In late June, Governor Newsom and state leaders reached a deal on the 2024-25 California state budget. Confronted with a substantial shortfall, state leaders negotiated a budget package that presents a mixed bag for California families. Policymakers managed to protect many essential programs, but some financial maneuvers and the continued resistance to significantly raise revenues to help all Californians thrive may hinder progress in future years.

The June budget package rejects many harmful cuts to critical programs initially proposed by Governor Newsom in January and May. State leaders protected many essential programs that Californians rely on, including by drawing on the state’s reserves and delaying some program expansions. However, the budget also relies heavily on borrowing from future budgets, commits a higher percentage of future revenue growth to schools, and only temporarily increases revenues. These decisions could compromise the state’s ability to sustain core programs and stall much-needed investments in the coming years if revenue conditions do not improve.

This analysis highlights key components of the June budget package and examines how it protects — or misses opportunities to enhance — services that aim to improve the well-being of Californians with low incomes, Californians of color, women, immigrants, and others historically excluded from sharing in the state’s wealth.

How did state leaders close the budget shortfall?

State leaders closed a roughly $47 billion General Fund shortfall across the three-year “budget window” (fiscal years 2022-23 through 2024-25) using a broad array of budget tools. The “solutions” in the 2024-25 budget package include:

• $16 billion in spending reductions.
• $13.6 billion from a combination of additional revenue (which is mostly temporary) and internal borrowing from state special funds.
• $6 billion in fund shifts, which transfer certain costs from the General Fund to other state funds.
• Nearly $6 billion in withdrawals from two reserves: the Budget Stabilization Account (also known as the rainy day fund) and the Safety Net Reserve.
• $3.1 billion in funding delays and pauses. This includes delaying, for two years, an expansion of food assistance to undocumented Californians as well as postponing, for six months, a wage increase for people who provide services to Californians with intellectual and developmental disabilities.
• $2.1 billion in deferrals, which postpone certain payments to later years. This includes shifting one month of state employee payroll costs from June 2025 (the last month of the 2024-25 fiscal year) to July 2025 (the first month of the 2025-26 fiscal year).

What happened to Prop. 98? Was school funding protected?

The budget agreement protects funding for Transitional Kindergarten, K-12 schools, and community colleges (TK-14 education) despite revenue challenges. Estimates of the Proposition 98 minimum funding guarantee for TK-14 education are updated to reflect two major budget actions: 1) the adoption of a proposal to “accrue” some funding from 2022-23 to future years and 2) the suspension of the Prop. 98 guarantee in 2023-24. These actions increase the Prop. 98 minimum funding levels across the 2022-23 to 2024-25 “budget window” and also ensure funding growth beyond the three-year window.

Key details that further explain the Prop. 98-related budget actions are outlined below.

Overall, decisions on the minimum guarantee push large spending obligations to future budget years that add pressure to the non-Prop. 98 side of the budget. First, while the Prop. 98 suspension provides relief in 2023-24, TK-14 education will get a higher percentage of future revenue growth than normal until the maintenance factor is paid. In other words, a larger portion of General Fund revenue growth will go toward the maintenance factor obligation, leaving less funding for the non-Prop. 98 side of the budget.

Second, shifting $6.2 billion in TK-14 education spending to the non-Prop. 98 side of the budget starting in 2026-27 will reduce funding available for other critical needs, such as food security, child care, housing, and other programs that help families make ends meet.

What revenue solutions does the budget include?

One of the budget solutions is a temporary increase in state revenues, which helps to avoid more harmful service cuts, but will also lead to decreased revenues in later years. 

Specifically, for tax years 2024 through 2026, the budget agreement 1) limits the tax credits businesses can use to $5 million and 2) suspends tax deductions for prior-year losses (“net operating losses” or NOLs) for businesses with at least $1 million in profits.  These provisions are estimated to increase revenues by $5.95 billion in 2024-25, $5.5 billion in 2025-26, and $3.4 billion in 2026-27.

However, the budget agreement also includes provisions to allow businesses impacted by these limitations to fully recoup the lost tax benefits in later years, reducing state revenues for several years beginning in 2027-28 by as much as a few billion dollars in some years. Notably, businesses subject to tax credit limitations will be allowed to receive the credits above the $5 million annual limit as a refund — spread across five years — after the limitation period ends. In other words, if the excess credits claimed in future years exceed a business’ tax bill, it can receive the difference in cash. Historically, business tax credits have generally not been refundable.

Additionally, if the governor’s administration determines that the budget can be balanced in 2025-26 and/or 2026-27 without the additional revenue from the temporary business credit limitation and NOL suspension, policymakers can specify in the Budget Act that these provisions do not apply for that year.

Finally, the budget contains some smaller, ongoing tax policy changes impacting businesses and investors. These changes will increase revenues by a few hundred million dollars ongoing, including eliminating tax subsidies that specifically benefit oil and gas companies.

How did California’s Rainy Day Fund and other reserves help cover the shortfall?

California has several reserve accounts that set aside funds intended to be used when economic conditions worsen and state revenues decline. These include:

• The Budget Stabilization Account (BSA), commonly referred to as the Rainy Day Fund. This is the state’s largest reserve and its funds may be used for any purpose.
• The Public School System Stabilization Account (PSSSA), which is also known as the Prop. 98 reserve. Funds withdrawn from this account must be used to support K-12 schools and community colleges.
• The Safety Net Reserve Fund. Funds withdrawn from this account are intended to maintain existing CalWORKs and Medi-Cal benefits and services during an economic downturn.

The budget agreement rejects many harmful cuts to critical services in part by drawing on state reserves. However, the budget takes an imbalanced approach, taking around half the funds in the BSA, but draining all funds from the Safety Net Reserve, leaving no dedicated funds to help support CalWORKs and Medi-Cal in future years.

Specifically, the budget agreement withdraws $4.9 billion from the BSA in 2024-25, and assumes an additional BSA withdrawal of $7.1 billion in 2025-26, which would leave about $10.5 billion available for future years. In contrast, the budget withdraws all $900 million from the Safety Net Reserve in 2024-25. The budget also takes all $8.4 billion from the PSSSA in 2023-24, but makes a $1.1 billion discretionary deposit to that account in 2024-25.

