Latest / Groundwork Policy / 2026 California Props 2, 42, and 37: What They Actually Do

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2026 California Props 2, 42, and 37: What They Actually Do · Groundwork Policy

• Sean Bhardwaj: Today, a change to California's constitution that went from introduction to your ballot in four days without a single committee hearing. James Joyce III: A hundred and twelve million dollar campaign to protect your retirement account from attacks California doesn't have. Sean Bhardwaj: And a twenty five billion dollar home loan program that nobody has filed a single argument against. This is Groundwork, the podcast where we take what's being decided at the local, regional, and state levels and tell you what it actually does to you, your business, and your community, and most importantly, what you can do about it. I'm Sean Bhardwaj. I work with business owners and leaders, so I read every policy the way they would. What will this do to my organization? James Joyce III: And I'm James Joyce. I was trained as a journalist and I've worked inside government for more than a decade, so I know some of the players and how the game gets played. We do the homework and follow the money, so you see what each choice gets you, and we'll each tell you where we land. Where you land is your call. Sean Bhardwaj: We're continuing our ballot rundown with three more of California's 14 state measures: Props 2, 42, and 37. Prop 2 is about California's rainy day fund, the savings account the state draws on when tax money comes up short. It would let the fund grow bigger and fill faster in boom years. And it changes how those savings count against the spending limit voters set decades ago, which is what the no side is fighting. James, for anyone who doesn't read state budgets, what is this spending limit? James Joyce III: Me, I'm anyone, but I do know this one, right? So it's known as the Gann limit after Paul Gann, one of its authors. Voters passed it in nineteen seventy nine, and it caps how much tax money the state can spend each year and caps grow with the state's population and incomes. If the state takes in more than it's allowed to spend over two years, The extra gets split. Half goes to taxpayers in the form of a refund or a rebate, and half goes to schools. Sean Bhardwaj: Saving more in good years sounds like one thing nobody would argue about. James Joyce III: And most of the Capitol doesn't. The governor, the state's firefighters, and the Los Angeles Area Chamber of Commerce back this one. The chief executives of the state's hospital and community clinics associations sign the case for it as well. They say it keeps schools, healthcare, and public safety from paying the price for boom and bust budgets. Against it are the vice chair of the Assembly's Budget Committee, a state senator, and a group that wants the spending limit left as it is. Sean Bhardwaj: Where did this one come from? James Joyce III: The governor has wanted a bigger fund since his January 2024 budget cycle. It was introduced on Monday, June 22nd, and both houses passed it on Thursday, June 25th. Four days from introduction to your ballot, and neither house held a committee hearing on it. This may sound wild, but it's not untypical of leadership led initiatives in Sacramento. especially at the end of a legislative session. The way I read it, the governor and legislative leaders want room to save in boom years without the Gann limit pushing money out the door. And the no side wants the limit and its rebates left alone. Sean Bhardwaj: Here's how the money moves today. Every year, the state sets aside 1.5% of the money coming into its general fund, which is the main budget account. Half of that 1.5% goes into the rainy day fund, and the other half pays down debts. Prop 2 keeps the debt half going until 2040 instead of 2030, and it lets it pay down the roughly $20 billion California owes the federal government for unemployment benefits. When the stock market booms, the state already sets aside some of the extra tax money from investment gains. Prop 2 makes it set aside more, split again between savings and paying down debt. The size of the fund also doubles from 10% to 20% of the state's general fund taxes. James Joyce III: So Sean, this kind of sounds like inside baseball for state budgeting. For anybody wondering, does this have any effect on raising my taxes? Sean Bhardwaj: No, Prop 2 doesn't change a single tax. It changes how much of the money already coming in gets saved instead of spent. James Joyce III: And when a downturn hits, how does that money come back out? Sean Bhardwaj: The governor still has to declare a budget emergency and no more than half the fund can come out in the first year. Then there's the part the official title and summary leave out. Today money going into savings counts as spending under the Gann limit. Prop 2 counts it the right way when it comes back out instead. James Joyce III: So saving counts as spending. Hmm. That one takes a second. Sean Bhardwaj: Picture a kid with an allowance who's allowed to spend $20 a week, but with one odd rule, every dollar they save in their piggy bank counts as a dollar spent. So the week grandma sends an extra $20, is the