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Governor Claims Small Surplus; Nonpartisan Analyst Projects Deficit.  The Governor’s budget projects a small “surplus” of $363 million for 2025-26, resulting in part from an increase in revenue projections and the withdrawal of $7.1 billion from state reserves. However, the nonpartisan Legislative Analyst’s Office (LAO) estimated that the state would have a deficit of $2 billion. The difference in the Governor’s and LAO’s projections appears to be the net result of the Governor’s higher revenue projections, offset partially by higher expenditures, though details remain to be sorted out. 

Although this difference is small as a percent of state spending, it is a crucial distinction because recognizing a $2 billion deficit would require proposing the same amount of solutions, which could affect numerous state programs. Since the Governor does not forecast a deficit, the budget does not include any proposed solutions. Also, many Californians would find it strange to claim there is a budget surplus when the state has to withdraw funds from its reserves to pay its bills. 

Revenues Above Levels Previously Projected. The Governor’s budget reflects General Fund revenues of $218 billion in the current 2024-25 fiscal year, higher than the enacted budget level by $10 billion. This total would remain flat at $218 billion in 2025-26 under the Governor’s plan. When considering the three-year budget “window,” the Governor’s budget estimates that General Fund revenues will be higher by nearly $17 billion combined through the 2025‑26 budget year, compared to levels assumed in last summer’s enacted budget. 

Expenditure Growth Momentarily Paused. General Fund expenditures under the Governor’s proposal would reach a revised total of $232 billion in the current fiscal year, which is, surprisingly, $20 billion above the level enacted seven months ago for the 2024-25 budget. Preliminarily, this increase appears to be partially the result of expenditures shifting from 2023-24 into 2024-25, but also an increase of $2.8 billion in Medi-Cal expenditures following recent eligibility expansions. Proposed General Fund expenditures would then decline by about $3 billion to $229 billion in 2025-26 before starting to grow again. When counting all state funds, the 2025-26 budget would reach $322 billion, a decline of about $10 billion from the current year. Federal funds would add another $171 billion in 2025‑26, a slight increase from the current year. 

Massive Deficits Persist Throughout Forecast. The Governor’s multiyear forecast also indicates the state will have annual operating deficits ranging from $13 billion to $19 billion each year through 2028‑29, as illustrated in the chart on the next page. If left unaddressed, these deficits would generate a cumulative deficit of $43 billion by 2028-29. In spite of this dismal projection, the Governor proposes no budget solutions to establish a structurally balanced budget.   

As noted above, the nonpartisan LAO projects lower revenues than does the Governor. The LAO’s forecast also indicates annual operating deficits will be higher than the Governor estimates. The chart below compares these annual deficit forecasts. 

Reserves Severely Diminished After Recent Withdrawals.  The proposed budget would withdraw $7.1 billion from the state’s reserves in 2025-26, as planned during last year’s budget process. This would leave $17 billion in remaining reserves, which is a relatively low 6.8 percent of General Fund resources in 2025-26. The proposed withdrawals and remaining reserve balances include the following: 

• Withdrawal of $7.1 billion from the state’s Rainy Day Fund in 2025-26, in addition to the current year withdrawal of $4.9 billion. These withdrawals would leave $11 billion remaining in the Rainy Day Fund. 
• A deposit of $376 million into the Proposition 98 Rainy Day Fund, leaving a balance of $1.5 billion in that account, which can only be used for education funding.
• A $4.5 billion balance in the discretionary reserve (the Special Fund for Economic Uncertainty).

Housing and Homelessness

Budget Fails to Provide New Funding for Housing Programs. The January budget does not include any new funding for the state’s various housing programs. Rather, the Governor proposes yet another bureaucratic expansion with the creation of a new agency, the California Housing and Homelessness Agency. The proposal would move through the existing process overseen by the Little Hoover Commission, and few details are available at this time. 