As required by the state Constitution, the governor signed a proclamation on June 26 declaring a budget emergency in order to allow the withdrawal of funds from the BSA. The governor did not need to declare a budget emergency to withdraw funds from the PSSSA or the Safety Net Reserve.

The budget includes a big cut to “state operations” spending — what does this mean and is the cut achievable?

The budget agreement adopted the governor’s plan to permanently reduce “state operations” spending by around $3 billion starting in 2024-25. This funding supports the basic activities of state government. Savings are to be achieved through two actions implemented by the Department of Finance (DOF) in collaboration with state departments:

These reductions would equal roughly 10% of total General Fund state operations spending. However, it’s questionable whether $1 of every $10 in state operations costs could be permanently eliminated through efficiencies and other measures without eroding state services. Moreover, in some departments, most state operations spending supports employee salaries and benefits — which cannot be unilaterally cut to generate state savings. As a result, some departments may have relatively little state operations funding available to cut to help meet the $3 billion statewide reduction target.

Furthermore, the governor’s administration reported in budget hearings that 24-hour operations would be exempt from the reductions. This includes, for example, the state prison system, which is overseen by the California Department of Corrections and Rehabilitation (CDCR). The budget agreement assumes that CDCR will account for nearly $400 million of the $3 billion in state operations reductions. CDCR could easily achieve these savings by closing state prisons. However, the governor refuses to plan for more prison closures, and it’s uncertain whether CDCR will be able to cut roughly $400 million from its operating budget without downsizing the state prison system.

Overall, it’s highly unlikely that the projected $3 billion in statewide savings will fully materialize, according to the Legislative Analyst’s Office. Unrealized savings would need to be addressed during the 2025-26 budget process and would “add to any fiscal challenges” the state is facing that year. In the meantime, DOF will update the Legislature in October and again in January on any progress made toward reducing state operations spending as envisioned in the budget agreement.

What changes were proposed to the MCO tax, and how does it help support Medi-Cal services for Californians?

Managed Care Organizations (MCOs), also known as health insurance plans, are responsible for managing health care services as a way to manage cost, utilization, and quality. States, with federal approval, can impose a tax on MCOs to reduce — or offset — state Medicaid spending and draw down additional federal funds. The MCO tax is a charge based on enrollment in Medi-Cal managed care plans and private health insurance plans. 

In 2023, California renewed its MCO tax with federal approval, effective from April 1, 2023 to December 31, 2026. State leaders planned to use the roughly $19.4 billion in tax revenue to offset General Fund spending on Medi-Cal and support provider rate increases to improve access to health care services. Currently, many Californians face difficulties accessing Medi-Cal health care services because local providers oftentimes do not accept Medi-Cal patients.

This year, state leaders proposed amendments to increase the tax, generating a net fiscal benefit of $24.3 billion total, given the budget shortfall. These amendments require federal approval.

The 2024-25 budget agreement outlines a plan to use revenue from the MCO tax to support the Medi-Cal program as well as rate increases for health providers, with some investments delayed to 2026. Budget allocations include:

• $6.9 billion in 2024-25, $6.6 billion in 2025-26, and $5.0 billion in 2026-27 to help maintain existing services in the Medi-Cal program; and
• $133 million in 2024-25, $728 million in 2025-26, and $1.2 billion in 2026-27 for new targeted Medi-Cal provider rate increases and investments.

However, the MCO tax spending plan would be overturned if voters approve a ballot initiative this November that would make the tax permanent and require the state to use these dollars solely for certain provider rate increases.

What was the overall impact of the budget on critical programs and services?

The budget agreement rejects many harmful cuts to critical programs proposed by Governor Newsom in January and May. However, despite growing needs, the agreement includes considerable cuts to housing and safety net programs and makes no significant ongoing investments in critical programs and services.

Safety Net

Housing & Homelessness

Child Care

Health

Domestic Violence

What changes to the 2024-25 budget package might happen in August?

Budget decisions happen throughout the year, not just from January to June. In August, for example, the governor and legislative leaders will revisit the 2024-25 budget package and make changes by passing additional trailer bills and, potentially, amending the 2024 Budget Act.

In fact, the Legislature is expected to soon consider proposals that aim to smooth budget volatility by requiring the state to set aside more revenue in the future. State leaders have indicated that this plan includes two components:

• Require a portion of a projected budget surplus to be placed in a “temporary holding account” to be allocated in future years if anticipated revenues are actually realized; and
• Ask voters to 1) amend the state Constitution to increase the maximum size of the Budget Stabilization Account (“rainy day fund”) — which is currently capped at 10% of General Fund tax proceeds — and 2) exclude deposits to state reserve funds from the state spending limit created by Proposition 4 in 1979 (the “Gann Limit”).

These proposals involve trade-offs. Expanding reserves would provide more budget resilience during revenue downturns and help policymakers avoid making harmful cuts. But some critical needs of Californians may remain unmet if additional resources must be saved instead of being immediately invested in California’s communities.

What more should state leaders do next year and beyond to create an equitable California?

For every Californian — from different races, backgrounds, and places — to thrive and share in the state’s economic and social life, strategic policy choices must be made. To a large extent, these choices are made through the state budget process. State leaders should set funding and policy priorities that help all Californians share in the wealth that they help create while also ensuring that the state’s tax dollars are invested in the areas of greatest need.

To achieve these goals — and move toward a more equitable California — bold approaches are needed across a broad range of public services and systems. For example, state leaders should:

Introduction

Governor Gavin Newsom released a summary of the May Revision to his proposed 2024-25 California state budget on May 10, projecting a $44.9 billion shortfall, or $27.6 billion shortfall, when taking into account early budget action taken by the legislature in April to reduce the shortfall by $17.3 billion. While many of the details are forthcoming, the governor proposes to close the budget gap through the partial use of reserves, spending cuts, and delays or deferrals of spending authorized in earlier years. While the $201 billion General Fund spending plan would protect many investments made in prior years, it also includes cuts and delays to programs and services that affect the day-to-day lives of Californians, particularly foster youth, Californians with disabilities, immigrant communities, students, and families with young children. Notably, the administration’s strategy demonstrates continued resistance to adopting long-term revenue solutions, putting corporate profits over families. This shortsighted approach exacerbates wealth inequality, stalls progress, and undermines the governor’s vision of a California for all.