kid gonna save it or spend it? That's the state when a good year hits the limit, as things stand. The extra can't go into savings, so it goes out the door. Prop 2 counts money as spent when it comes out of savings, not when it goes in. For now, the state is about twenty seven billion dollars under that limit, so no rebate is on the table for this year. James Joyce III: So the current structure seems to disincentivize saving, but doubling the ceiling and the fund isn't even full today? That doesn't make much sense. Sean Bhardwaj: Yeah, it's under even today's ceiling. What's kept it there is withdrawals and skipped deposits. This year's budget skipped a five point four billion dollar deposit the rules called for. In a year the legislature's budget analyst said that revenue was still running high. Prop 2 keeps this power to skip deposits though. James Joyce III: And 20 percent is less than what the LAO recommended. Last year it said to raise the cap in steps to 50 percent and to save more to fill a bucket that big. Sean Bhardwaj: Let's do our box score, which is something we do with every measure. We give it a number from 1 to 10, 1 being not at all, and 10 being a perfect match for whether the label matches what's inside. It's not whether it's the right tool for the job. We'll get to that later. James, does Prop 2 do what it says on the box? James Joyce III: For me, this one gets a 7. the title says it increases the rainy day fund, and it does raise the ceiling and save more in boom years, but the label never mentions the change to the spending limit. That omission can stoke skepticism. Where are you at on this one, Sean? Sean Bhardwaj: An 8, it does what the title says, but the title doesn't mention when savings count against the Gann limit or the ten more years of extra debt payments, and both are material. I'm giving it some grace because this is complex accounting stuff, and I'm not sure anyone but us and our listeners would dive in this far. Who's taking a stand on this one? James Joyce III: So as of October 6, no committee had reported raising money for or against it. The president of the state Board of Education signed the case for it, but few groups have taken a position either way. Sean, if you run a business, why care about the state savings account? Sean Bhardwaj: If you have employees, you're already paying back that federal unemployment loan through higher federal payroll taxes. Prop 2 lets the state put its debt payments towards it, which a budget research group says would shift the cost from businesses to the state. If your organization runs on state money, a bigger cushion means fewer sudden cuts when the economy turns. It works in the other direction too. Money saved in a good year isn't spent that year on services, contracts, or tax relief. It stays in the state treasury, invested, and the state can borrow it for day to day cash until a downturn, which is when it gets spent. James, what happens when a downturn hits? James Joyce III: So after the 2008 crash, the state ran so short on cash that in July 2009 it started paying some of its bills with IOUs. If you were waiting on a state tax refund that summer, you could get a piece of paper promising to pay you later with interest instead of a check. About one point nine billion of them went out in six weeks. Sean Bhardwaj: And the businesses that sold to the state got them too. For all of us, about half the state's main budget goes to schools, community colleges, and the state universities. In those same years, the state reduced school spending by more than $16 billion over two budgets. There's a tension between spending on what we need now and holding money for when we'll need it more. Is a bigger rainy day fund filled faster in boom years a good way to protect funding for education, healthcare, and public safety when the economy turns down? James Joyce III: The goal's right, and most of the design is too. Saving in good years is good government. And money in the rainy day fund still can't come out without an emergency. My hang up is that it's a bigger bucket that the legislature already hasn't been filling. And The budget just skipped that $5.4 billion deposit. Perhaps this is because of the disincentive to save instead of spend under the current rules. So maybe this does get the job done. Sean Bhardwaj: I like that it means more savings and more debt paid down without raising taxes, and it gives services a cushion when times change. Businesses are used to keeping a real operating reserve, and the state should too. Predictability matters the most when times are unpredictable. That's worth trading away the chance of a rebate in some good years. And my hope is that with better governance to help businesses grow, there are many more good years ahead. James. If the goal is more savings for a downturn, why not make it harder to skip a deposit in the first place? James Joyce III: Well, before I answer that, Sean, let me elevate something that you just said that I think is foundational to our work. You said predictability matters most when times are unpredictable. I love that concept, and that works beyond this proposition alone. Okay, to your question, why not make it harder to skip a deposit? Well, skipping