No Details, but Housing Policy Principles Outlined. Although the Governor does not include any General Fund for housing programs, the budget does outline what is identified as “policy principles” for housing. These principles include ways to reduce the cost to build, improve accountability, and advance policies that promote climate change initiatives, such as transit-oriented housing development.  It remains to be seen if the Governor will release specific trailer bill language to effectuate these principles or if the budget rhetoric is just intended to mitigate the obvious concerns for the lack of progress in addressing California’s housing woes. 

Budget Fails to Provide New Flexible Funding for Local Governments’ Homelessness Programs. The Governor’s budget fails to include any new General Fund in 2025-26 for the Homeless Housing Assistance and Prevention program, which provides flexible funding necessary to support local governments’ homelessness efforts. 

Encampment Resolution Grant Program. The budget includes $100 million General Fund for the Encampment Resolution Grant Program. The program provides grant funding to assist local governments with resolving critical encampment concerns and transitioning individuals into safe and stable housing.

K-12 Education

Proposition 98 Education. The Governor’s budget includes $137 billion ($83 billion General Fund and $54 billion other funds) for all TK-12 education programs. Proposition 98 funding for TK-12 schools and community colleges in 2025-26 is $119 billion. The budget maintains a Proposition 98 funding level of $99 billion in 2023-24. The revised 2024-25 Proposition 98 guarantee is calculated at $119.2 billion, however, the budget proposes to fund the guarantee at $117.6 billion, for a difference of $1.6 billion. According to the Department of Finance, this is to provide a buffer for changes in the guarantee before the final calculations are made. 

Proposition 98 General Fund spending per pupil would be $18,918 in 2025-26 and $24,764 per pupil from all funding sources. This is a Proposition 98 General Fund increase of $7,041 per pupil, or 59 percent, compared to six years ago in 2019-20, the year before the pandemic started. When accounting for all funds, it is an increase of $7,750 per pupil, or 46 percent. 

Local Control Funding Formula. The Governor’s budget proposes a $2.5 billion increase in the Local Control Funding Formula (LCFF). This reflects a 2.43 percent cost of living adjustment (COLA) and population growth adjustments. 

Proposition 98 Reserve. The budget reflects a revised final balance in the Public School System Stabilization Account of $1.5 billion at the end of 2025-26. This reflects revised deposits of $1.2 billion and $376 million in 2024-25 and 2025-26 respectively, both of which are mandatory. The balance in 2024-25 is $1.2 billion, which does not trigger the previously authorized (but ill-advised) 10 percent cap on local school district reserves in 2025-26. 

Student Support and Discretionary Block Grant. The Governor’s budget proposes $1.8 billion one-time Proposition 98 General Fund for the Student Support and Discretionary Block Grant. According to available information, the funding is intended for career pathways and dual enrollment expansion, teacher recruitment and retention, and professional development for teachers on mathematics, English language arts, and literacy. 

Proposition 2 School Facility Funding. The Governor’s budget notes that the passage of Proposition 2 in November 2024 authorized $8.5 billion in state General Obligation bonds for K-12 schools to be allocated through the School Facility Program. The funding allocation is $4 billion for modernization projects, $3.3 billion for new construction, $600 million for charter schools, and $600 million for career technical education projects. It should be noted that the 2024-25 budget eliminated a planned $550 million one-time General Fund investment in the Preschool, Transitional Kindergarten, and Full Day Kindergarten Facility Grant program, and another planned $875 million one-time General Fund investment in the School Facility Program, in anticipation of the bond passing. 

Literacy Screenings and Instruction. The Governor’s budget proposes $500 million one-time Proposition 98 General Fund for TK-12 Literacy and Mathematics Coaches, which builds upon $500 million one-time Proposition 98 General Fund provided in prior budgets. In addition, the Governor’s budget proposes $40 million one-time Proposition 98 General Fund to support training educators on literacy screenings and other costs, such as screening materials. The 2024 Budget Act also appropriated $25 million one-time Proposition 98 General Fund for professional development related to the implementation of literacy screenings for reading disabilities in kindergarten through second grade.