The rapid shift from a budget surplus, as was the case in recent fiscal years, to the budget shortfall we face today, is a lingering effect of the unprecedented COVID-19 pandemic and its impact on the economy. The projected budget shortfall is primarily the result of state revenue collections that the administration now projects are $12.5 billion lower over the three-year budget window (fiscal years 2022-23 through 2024-25) than was anticipated in the governor’s January proposal. The shortfall reflects the steep stock market decline in 2022 — after significant growth in 2020 and 2021 — that negatively impacted income tax collections from high-income Californians and corporations, as well as the economic dampening effects of the Federal Reserve’s interest rate hikes.

Lower state revenues over the three-year budget window result in automatic adjustments to constitutionally-required funding allocations, including to the state’s main reserve and education reserve accounts, as well as reduced funding for K-12 schools and community colleges.

The governor’s proposed solutions to cover the shortfall would partially draw down on various state reserves. The solutions include using $12 billion enacted through legislative early action in April, however, just $3.1 billion would be used in 2024-25, and $8.9 billion would be shifted to 2025-26. The administration also proposes draining the Safety Net Reserve ($900 million), withdrawing $2.6 billion from the Public School System Stabilization Account for education, and leaving an estimated $22.9 billion for future use.

The administration’s proposals include billions in cuts, delays, and deferrals of critical investments intended to improve the health and well-being of all Californians. Reductions that will disproportionately affect the lives of low-income communities, Californians of color, Californians with disabilities, and families with children include, among others:

• Ongoing cuts to CalWORKs for supportive services, home visiting, and mental health/substance abuse services (despite draining the Safety Net Reserve intended to be used to avoid cuts to CalWORKs) and a one-time cut in employment services,
• Cuts to programs that help address homelessness and provide affordable housing,
• Indefinitely delaying further expanding child care slots, 
• Various reductions in investments in behavioral health, including cuts to infrastructure, housing, workforce, and youth behavioral health initiatives,
• Cuts in ongoing support for public health and one-time investments in the health workforce, 
• Cuts to services for Californians who are undocumented, including ongoing support for the expansion of In-Home Support Services (IHSS) and delayed expansion of the California Food Assistance Program (CFAP),  
• Pulling back investments in transitional kindergarten (T-K) facilities and pre-kindergarten (pre-K) inclusivity of students with disabilities.

The revised budget also continues to utilize a controversial accounting maneuver to shift $8.8 billion in K-12 schools and community college (K-14) costs  — on paper — from 2022-23 to later fiscal years and pay for these delayed expenses using non-K-14 funds. 

The May Revision proposals would protect and maintain some progress made in prior budget years to help improve economic security and opportunities for Californians with low incomes and Californians of color, including expanding full-scope Medi-Cal coverage to all Californians, maintaining investments in cash assistance through the CalEITC, Young Child Tax Credit, and Foster Youth Tax Credit, and temporary rate increases for child care providers.

However, state leaders have the tools and resources to prevent other harmful cuts. By further tapping into the state’s main rainy day fund and permanently reducing tax breaks for profitable corporations, state leaders can ensure corporations pay their fair share and avoid cuts to services that help Californians stay healthy, housed, and put food on the table.

This First Look report outlines key pieces of the May Revision to the 2024-25 California budget proposal, and explores how the governor prioritized spending and determined cuts to balance the budget amid a sizable projected state budget shortfall.

Contents

Budget Overview

Economic Outlook: Revised Budget Projects Moderate Job and Wage Growth
Revenue: Revised Budget Reflects Additional $12.5 Billion Downgrade in Revenue Outlook
Tax Policy: Modified Tax Proposals Include Temporary Business Tax Break Limitations
Reserves: May Revision Includes Withdrawal of Reserve Funds, Proposes New Fund to House “Excess Revenue”

Health

Coverage, Affordability & Access: Governor Upholds Medi-Cal Expansion, Amends MCO Tax, Proposes Harmful Cuts
Health Workforce: Revised Budget Severely Cuts Health Care Workforce Development
Behavioral Health: Behavioral Health Initiatives Mostly Sustained, But New Cuts Proposed
Public Health: Cuts to Public Health Leave Californians Vulnerable to Future Threats

Homelessness & Housing

Homelessness: May Revision Reduces Limited Funding for Homelessness
Housing: May Revision Proposes Deeper Cuts for Affordable Housing

Economic Security

Overview: May Revision Proposes Alarming Cuts to Vital Safety Nets
Refundable Tax Credits: Revised Budget Maintains Tax Credits for Californians with Low Incomes
Refundable Tax Credits: Revised Budget Does Not Implement Workers’ Tax Credit Slated for 2024
CalWORKs: May Revision Proposes Additional Cuts to Critical CalWORKs Support Services
Food Assistance: Governor Proposes Cuts and Delays to Previous Food Assistance Commitments
Child Care: Governor Maintains Temporary Rate Increase, Pauses Slot Expansion
Californians with Disabilities: Governor Protects SSI/SSP but Cuts Key Services for People with Disabilities
Immigrant Californians: Proposal Eliminates and Delays Vital Services for Immigrant Californians, Maintains Cut to Legal Services
Domestic Violence: Governor Does Not Provide Needed Support to Domestic Violence Survivors

Education

Early Learning & Pre-K: Transitional Kindergarten Expansion Continues While Facilities are Cut
Proposition 98: K-14 Education’s Minimum Funding Level Drops Due to Lower Revenue Estimates
K-12 Education: Budget Proposal Relies on Reserves to Support K-12 School Funding Formula
Community Colleges: Revised Budget Increases Reserve Withdrawals for Community Colleges Funding
CSU/UC: Revised Proposal Maintains Deferrals for the CSU and UC Systems
Student Financial Aid: May Revision Abandons Commitments to Expand Student Financial Aid