one already takes the governor declaring a budget emergency and legis the legislature passing a bill. Raise that bar and skipping gets harder in in a real recession too, when a budget has to pass fast. Sean Bhardwaj: A yes means the state would save more of its tax money in a rainy day fund allowed to grow to twice today's ceiling, keep making extra debt payments to 2040, and count those savings against the spending limit when they're spent, not when they're saved. A no means today's rules stay. If it passes, who decides how much actually gets saved? James Joyce III: The governor's budget in January 2027 and the legislature's vote on it by June are the first ones written under the new rules. Your assembly member and state senator vote on what gets saved and what gets skipped. Sean Bhardwaj: And if it fails? James Joyce III: The 10% ceiling stays. And the extra debt payments end in twenty thirty. Changing that takes another vote of the people and it starts with the same two offices when the new legislature gets to work this winter. Sean Bhardwaj: That covers Prop 2. Next, Prop 42. Prop 42 would change the state constitution to ban any new state tax on owning personal property from your retirement account to the things in your house. It would also ban, with one narrow exception, any new state tax that reaches back to what you did or where you lived before it took effect. And there's a hundred and twelve million dollar campaign behind it to try to protect you from attacks California doesn't have. James, for anyone who hears property and just thinks of a house, what's personal property in this context? James Joyce III: For this context, it's everything that you own that isn't land or a building. Your car, your savings, your retirement accounts, stocks, a piece of a business, even your furniture. Real estate has its own rules and Prop forty two doesn't touch any of those. Sean Bhardwaj: A ban on taxing your savings is gonna sound good to almost anyone. James Joyce III: Sure, and California doesn't tax owning your savings right now. The yes side is firefighters, building trades, police and small business groups, and since October 9, the governor. They say it protects retirement and life savings from new state taxes and keeps the state from changing the rules after the fact. The no side, led by the Healthcare Workers Union, the same one that put Prop 40 on the ballot, says it's designed specifically to undo the billionaire tax. Sean Bhardwaj: So remind us what Prop 40 does. James Joyce III: Prop 40 is the one time 5% tax on California's billionaires' net worth, what they own minus what they owe, mostly for healthcare. That's what it would fund. It applies to people, billionaires only, who lived here on January 1 of this year. Prop forty two bans both of those for any new tax, taxing what people own other than real estate, and taxing people based on where they live before the tax took effect. And if it gets more yes votes than Prop 40 on the on this ballot, that measure is void. Sean Bhardwaj: That makes this as much about Prop 40 as anyone's savings. James Joyce III: CalMatters reports that billionaire Google co founder Sergey Brin funded it and put it on the ballot to defeat the billionaire tax. Nearly all of its money comes through one committee, whose top donors are Brin and venture investor John Doerr. If both 40 and 42 passes and 42 gets more yes votes, a court could stop Prop 40 from taking effect, even with a majority behind it. My read is that the billionaire tax's opponents wrote a rule that could cancel it this year and keeps any tax like it out until voters change the Constitution again. Sean Bhardwaj: Here's what's in the text. For any law passed since January 1st of this year, the state can't tax owning personal property, retirement accounts, stocks, mutual funds, a stake in a business, digital assets like crypto, intellectual property, and personal belongings. Taxes that are already in place and collected by the end of 2025 stay, like the license fee on your car, the county's yearly tax on business equipment, and the income tax on what comes out of a 401(k). So this doesn't really affect your retirement accounts. James Joyce III: And there was something you mentioned about taxes that reach back. What's that about? Sean Bhardwaj: No new state tax can reach back to something you did or a status like where you lived before it took effect. The one exception is the legislature in a declared emergency reaching back no more than a year with the money going into that emergency. A measure that gets on the ballot by petition gets no exception at all. James Joyce III: The Constitution already lets the legislature tax stocks and bonds though, doesn't it? Sean Bhardwaj: It does, and it's capped at four-tenths of one percent of what they're worth. That's the door the Constitution leaves open on stocks today, a fraction of one percent. And Prop 42 closes it for any new tax. There's a line the summary skip. The text says that if Prop 40 got more votes and a court later struck it down, Prop 42 comes back in full. So it's got a zombie clause written to outlast Prop 40 either way. James, does Prop forty two do what it says on the box? James Joyce III: I'd give it about a 4. The