Higher Education

University Deferrals and Reductions Maintained. The Governor’s budget maintains previously planned deferrals and reductions to the University of California and California State University systems. The University of California’s five percent base increase of $241 million and $31 million for the replacement of 902 nonresident undergraduate students is deferred to 2027-28. The California State University five percent base increase of $252 million is deferred to 2027-28. Under last year’s budget actions, both the University of California and California State University are subject to a 7.95 percent General Fund operations reduction, representing $397 million and $375 million, respectively.  

Community Colleges Categorical Cost of Living Adjustment. The Governor’s budget includes $230 million ongoing Proposition 98 General Fund to provide a 2.4 percent cost-of-living adjustment for Student-Centered Funding Formula apportionments and $30 million ongoing Proposition 98 General Fund for 0.5 percent enrollment growth.

Community College Facilities Bond Funding. Following the voters’ enactment of the Proposition 2 education bond, the budget proposes $52 million one-time bond funds allocated for infrastructure, modernization, and enrollment growth projects for 28 community college facilities.

Credit for Prior Learning Expansion. The Governor’s budget includes $100 million one-time Proposition 98 General Fund ($7 million of which is ongoing) to update and modify credit for prior learning policies. Students’ past experiences, such as military service, could earn course credit.  

Health

Higher Caseload, Pharmacy Costs, and Giveaways Increase Medi-Cal Budget. The Governor’s budget estimates that current Medi-Cal enrollment has increased to 15 million Californians at a cost of $38 billion General Fund in 2024-25, an increase of more than 450,000 individuals and $2.8 billion General Fund over the 2024 Budget Act estimates. The Governor also projects a $1.5 billion General Fund increase in pharmacy expenditures through 2025-26. For the 2025-26 budget year, the Governor proposes a record $42 billion General Fund for Medi-Cal expenditures, a $4.5 billion year-over-year increase from 2024-25, an amount that includes the ongoing costs of prior-year Democrat priorities such as the expansion of Medi-Cal to 1.5 million undocumented individuals and the increase in wage mandates for healthcare facilities, which took effect in October 2024.

Delay of Proposition 35 Implementation Could Irk Medi-Cal Providers. Proposition 35, approved by the voters in November 2024 and supported by a large coalition of Medi-Cal providers, permanently authorizes the state to impose a tax on managed care plans (MCO tax), and restricts use of the MCO tax proceeds to Medi-Cal provider reimbursement rate increases. The Governor’s budget assumes that full implementation of Proposition 35 would be delayed until 2026 after the administration negotiates a new spending plan with the provider coalition. In doing so, the Governor sweeps an additional $1 billion of MCO tax for General Fund relief. Medi-Cal providers may question the Governor’s interpretation of the proposition requirements and could challenge the Governor’s decision to take more MCO tax for budget relief.

Free Diapers for Newborns. The Governor proposes the creation of a new state program to supply three-month’s worth of diapers for every family with a newborn baby. The Governor proposes using $7.4 million in General Fund in 2025-26 and $13 million in future years to cover this new benefit, which would be implemented through state contracts with hospitals. Legislators may question whether this program should be open to all Californians or should be limited to those families truly in economic need. It is also unclear how this proposal would overlap with existing health and human services entitlements.  

Developmental Services

Finally Implementing Rate Increases to Developmentally Disabled Service Providers. The Governor finally funds a long-delayed promise to families with developmentally disabled individuals by including an additional $2.3 billion General Fund through 2025-26 to increase the reimbursement rates for service providers. These rate increases will allow service provider vendors to hire more individuals in order to serve the growing demand for services. The Governor also plans to release a Master Plan for Developmental Services in March 2025 to outline future improvements in the delivery of services. 

Human Services

Department of Social Services Total Budget. The Governor’s proposed budget for the Department of Social Services is $62 billion ($23 billion General Fund) for 2025-26. 