Justice System

State Corrections: May Revision Calls for Deactivating Prison Housing Units, but Not Prison Closures
Retail Theft: Revised Budget Continues to Provide Over $100 Million to Address Retail Theft
Proposition 47 Investments: Revised Budget Estimates Proposition 47 Savings of $95 Million for Local Investments

Workforce & Climate Change

Other/General Workforce: Governor Proposes Additional Cuts to Several Workforce Programs
Climate Change: Revised Budget Proposes Further Cuts to Prior Environment Commitments

Budget Overview

Revised Budget Projects Moderate Job and Wage Growth

The administration’s economic outlook projects trends in major economic indicators that affect state tax collections and revenues in the budget. The revised outlook projects steady, but slowing national economic growth into next year, with California job gains expected to remain relatively weak through 2025. The number of nonfarm jobs in the state is forecast to increase by just 0.1% in 2024 and 0.4% in 2025, following a stronger increase of 0.9% in 2023 and 1.5% in 2019, just before the pandemic. California’s unemployment rate is projected to remain relatively higher in the near term as well: 5.2% in 2024 and 5.3% in 2025, up from 4.7% in 2023 and 4.1% in 2019. Wages and incomes are also expected to grow more slowly this year and next than just prior to and coming out of the pandemic downturn. The revised budget does not project a recession in the near term, but does note that if inflation remains elevated, the Federal Reserve could maintain higher interest rates which could slow economic activity by more than projected. 

While the administration’s outlook is useful for understanding how economic conditions might impact budget revenues, it’s also important to consider how economic conditions are affecting Californians with low incomes, who count on programs and services funded by the budget. In March 2024, the majority of California households with incomes under $25,000 (55%) reported having difficulty paying for basic needs like food, housing, and medical expenses, according to the most recent US Census Pulse survey. Black, Latinx, and other Californians of color, as well as households with children were more likely to struggle paying for basic expenses. The Census data from March also show that 42% of Black households with children and 32% of Latinx households with children did not have enough to eat, compared to 15% of white households with children. Among all households with children, about one-quarter (24%) had insufficient food. In addition, the latest Census data show that California continues to have the highest poverty rate of the 50 states based on the Supplemental Poverty Measure, which provides a more accurate picture of poverty by accounting for differences in the cost of housing across communities. Housing costs in California typically exceed costs in the rest of the nation, and rents have risen sharply in many parts of the state in recent years making it difficult for Californians with low incomes to afford housing.

Revised Budget Reflects Additional $12.5 Billion Downgrade in Revenue Outlook

The governor’s revised proposal is based on an updated revenue estimate for the three-year budget window spanning fiscal years 2022-23 through 2024-25. After lower-than-expected tax collections since the governor’s January proposal, the administration now expects General Fund revenues to be about $12.5 billion lower over that window than the January estimate. This is before taking into account loans and transfers, the governor’s revenue proposals, and other budget solutions (see Tax Proposals section).

The administration continues to have a more optimistic revenue outlook than the Legislative Analyst’s Office, which recently projected that the three-year total of the “Big Three” General Fund revenues sources — personal income taxes, corporate taxes, and sales taxes, which together make up the majority of General Fund revenues — could be around $19 billion lower than the governor’s January projection.

After accounting for automatic spending changes resulting from the lower revenue estimate, the governor estimates that the downgraded revenue outlook results in a $7 billion addition to the three-year state deficit the governor identified in January. 

The administration expects state revenue growth to generally return to the pre-pandemic pattern after the dramatic spike in revenues during the pandemic as the stock market surged and then subsequently corrected.

Modified Tax Proposals Include Temporary Business Tax Break Limitations

In January, the governor proposed a modest package of revenue solutions that included limiting the extent to which businesses can use prior-year losses to offset their taxable profits (“Net Operating Loss carryforwards”), eliminating oil and gas tax subsidies, and other minor tax changes. These revenue proposals made up less than 1% of the total budget solutions proposed in January.

The May Revision modifies the January revenue-related proposals by:

While temporary limitations on businesses’ ability to reduce their state income taxes help to address the deficit in the short-term, the governor’s revised proposal does little to increase state revenues on an ongoing basis and misses key opportunities to make the state’s tax system more fair. Policymakers should consider permanent limitations on business tax credits — as some states already do — to ensure that businesses are not paying next to nothing in state income taxes when they turn large profits. State leaders should also explore other options to permanently increase state revenues by making the corporate tax system more fair and eliminating or reforming other costly and inequitable tax breaks, which are not regularly considered as part of the budget process.

May Revision Includes Withdrawal of Reserve Funds, Proposes New Fund to House “Excess Revenue”

California has a number of state reserve accounts that set aside funds intended to be used for a “rainy day” when economic conditions worsen and state revenues decline. Some reserves are established in the state’s Constitution to require deposits and restrict withdrawals, and some are at the discretion of state policymakers.  

California voters approved Proposition 2 in November 2014, amending the California Constitution to revise the rules for the state’s Budget Stabilization Account (BSA), commonly referred to as the rainy day fund. Prop. 2 requires an annual set-aside equal to 1.5% of estimated General Fund revenues. An additional set-aside is required when capital gains revenues in a given year exceed 8% of General Fund tax revenues. For 15 years — from 2015-16 to 2029-30 — half of these funds must be deposited into the rainy day fund, and the other half is to be used to reduce certain state liabilities (also known as “budgetary debt”).

Prop. 2 also established a new state budget reserve for K-12 schools and community colleges called the Public School System Stabilization Account (PSSSA). The PSSSA requires that when certain conditions are met, the state must deposit a portion of General Fund revenues into this reserve as part of California’s Prop. 98 funding guarantee (see Prop. 98 section). In order to access the funds in the BSA and PSSSA, the governor must declare a budget emergency — an action that is not included in the May Revision or in the early budget action agreed to by the governor and Legislature in April, but will be necessary to access these funds.