title says it bans new state taxes on personal property and certain retroactive taxes, and it does that. But it's named the retirement and personal savings. And it reaches all personal property from stocks to furniture. A bit misleading by my read. How about you? Sean Bhardwaj: A 1, and I'd call it highly misleading. It's sold as protecting your retirement and my retirement, but it changes nothing for most people or most businesses. And with the reach back to January 1st, the line that brings it back if Prop 40 is struck down, it's built to stop one measure. It's the definition of a special interest proposition. We talked about this a little bit already, but who else is writing the checks? James Joyce III: As of October 14th, the Yes Side's biggest donor had put in more than 112 million. All but about 23,000 of that came from one committee. The same committee put more than $100 million into defeating Prop 40 and $58 million into Prop 41. That's the other measure aimed at Prop 40. That's about $275 million from one committee across all three propositions. On the other side, the committee backing Prop 40 and fighting 41 and 42, sponsored by the Healthcare Workers Union, had about $32 million. As of that same date. Sean Bhardwaj: More than eight to one. James Joyce III: And labor's on both sides. For 42, the firefighters and police officers whose members retire on public pensions that the state and local government pays into, plus the building trades and the Governor's with them. That's a tech fortune and a big piece of organized labor on the same side. Sean, does any of this touch what a business pays? Sean Bhardwaj: For businesses, a company's stock, its intellectual property, and its digital assets can't be hit by a new state tax just for owning them. James Joyce III: That's a relief mostly for the people who own a lot of those things. Sean Bhardwaj: For most businesses, it changes nothing they pay today and could cost them later. With one kind of tax off the table, the next budget gap gets closed with the taxes that are left or with cuts, and the legislative analyst says future tax revenue may not grow as much if this measure were to pass. Let's say Prop 3. The top earner income tax from our second episode fails, and schools lose their share of those rates when they expire in 2031. The state can't make that up by taxing stocks, savings, and other holdings. So it looks at what's left and business taxes are on that list. James Joyce III: So picture your ballot on your kitchen counter. A yes for 40 and a yes for 42 both count. And if 42 ends up with more yes votes, 40 could be stopped. It's one of the few places on the ballot where two of your votes affect each other. In September, a PPIC poll had 42 at 54% yes among likely voters. Prop 40 was at 52%. Two points behind it inside the poll's margin of error. I wonder what the prediction markets had to say. Never mind, I don't want to know. I don't play those games. Sean Bhardwaj: For all of us here, no local tax you pay now changes. What's on the line this year is the healthcare money Prop 40 would raise if Prop 42 or Prop 41 stop it. I think we're pretty clearly seeing that they're trying to scare people here to protect what they own that's not being taxed in order to prevent the state from having new options to raise taxes to solve the next budget gap. Is a constitutional ban on new taxes on owning personal property and on taxes that reach back in time a good way to protect Californians' ability to save for their futures? James Joyce III: The ban on taxes that reach back makes sense to me. Nobody can plan if the rules change after the fact. But it's a permanent rule in the Constitution, and it reaches a lot more than savings. That's a hammer when we could really use maybe a carving tool. What's that, a whittling? Sean Bhardwaj: This uses the Constitution to lock out a whole category of taxes. Raising money through people we elect is how government gets its work done, and this takes part of that away from every future legislature and from voters too, unless they change the Constitution again. To me, it's borrowing against the future. Every budget from here on gets fewer options, so a few people can keep the status quo. A yes means the state couldn't create new taxes on owning financial assets or other personal property, or new taxes that can reach back before they took effect. And if 42 gets more yes votes than Prop 40, Prop 40 could be stopped. A no means the state keeps the option to create those taxes. Say both pass. What happens next? James Joyce III: The next step would be a courtroom. Capitol Weekly reported court challenges are almost certain if both pass, and Prop 40's own text sends challenges to it to a court in Sacramento within 60 days, with appeals straight to the state Supreme Court. And if forty two passes and forty doesn't, the next test is the governor's budget in January, the first one written without these taxes as an option. Sean Bhardwaj: What if forty two fails? James Joyce III: Nothing changes in what you pay. A new tax on owning savings or stock would still be possible and it would start with the petition or with your assembly member and state senator, the same door as Prop 2, when the new