CalWORKs Federal Pilot Program. California was chosen by the federal government in November 2024 to participate in a pilot program that seeks to test alternative performance measures for the Temporary Assistance for Needy Families (TANF) program, known in California as California Work Opportunity and Responsibility to Kids (CalWORKs). While details are still being worked out on how the state will advance the goals of the pilot project, prior authorizations were provided to the Department of Social Services to consider proposals to modify the existing welfare-to-work process, limit sanctions, and repeal the federal work participation rate penalty pass-through. 

CalWORKs Grant Increase. The Governor’s budget includes a 0.2 percent increase to the CalWORKs Maximum Aid Payment levels, estimated to cost $9 million in 2025-26. This increase is funded entirely by the Child Poverty and Family Supplemental Support Subaccount, a fund source that the state previously realigned to counties. While this expansion is being covered by the subaccount, it should be noted that if the subaccount ever has insufficient funding to cover this increase or any prior grant increases, General Fund will be used to backfill the difference.

Child Care and Early Education

Child Care Collective Bargaining and Rate Increases. The Governor’s budget includes $7.1 billion ($4.6 billion General Fund) for child care and development programs in 2025-26. No new child care proposals have been included in the Governor’s budget, but are expected to appear at a later time. The current bargaining agreement with Child Care Providers United (CCPU) expires on June 30, 2025. The Administration is still in negotiations with CCPU for a new agreement, which is likely further complicated by the continued push to roll out an alternative rate methodology. The 2024 budget set a requirement that the Governor and Legislature establish reimbursement rates based on the alternative methodology by no later than July 1, 2025. No details have been provided on the potential cost of the new bargaining agreement with CCPU.

Public Safety

Bare Minimum for Proposition 36 Implementation. The Governor’s budget assumes the state prison population will increase due to Proposition 36 (2024) by 818 inmates in 2024-25 and 1,606 in 2025-26 relative to projections from the 2024-25 May Revision. While the budget does include funding for CDCR to house the additional inmates, it does not include any funding for additional court workload to hear more felony vs. misdemeanor cases, nor does it provide any funding for cities or counties to provide the court-ordered treatment and services to offenders that are at the heart of Proposition 36. The lack of additional funding appears to ignore the clearly expressed will of the voters, nearly 70 percent of whom voted for Proposition 36 despite the Governor’s opposition to the measure. 

Continued Investment in Softening the Prison Experience. The budget proposes $7.8 million in 2025-26 and $13 million annually thereafter to increase staffing and expand rehabilitative programming at the San Quentin Rehabilitation Center. This new funding would further the effort to implement the “California Model” at San Quentin, which focuses on trauma-informed programming, normalization of the physical environment, and generally making prison feel less like prison. It remains to be seen whether making prison more palatable will have a positive or negative impact on public safety in the long term.

Child Pornography and Human Trafficking Investigations. The budget proposes $5 million General Fund ongoing and 12 positions, beginning in 2025-26, for the California Highway Patrol to expand its Computer Crimes Investigation Unit to assist local law enforcement agencies with multi-jurisdictional investigations into human trafficking and the distribution of child sexual abuse material. These resources will help to combat the recent alarming increase in child pornography that has been closely linked with human trafficking.

Partial Reversal of Ill-Advised Trial Court Reduction. The 2024-25 Budget Act included a $97 million unallocated reduction to trial court operations as part of a blanket 8 percent reduction to state operations applied to most state departments. This unallocated reduction would have required courts to re-calendar cases to meet statutory timelines for criminal caseloads, which ultimately would have led to worsening backlogs of civil cases. The Governor’s proposed budget reverses $42 million of the $97 million reduction. While this is an improvement, the trial courts still face a $55 million reduction in 2024-25 and ongoing, which unfortunately means civil case delays and backlogs are still likely.

Energy and Utilities

Port Upgrades for Offshore Wind Development.  The Governor proposes $228 million from the California Climate Bond (Proposition 4, 2024) for upgrades to California ports to accommodate the development of offshore wind electricity generation. Of the $10 billion bond approved by voters, $850 million is for energy infrastructure, with $475 million specifically to develop a system of floating wind turbines off the California coast. Spending taxpayer dollars on port upgrades prior to fully assessing the environmental impacts and viability of floating windmills may be placing the cart before the horse. 