The BSA and the PSSSA are not California’s only reserve funds. The 2018-19 budget agreement created the Safety Net Reserve Fund, which holds funds intended to be used to maintain benefits and services for CalWORKs and Medi-Cal participants in the event of an economic downturn. Additionally, the state has a Special Fund for Economic Uncertainties (SFEU) — a reserve fund that accounts for unallocated General Fund dollars and that gives state leaders total discretion as to when and how they can use the available funds.

The current-year (2023-24) budget, enacted in mid-2023, projected $22.3 billion in the BSA; $10.8 billion in the PSSSA; $900 million in the Safety Net Reserve; and $3.8 billion in the SFEU. However, revenue adjustments in the current year result in updated 2023-24 projections in the governor’s proposed budget — $22.6 billion in the BSA; $2.6 billion in the PSSSA; $900 million in the Safety Net Reserve; and a shortfall of $843 million in the SFEU, which fluctuates throughout the year based on changes in revenues.

In April 2024, the governor and legislative leaders agreed to an early action budget package to partially address the state’s budget shortfall that included drawing down $12 billion from the BSA, a proposal that was also included in the governor’s January budget proposal.

The May Revision:

• Includes the $12 billion withdrawal from the BSA, but spreads the withdrawal over the next two fiscal years — utilizing only $3.1 billion in 2024-25 and shifting $8.9 billion to 2025-26. 
• Withdraws all $900 million from the Safety Net Reserve, despite also proposing significant cuts to the CalWORKs program, a program the reserve is designed to protect (see CalWORKs section).
• Withdraws $5.8 billion from the PSSSA in 2023-24 and the remaining $2.6 billion in 2024-25.
• Projects a 2024-25 year-end SFEU balance of $3.4 billion.

In total, the May Revision proposes to withdraw less from the state’s rainy day funds for 2024-25 than the governor’s January proposal, despite the fact that the administration projects that the budget shortfall has increased since January. Taking into account the remaining reserves in the BSA and the SFEU, the governor’s May Revision projects total remaining reserves of $22.9 billion at the end of 2024-25, compared to $18.4 billion in the governor’s January proposal. 

Given that the administration’s approach to resolving the state budget shortfall includes an array of harmful cuts to vital programs and services that help Californians with low incomes, communities of color, and Californians with disabilities, state leaders appear to have additional room to responsibly draw upon reserves to protect those programs and also leave funds available to address future fiscal uncertainties.

New Fund to Capture “Excess Revenue”

The May Revision also signaled the administration’s intent to enact legislation to enable state leaders to save more during future upswings in revenue by requiring the state to set aside a portion of anticipated “surplus” funds — funds that exceed a yet-to-be-determined standard for historical trends. The administration notes that the funds would not be able to be committed until revenues have been realized. 

While the specifics of the governor’s proposal are not yet available, any efforts to set aside additional funds would likely interact with other constitutional requirements that affect state spending and reserves, including Prop. 4 (1979; the “Gann Limit”), Prop. 98 (1988), and Prop. 2 (2014). For instance, the administration notes that amendments would be needed to Prop. 2 to allow for increased deposits to the BSA. Any amendments to the constitutional provisions, however, would need to be approved by California voters.

Health

Governor Upholds Medi-Cal Expansion, Amends MCO Tax, Proposes Harmful Cuts

Access to health care is necessary for everyone to be healthy and thrive. About 14.5 million Californians with modest incomes — nearly half of whom are Latinx — are projected to receive free or low-cost health care through Medi-Cal (California’s Medicaid program) in 2024-25. Another 1.8 million Californians purchase health coverage through Covered California, the state’s health insurance marketplace. 

The May Revision maintains recent Medi-Cal expansions, but pulls back on other health care investments that were established in prior years. Specifically, the revised budget:

The May Revise also amends the Managed Care Organization (MCO) tax revenue and expenditure proposal. The MCO tax is a provider tax imposed by states on health care services that essentially reduces, or offsets, state General Fund spending on Medi-Cal. The federal government approved the initial MCO tax proposal last year. In January, the administration proposed to increase the MCO tax and the May Revision proposes an additional amendment to the MCO tax to include health plan Medicare revenue, resulting in an additional $689.9 million in reduced General Fund costs in 2024-25, $950 million in 2025-26, and $1.3 billion in 2026-27. These changes would be subject to federal approval. Overall, the May Revision includes $9.7 billion in MCO tax funds over multiple years to support the Medi-Cal program. However, rather than using $6.7 billion of this amount to continue Medi-Cal provider rate increases, as originally planned, these funds will be used to offset General Fund spending. 

The May Revise does protect some health care investments that were established in prior years. Specifically, the budget:

Lastly, the May Revision includes directed payments to children’s hospitals and public hospitals. This includes an annual allocation of $230 million to support children’s hospitals, with half of these funds provided by the federal government and the remaining half sourced from the Medi-Cal Provider Payment Reserve Fund. 

Revised Budget Severely Cuts Health Care Workforce Development

Access to health care services is important for everyone’s health and well-being. The state’s workforce must meet the needs of Californians to achieve equitable access to timely and culturally competent health services. While state policymakers have made considerable investments in recent years to bolster the health workforce, investments in various health workforce areas still fall short. 

Despite the clear need to invest in the health workforce, the May Revision cuts over $1 billion over multiple years. This includes:

The May Revision also modifies previous plans to enhance Medi-Cal provider participation under the Managed Care Organization (MCO) tax proposal. While the revised budget maintains $727 million to increase provider rates for primary care, maternity care (including doulas), and non-specialty mental health services, it reallocates $6.7 billion previously intended for other health areas, including primary and specialty care in Medi-Cal, abortion and family planning access, clinics, and the Medi-Cal workforce pool. This redirection of funds towards existing Medi-Cal services is sensible in a budget deficit, but it raises concerns about the impact on timely access to health care services.

