and state laws, as applicable, generally require such liabilities to be paid off over many years. Just as households and businesses can see lower long-term costs from paying off debts faster, the same is true for state and local governments. Accordingly, discussions about paying down debts early often are a part of California’s annual budget process. Proposition 2 currently sets aside funds annually for some specified early debt paydowns.