Resources and Environment 

Overall Climate Spending Relies on Bond Funds. The Governor’s budget heavily relies on allocating $2.7 billion in funds from the recently passed Climate Bond (Proposition 4) to manage the state’s resources and address an array of environmental and infrastructure challenges. While the budget is substantial, it lacks strategic integration and prioritizes short-term spending over long-term, integrated solutions. Taxpayers deserve a more transparent and strategic approach that will provide lasting environmental and economic benefits. Significant spending priorities are outlined in the following paragraphs. 

Water Projects. $232 million is earmarked for dam safety, $183 million for water quality, $173 million for flood management, $153 million for water reuse, $148 million for Salton Sea restoration, and $174 million for water storage. However, the budget overlooks opportunities to link water quality with flood management, potentially leaving communities vulnerable to disasters and higher future costs.

Wildfire Prevention and Mitigation. The budget proposes $325 million from the bond for fire-related issues, including $82 million for forest health, $80 million for regional efforts, $59 million for local fire grants, and smaller amounts for state lands and wildfire mitigation. Without a clear focus on long-term forest management or ensuring grants are used effectively, however, these measures may fall short of reducing fire risks or addressing California’s escalating wildfire crisis.

Coastal Resilience. Proposed spending includes $31 million for resilience projects, $20 million for sea level rise mitigation, and $8.5 million for dam removal. However, these efforts fail to prioritize the most at-risk areas or involve communities in planning, potentially wasting resources on projects that lack local support or urgency.

Extreme Heat Mitigation. With $47 million for urban greening, $38 million for fairground updates, and $16 million for community programs, the budget addresses extreme heat but misses opportunities to invest in innovative cooling technologies, leaving many areas unprepared for intensifying heat waves.

Biodiversity. $176 million supports fish and wildlife conservation, $80 million goes to state conservancies, and $9.4 million is allocated for tribal nature-based projects. Tribal initiatives, however, receive disproportionately low funding, and the lack of coordination with wildfire prevention efforts could reduce overall effectiveness.

Climate-Smart Agriculture. Allocations include $38 million for water efficiency, $36 million for healthy soils, and $20 million for invasive species. The budget neglects nutrient management and pest control, which are vital for scalable, sustainable agriculture.

Outdoor Access. Parks receive $190 million for statewide programs, $84 million for deferred maintenance, and $11 million for recreation. The Legislature may want to question why critical safety upgrades aren’t prioritized or why funds aren’t directed toward multi-use facilities to increase park accessibility and utility.

Offsetting General Fund Expenditures with Bond Funds. The plan shifts $273 million from General Fund obligations to Climate Bond funding for land stewardship, recycling, and dam safety. This lacks transparency, as the selection criteria for these projects remain unclear, raising concerns about fiscal accountability.

Transportation Fuel. The budget allocates $2.3 million to explore higher ethanol blends (E15). While a step forward, the plan overlooks the potential costs and benefits of transitioning, risking ineffective policies without adequate scientific backing or stakeholder input.

Tax Policy

Single Sales Factor Would Increase Taxes on Corporations. The Governor’s budget would increase General Fund revenues by $330 million in 2025-26 as a result of requiring multi-state financial firms to use a mandatory single sales factor policy instead of the equally weighted three-factor formula. With this change, a California-based corporation with significant payroll and property in the state could be able to reduce its tax bill with the proposed switch to a single sales factor, but an out-of-state corporation that has relatively high sales in California compared to its property and payroll would see the tax liability of the company increase. 

Retirement Income Exclusion for Vets. The budget includes a reduction of $130 million in General Fund revenue (projected loss of $85 million General Fund annually thereafter) as a result of excluding from taxable income military retirement and survivor benefit payments received by a veteran from the federal government. The proposal would exclude up to $20,000 and would be limited to taxpayers with up to $250,000 in income for joint filers, and $125,000 in income for single filers.