The health care workforce and access to health care services are intrinsically linked. If people cannot find a health care provider in their area or face extended wait times for an appointment, they do not have meaningful access to health care. State policymakers must continue to build a health care workforce that not only meets the needs of Californians but also mirrors the state’s diverse population in terms of race, ethnicity, sability, gender identity, and sexual orientation. Doing so will require sustained, ongoing investments, not cuts.

Behavioral Health Initiatives Mostly Sustained, But New Cuts Proposed

Millions of Californians who cope with behavioral health conditions — mental illness or substance use disorders — rely on services and supports that are primarily provided by California’s 58 counties. Improving California’s behavioral health system is critical to ensuring access to these services for all Californians, regardless of race, age, gender identity, sexual orientation, or county of residence. 

In recent years, state policymakers have launched various initiatives to transform California’s behavioral health system with the goal of improving access. Proposition 1, the most recent of these initiatives, was approved earlier this year. Prop. 1 is a two-part measure that 1) amends California’s Mental Health Services Act and 2) creates a $6.38 billion general obligation bond to fund behavioral health treatment and residential facilities as well as supportive housing for veterans and Californians with behavioral health needs.

The May Revise includes some initial funding to begin Prop. 1 implementation, including:

In the governor’s January budget proposal and the revised budget proposal, the administration maintains funding to continue behavioral health initiatives that state leaders launched in recent years. For instance, the revised budget sustains the Behavioral Health Community-Based Organized Networks of Equitable Care and Treatment (BH-CONNECT) Demonstration, which aims to improve mental health services for Medi-Cal members. The administration assumes that implementation of BH-CONNECT will begin on January 1, 2025. Major reforms to the Medi-Cal program as well as the level of federal funding provided must be negotiated with the federal government through the Medicaid waiver process. As such, implementation will depend on the availability of funding and federal approval.

However, the revised budget also proposes a series of cuts and delays to other behavioral health initiatives. Specifically, the revised budget:

Investing in the state’s behavioral health system is crucial for supporting Californians who are coping with mental health conditions or substance use disorders. State leaders should continue to invest in the behavioral health system and address the behavioral health workforce shortage. Policymakers can also invest in efforts to make sure that the behavioral health workforce better reflects the diversity of all Californians, including their gender identities and sexual orientations.

Cuts to Public Health Leave Californians Vulnerable to Future Threats

Everyone should have the opportunity to be healthy and thrive. The California Department of Public Health as well as local public health departments are vital in protecting and promoting Californians’ health and well-being. From improving living conditions to promoting healthy lifestyles to responding to infectious disease emergencies, public health workers are essential.

Despite this important responsibility, funding has not kept pace with the cost of responding to ongoing and emerging health threats. Many Californians suffered during the COVID-19 pandemic due to the state’s lack of preparedness. Communities of color experienced higher rates of illness and death due to historic and ongoing structural racism that deny many communities the opportunity to be healthy and thrive. Structural racism continues to underscore the need to address the root cause of health disparities through public health initiatives. 

In an alarming move, the governor’s revised budget proposes significant cuts to public health investments that were established in previous years. Specifically, the May Revision eliminates $52.5 million in 2023-24 and $300 million ongoing General Fund thereafter to improve public health infrastructure at the state and local level. Under this revised spending plan, local health jurisdictions would no longer continue to receive a minimum base allocation to support workforce expansion, data collection and integration, and partnerships with health care delivery systems and community-based organizations. At the state level, these cuts will reduce the capacity to assess and respond to current and emerging public health threats and will weaken key functions such as emergency preparedness and public health communications.

These cuts to public health capacities are short-sighted and harmful. After years of underinvestment in public health, these dollars provided much-needed infrastructure support. Given that public health emergencies and climate change disasters often disproportionately impact people with low incomes and communities of color, these cuts undo progress to advance health equity. State leaders should ensure that counties and cities have the capacity to address ongoing and future public health threats.

Homelessness & Housing

May Revision Reduces Limited Funding for Homelessness

Having a place to call home is core to living with dignity and health. Yet homeless service providers served over 330,000 Californians experiencing homelessness last year, underscoring both the need and increased capacity of the state’s response systems. Homelessness providers and localities are serving more individuals and families than ever before partially due to previous one-time state funding investments that provided critical resources for homelessness prevention and resolution services. Despite this, the May Revision proposes no new resources and reduces previous allocations, effectively leaving no significant state funding to address homelessness in 2024-25 or beyond. 

The May Revision proposes to eliminate $260 million in supplemental grant funds for the  Homeless Housing, Assistance and Prevention (HHAP) Grant Program in 2025-26, but maintains the last round of funding in 2023-24. HHAP is critical as it provides local jurisdictions with flexible funds to address homelessness in their communities in a variety of ways, ranging from rental and operating subsidies to acquiring shelter, interim and permanent housing beds, and street outreach, among other uses. The May Revision also changes previously proposed funding delays into funding cuts for various homelessness programs that serve diverse populations.

These funding reductions include:

Also notable is the increased reduction of $450.7 million one-time from the last round of the Behavioral Health Continuum Infrastructure Program (BHCIP), leaving $30 million one-time General Fund in 2024-25. This program provides competitive grants to expand the community continuum of behavioral health treatment resources ranging from wellness centers to psychiatric care facilities. BHCIP will be receiving $4.4 billion in bond funds through Proposition 1, which voters approved in March 2024. The Department of Health Care Services is anticipated to open funding applications this summer and begin granting competitive awards by the fall (see Behavioral Health section). Prop 1. also restructures funds from the Mental Health Services Act, which exists separately from the state budget. It now requires counties to redirect 30% of these funds for housing interventions for people experiencing or at risk of homelessness with behavioral health conditions. However, these funds are inadequate to address the overarching need for state investments, as they focus solely on a specific subset of unhoused Californians.

May Revision Proposes Deeper Cuts for Affordable Housing

All Californians deserve a safe, stable, and affordable place to call home. However, many are blocked from this opportunity due to California’s affordable housing shortage and accompanying high housing costs. Renters, people with low incomes, Black and Latinx Californians, and undocumented Californians are especially likely to struggle to afford their homes. Yet despite noting California’s serious housing affordability challenges, the May Revision proposes deeper funding reductions and scarce new investments to affordable housing programs.