legislature gets to work this winter. Sean Bhardwaj: That covers Prop forty two. Next, Prop thirty seven. Prop 37 would let the state's housing finance agency, Cal HFA, sell up to twenty five billion dollars in bonds and lend middle income buyers up to 17 percent of the price of a newly built home as a second loan they pay back every month. And no one's filed a single argument against it. James, for anyone who remembers Prop 1 from our second episode, how is this bond different? James Joyce III: So Prop 1 is the kind of bond the state pays back out of its main budget, and about $10 billion of Prop 1 gets repaid that way. Prop 37's bond get paid back only by the buyer's loan payments. The legislative analysts say that means no direct state or local costs. Sean Bhardwaj: Middle class home ownership is about as easy a sell as it gets. James Joyce III: The yes side is the realtors, the carpenters, nurses and teachers, and the state treasurer who sit on the Cal HFA's board. They say it helps working families buy a home at no cost to taxpayers. Prop 37 is led by Robert Hertzberg, a former Assembly Speaker and Senate Majority Leader. I remember him from my time working in the legislature. KQED reports he started thinking about it after the two thousand and eight crash and Ballotpedia quotes him saying home is where the wealth is. To me, it's built for people who earn too much for most housing help and still can't afford to buy here. Sean Bhardwaj: Here's how it works. Cal HFA sells the bonds and lends you up to 17% of a new home's price as a second loan behind your regular mortgage. You pay it back every month at a fixed rate with no penalty for paying it off early. To qualify, you've lived in California for a year, you'll live in the home, and you earn up to twice your area's typical income, which is about $271,000 for a family of four in Ventura County. You have to put in at least 3% down. from your own money. The home has to be newly built, you have to be its first buyer, and the price tops out depends on the area, but it's $1.29 million in Ventura County. James Joyce III: That still leaves a big first mortgage. Sean Bhardwaj: Yeah, put together you can be financed on up to 97% of the price, 3% down, 17% on the second loan, 80% on your regular mortgage. The rate on the second loan isn't set, Cal HFA sets it as favorable to buyers as it can be while still repaying the bonds and running the program. Here's what that looks like in dollars. Take a house at Ventura County's August median for an existing home, which was about $925,000. Put both loans at The weekly average when we calculated this is about seven point four percent. With property tax and insurance, that's about seven thousand two hundred and fifty dollars a month. James Joyce III: For anyone thinking ahead, what happens when you sell? Sean Bhardwaj: You pay it off, like any loan. The text doesn't give the state a share of your gain, and Cal HFA sets the rest of the repayment terms. James Joyce III: And backers say it costs taxpayers nothing. Sean Bhardwaj: The yes side's zero cost leaves out a word. The legislative analyst says no direct cost, and the risk left over by the Hoover Institution's read is pressure for a state rescue if the loans go bad, although it calls that not a certainty. James, does Prop thirty seven do what it says on the box? James Joyce III: Give it a 7. It creates the loan program the title says it does, but for a measure that names consumer protection as a goal, carving its own loan out of a 2025 law is a big gap. How's your score? Sean Bhardwaj: Any, it's the clearest of our three today and it does what the title says. The big unknown is just the rate, and that's Cal HFA's call, and mortgage rates change all the time anyway. Who's lining up on each side? James Joyce III: As of October 14th, the yes side's biggest donors had put in 24 million. About 16 million came through the Realtors' state and national groups. 6 million came from Building a Better California. And that's the committee that's behind Prop 42. And then three carpenters groups put in 1.7 million. Two groups that don't usually agree both oppose this for different reasons. The League of Women Voters says buyers would take out a second monthly payment on terms nobody knows yet, with no priority for first-time buyers. And in some areas, it could help households earning over $300,000 a year. Reform California, the same group that's against Prop 2, calls it a subsidy for rich home developers. The home builders groups haven't taken a position we could find, even though the loans only work on new homes they build. Sean, what's in it for businesses that don't build homes? Sean Bhardwaj: For most businesses, it's about your people. When they can afford to live where they work, they're part of the community they work in. For builders, more buyers who can afford a new home means more reasons to build. Builders who opt-in also take on more liability for unpaid wages on their job sites in exchange for friendlier rules when buyers sue over defects. James Joyce III: If it gets anything built. Sean Bhardwaj: That's the big if. The legislative analyst calls the construction effect unknown. By a Brookings review, past state down payment programs raised