Wildfire Settlements Income Exclusion. The budget proposes to exempt all wildfire settlements from state taxation for settlements paid in tax years 2025 through 2029, regardless of when the fire occurred. Republicans have proposed similar exemptions in the past that were not enacted, so this proposal is a welcome move to align with those previous efforts. 

Extension of Pass-Through Entity Elective Tax. The budget proposes to extend the state’s pass-through elective tax if the federal government extends the state and local tax payment changes enacted in the Tax Cut and Jobs Act of 2017. These tax policies are set to expire after 2025.

Business Support, Workforce Development and Employment 

Expands the Hollywood Film Tax Credit. The Governor’s January budget prioritizes the Film and Television Tax credit program, increasing the available tax credits from $330 million to $750 million annually from 2025-26 through 2029-30. The budget assumes a revenue reduction of $15 million in 2025-26, growing to more than $200 million annually. 

CalCompetes Grant Program Prioritized. The budget proposes $60 million General Fund for the CalCompetes Grant program, which was created in 2021-22 and is meant to provide financial assistance to businesses unable to participate in the CalCompetes Tax Credit program.

New Funding for Social Enterprises. The budget includes $17 million General Fund for the Regional Initiative for Social Enterprises Program, a grant program intended to provide specialized support to people facing high barriers to work, connecting employment social businesses with the other job training programs. 

Interest Payment for Unemployment Debt. The Governor’s budget includes $634 million (General Fund) for the annual interest payment on the state’s growing $21 billion Unemployment Insurance loan from the federal government. Previously, the Governor planned to use $50 million from the Employment Training Fund (paid by employers) to cover a portion of the 2025-26 payment. However, after the current year $100 million interest payment from this fund, it was determined further interest payments would require reductions to employment training programs meant to create a skilled and productive workforce. These interest payments and the increased tax burden on California businesses would have been avoided if the Governor had used past surplus funds to pay off the federal loan.

Employment Development Department Problems. The proposed budget includes $124 million ($62 million General Fund) for the Employment Development Department’s computer systems, improved service for claimants, and fraud prevention. This money would fund the fourth year of a five‑year modernization plan which began in 2022-23. 

Erosion of State Operations Savings and Vacancy Sweep. In order to help address last year’s $71 billion deficit, the 2024-25 budget authorized statewide operations savings of up to 7.95 percent and the elimination of 10,000 vacant state positions.The Governor’s budget now reflects lower-than-projected results from these two actions. Savings for the 7.95 operations reductions are now projected to be $1.2 billion in 2025-26 and thereafter, compared to last year’s assumed savings of $2.7 billion. The number of vacancies swept would be 6,500, rather than 10,000, and the resulting savings would be $234 million General Fund, rather than the previously assumed $763 million. During last year’s budget process, the nonpartisan LAO and Senate Republicans raised concerns that the promised savings would in fact not appear as promised, and the Governor’s proposal now validates these concerns. 

Transportation

Gas Taxes Increase Again. Despite claims to prioritize affordability for Californians, the Governor proposes no changes to existing law, continuing the automatic annual tax increases to gasoline and diesel fuel. Gasoline taxes are estimated to increase as of July 1, 2025, by 1.1 cents per gallon (cpg), or 1.8 percent, to 60.7 cpg, and diesel fuel taxes would increase by 0.8 cpg, or 1.7 percent, to 46.2 cpg. 

Community Development

Expands the Governor’s College Corp Volunteer Program. The budget provides $68 million in 2025-26 and $84 million ongoing, permanently establishing the College Corp Program within the Governor’s Office of Service and Community Engagement.

Capital Funding for Non-Profit Technology Center. The budget provides $25 million to reimburse Natcast, a non-profit entity designated to operate the National Semiconductor Technology Center. The new facility is expected to bring in hundreds of millions of dollars in new research funding and create more than 200 new jobs over the next ten years.

Another New “Feel Good” Program. The budget would provide $5 million General Fund to launch what would be known as a “Belonging Campaign” within the Administration. This new program would include research projects to evaluate how Californians define belonging and how connected they feel to their communities.