The administration now proposes $1.7 billion in General Fund reductions for various programs that support affordable housing development and homeownership. The May Revision reductions build on those in the January proposed budget. These include:

• An additional reduction of $236.5 million General Fund for the Foreclosure Intervention Housing Preservation Program in 2023-24, bringing the total reduction to $474 million, which will eliminate the program.
• An additional reduction of $75 million General Fund for the Multifamily Housing Program, bringing the total reduction to $325 million General Fund, eliminating state funding in 2023-24.
• A newly proposed reduction of $127.5 million General Fund for the Adaptive Reuse Program, with $87.5 million from the 2023 Budget Act and $40 million from the 2022 Budget Act, which will eliminate the program. 
• An additional reduction of $35 million General Fund for the Infill Infrastructure Grant Program, with $25 million from 2023 Budget Act and $10 million from the 2022 Budget Act, eliminating state funding in 2023-24.
• An additional reduction of $26.3 million General Fund for the Veterans Housing and Homelessness Prevention Program from the 2022 Budget Act. The January proposed budget already fully reduced allocated state funds for this program in 2023-24.

The May Revision does reinstate an additional $500 million for state Low Income Housing Tax Credits – as has been done since 2019 – which help promote and finance affordable housing development. The administration also highlights Proposition 1, approved by voters in March, as providing some funding for supportive housing programs. Prop. 1 provides roughly $2 billion in bond funds for the development of permanent supportive housing units specifically for Californians experiencing or at risk of homelessness with behavioral health needs (see Homelessness and Behavioral Health sections). Over half of these funds are designated for veterans. The Department of Housing and Community Development is anticipated to open applications for this funding at the end of 2024. However, these funds are specifically for supportive housing units and fall short in providing the diverse critical investments needed to continue meaningful, affordable housing development in California.

Economic Security

May Revision Proposes Alarming Cuts to Vital Safety Nets

While California has made significant investments in its social safety net in recent years, millions of people in communities across the state are still struggling to make ends meet as the cost of living continues to outpace incomes. Poverty, particularly among children and people of color, is on the rise. Despite this, the governor’s proposed budget includes very concerning cuts to vital safety net programs that may have devastating consequences for California families with the greatest needs. Cuts to the Department of Social Services, which administers the state’s safety net programs, total nearly $2 billion in the 2024-2025 fiscal year alone. These cuts target key investments in CalWORKs, food assistance, and child care. The budget proposal outright eliminates several critical support services for CalWORKs families, significantly reduces funding for program administration, and drains the dedicated reserves that were designed to protect the program from cuts.

Additionally, the proposal delays a long-awaited program expansion of food assistance to undocumented older adults and defunds a pilot to increase CalFresh benefits. In delaying and eliminating these vital services, which were small stepping stones to larger expansions that would close gaps in food insecurity across the state, the proposal would take California a step backward. In the child care space, the governor indefinitely delays his promised slot expansion despite the growing unmet need. Other cuts in this space would affect programs that serve foster youth and people with disabilities. 

California’s future largely depends on children whose entire lives will be shaped by the extent to which our state invests in their education, health, and well-being. But children cannot thrive unless their families thrive. Despite the budget shortfall, California’s leaders have a responsibility to ensure that our state’s children and families have the opportunity to reach their full potential.

Revised Budget Maintains Tax Credits for Californians with Low Incomes

California’s Earned Income Tax Credit (CalEITC), Young Child Tax Credit, and Foster Youth Tax Credit are refundable state income tax credits that provide tax refunds or reductions in state taxes owed to millions of Californians with low incomes, boosting their incomes and helping them to pay for basic needs like food. These credits also help to promote racial and gender equity by targeting cash to Californians of color, immigrants, and women who are frequently blocked from economic opportunities and forced into low-paying jobs that fail to provide economic security.

The administration maintains these tax credits in the revised budget while also continuing to cut funding for free tax preparation assistance, education, and outreach,  in half to $10 million in 2024-25, as proposed in January. These funds support community based organizations (CBOs) in their efforts to educate community members about state and federal refundable tax credits, connect eligible tax filers to free tax preparation services and assist tax filers in applying for or renewing Individual Taxpayer Identification Numbers, which some Californians must have in order to claim tax credits. Cutting this funding will reduce the capacity of CBOs to provide these services.

Revised Budget Does Not Implement Workers’ Tax Credit Slated for 2024

The 2022-23 budget included a new refundable tax credit for workers slated to become available in tax year 2024 if the Department of Finance determined that sufficient General Fund resources were available to support it. This credit was intended to help cover the cost of being a member of a labor union, particularly among workers with lower incomes who are typically excluded from an existing tax deduction for certain business expenses, including union dues. The administration does not include this new tax credit in the revised 2024-25 budget given the multi-year budget shortfall.

May Revision Proposes Additional Cuts to Critical CalWORKs Support Services

The California Work Opportunity and Responsibility to Kids (CalWORKs) program is a critical component of California’s safety net for families with low incomes. The program helps over 650,000 children and their families, who are predominantly people of color, with modest cash grants, employment assistance, and critical supportive services. The governor’s May Revision proposes deeply concerning cuts to CalWORKs administrative and program funding in addition to the significant cuts proposed in January.

The newly proposed cuts include:

• A one-time reduction of $272 million in 2024-25 for employment services under the single allocation funding.
• An ongoing reduction of $126.6 million for Mental Health and Substance Abuse Services, effectively eliminating this service. 
• An ongoing reduction of $47.1 million for the Home Visiting Program, which is designed to support positive health, development, and well-being of CalWORKs families with children under 2.