prices by less than 1%, and even less where builders could add homes. PPIC puts it plainly. The program's success depends on builders expanding housing inventory. Two measures from our first two episodes work on the supply. Prop 45, the CEQA shot clock, puts housing that opts in on a deadline for environmental review. And Prop 1 borrows to build homes, mostly apartments for low income renters. So Prop thirty seven is bringing more buyers to the table and creating more incentives to build more houses. James, what does that look like for a family here? James Joyce III: Let's say you're a family of four in Ventura County earning right at the median, about $136,000 a year. A common rule of thumb keeps your total debt payments under about 43% of your income. For you, that's about $4,900 a month. A home at the county's median price with this loan runs about seven thousand two hundred and fifty dollars. Even with the help, you're shopping well below the median or you're not buying. Sean Bhardwaj: What I can't get over is what this says. To carry a median home, even with this assistance, 97% financed, a household needs to make around $200,000. That's half again what a typical family of four earns here. So what this means is that if you're earning up to about $271,000 a year, that's middle income. So is the middle class now anything less than earning half a million dollars a year? That's crazy. In Santa Barbara County, August's median home was over the program's price cap. The trade-off is can we help buyers now? And trying to do things in a way that doesn't block them out while we wait to build homes instead of just bidding up prices. Is a state loan for up to 17 percent of a new home's price repaid by the buyer a good way to help middle class Californians own a home with no cost to taxpayers? James Joyce III: Helping people who teach and nurse here own a home here, that's the right goal. It aims to help new homes rather than the ones that are already for sale. And the state's budget isn't on the hook. But it's helped with the down payment that adds a second bill every month at a rate nobody knows yet. I'd want to see what that rate is before calling it built right. Sean Bhardwaj: It can be a good tool, but not on its own. In California, homes are a big part of how families build wealth. And a lot of our tax rules are built around that. It cuts both ways. People need homes, and building more of them slows how fast existing homes gain value. That's just supply and demand. A lot of people who locked in a low mortgage rate during the pandemic can't afford to trade it for today's. So they stay put. And that means the housing inventory and housing supply for new buyers is limited. This doesn't change that. But kept in its lane, it's not a bad idea. There's no direct cost to taxpayers, and it could help a lot of Californians put down roots where they live. A yes means the state would create a new home buying program and could sell up to twenty five billion in bonds paid back by homeowners' payments on their loans. A no means the state wouldn't be required to create it. If it passes James, where's the next decision being made? James Joyce III: At Cal HFA's board, which writes the rules and sets the rate, and has a year to start doing that. That's where the monthly payments get decided for the homes themselves. It's your city council and planning commission every time a new subdivision comes up. Sean Bhardwaj: And if it doesn't pass? James Joyce III: Dream For All. The state's down payment program for first generation buyers keeps going when the state budget funds it, and the legislature could create a program like this by law. That's the same two offices as Prop 2 and Prop forty two, your assembly member and your state senator when they write next year's budget in the spring. Hopefully, our listeners are starting to understand the importance of engaging their elected state representatives on a regular and consistent basis. Sean Bhardwaj: That covers Prop thirty seven and that's our episode. James Joyce III: Next time, our last two state measures. Prop 41 would require audits of programs paid for by new state special taxes and ban new state taxes that are left out of the state spending limit. And Prop 38 would authorize bonds for immunology research. That's the study of the immune system. We'll also get into some of the local measures on your ballots around here in Ventura and Santa Barbara counties. Sean Bhardwaj: Remember to subscribe to Groundwork wherever you're listening, so the next one is in your feed right when it comes out. James Joyce III: Groundwork is a podcast from Common Ground Policy and Public Affairs. The rest of the week, we do this work for businesses and organization. We tell them what's coming at the local, regional, and state levels, what it means, help them decide what to do about it, and see it through with them. Sean Bhardwaj: If you like this, send it to someone you know who needs help filling out their ballot this year. Also, if you have different ideas, questions, or something we didn't get to, tell us in the comments. And if your organization needs support with policy and public affairs, reach out to us at hello at common groundppa.com and let's talk.