This amounts to a total cut of $445.7 million. Adding on to the cuts proposed in January, which totaled about $293 million in FY 24-25, this brings the total to about $739 million in cuts to CalWORKs, two-thirds of which would be ongoing. For many years, California has led the way in expanding CalWORKs support services, recognizing families have diverse needs and often need additional support to address barriers to work and improve their well-being. Taking programs away that offer mental health support, crisis intervention (Family Stabilization Program), and parenting support (Home Visiting Program), which research has shown can reduce or prevent the effects of adverse experiences for children, could jeopardize families’ ability to meet all program requirements and maintain access to their grants. Families not meeting strict program requirements will be at risk of punitive sanctions, which will only push them deeper into poverty. 

In addition to the proposed cuts, the governor’s budget does not include funding to redirect collected child support payments from the state back to former CalWORKs parents. For formerly assisted families, outstanding child support debt that is collected does not go to the families but rather goes to the state, county, and federal governments as “reimbursement” for the costs associated with the CalWORKs program.  Under this change, which was supposed to go into effect in April 2024, these families would have received an estimated annual total pass-through of $187 million annually.

Additionally, the governor proposes drawing down the full $900 million in the Safety Net Reserve, which was created to maintain existing CalWORKs and Medi-Cal benefits and services during an economic downturn (see Reserves section). While the governor does not propose cutting cash grants, given the projections of a sustained deficit in upcoming years, fully drawing down the reserve will leave CalWORKs vulnerable to additional cuts, similar to what occurred during the Great Recession. Closing the budget shortfall at the expense of families with low incomes is a short-sighted approach that could have detrimental effects on California’s economy and families facing the greatest needs.

Governor Proposes Cuts and Delays to Previous Food Assistance Commitments

All Californians should be able to put enough food on the table without having to go without other basic needs. But about 1 in 11 California households — and 1 in 8 California households with children — sometimes or often didn’t have enough to eat in March 2024, according to recent US Census Household Pulse data. In recent years, households have been hit with both rising food prices as well as the expiration of enhanced pandemic-era food benefits. 

CalFresh — California’s version of the federally funded Supplemental Nutrition Assistance Program (SNAP) — provides modest food assistance benefits to about 5.4 million Californians. The California Food Assistance Program (CFAP) is a state-funded program providing food benefits to certain non-citizens who are excluded from receiving federal  benefits, but undocumented immigrants are still excluded from CFAP benefits. The 2021-22 budget agreement included a plan to expand CFAP to Californians aged 55 and older who are excluded solely due to their immigration status. The expansion is currently set to begin in October 2025.

While the governor’s January budget proposal generally maintained prior commitments to  improve and expand the state’s food assistance programs, the May Revision proposes cuts and delays that would reverse or pause recent progress, including:

Additionally, the budget does not include funding to implement Cal Grant reform, which would allow more college students to access CalFresh benefits (see Financial Aid section). The 2022 budget included a plan for Cal Grant reform, but it was subject to sufficient funds being available in 2024, so this was one of several “trigger” proposals included 2022 that will not be moving forward this year.

Finally, the budget includes $63 million in additional funding to implement the universal school meals program to account for an expected increase in the number of meals to be provided and a cost-of-living increase (see K-12 Education section). The $63 million is in addition to the increase included in the January proposal.

Governor Maintains Temporary Rate Increase, Pauses Slot Expansion

Thousands of families in California rely on subsidized child care and development programs administered by the California Department of Social Services (CDSS) as a critical resource for supporting their families to grow and thrive. While the state has made improvements to California’s child care system — most recently through reforming family fees and committing to an alternative methodology for child care provider reimbursements — the system is still falling short for many families and child care providers. For example, as of 2022, only one in nine children eligible for subsidized child care received services, despite growing demand. Moreover, the state released data this year showing that 73% of family child care providers do not pay themselves a salary. The administration therefore has an opportunity to advance progress toward creating an equitable child care system that meets the needs of all families and reflects the integral role of child care providers.

The governor’s revised budget:

Governor Protects SSI/SSP but Cuts Key Services for People with Disabilities

All Californians should be included, supported, and treated with dignity in their communities, regardless of disability status. In California, people with disabilities can access several essential programs and services to manage their needs. The governor’s revised budget maintains a recent increase to the largest cash assistance program serving low-income Californians with disabilities, but builds on January’s proposed cuts and reduces support for key programs serving this population.

Specifically, the governor’s budget:

The governor’s January proposal included:

The May Revision maintains these delays in funding and also:

Proposal Eliminates and Delays Vital Services for Immigrant Californians, Maintains Cut to Legal Services

Immigrants are an integral part of California’s communities. They are not just part of the state’s mighty economic engine as taxpayers, entrepreneurs, and members of the workforce — they enrich our cultural identity as the Golden State. They are students, teachers, artists, chefs, religious leaders, colleagues, neighbors, and family members. 

California has the largest share of immigrant residents of any state. Over half of all California workers are immigrants or children of immigrants, and nearly 2 million Californians are undocumented, according to recent estimates.

State leaders have made notable progress in recent years working toward a California for all, where all people have access to economic opportunity and essential services, regardless of immigration status. Extending full-scope Medi-Cal eligibility to undocumented Californians is one significant example of this, and the governor’s May Revision maintains the final and most recent step in this expansion, extending coverage to adults ages 26 to 49. However, the revised budget takes a step backwards by eliminating or delaying other vital services for undocumented Californians that other Californians can access. Specifically, the revised budget:

The revised budget also maintains the governor’s January budget proposal to cut immigration legal services, which are a lifeline for immigrant families. Specifically, the May Revision:

• Continues to permanently cut funding for the Temporary Protected Status (TPS) Services program, eliminating $10 million General Fund in 2023-24 and each year thereafter, zeroing out all resources for this program. 
• Continues to permanently cut funding for the California State University Legal Services program by $5.2 million General Fund in 2023-24 and each year thereafter.

Cutting support for immigrant legal services is harmful. These services are crucial for helping immigrants stabilize their lives and remain in their communities. Immigration legal services can help put immigrants on a pathway to stability, particularly for those without status. Without access to legal services, immigrants can face greater risks of deportation and family separation, which can lead to financial hardship for families and adverse health outcomes. Given that newly arriving immigrants have the potential to grow the economy and contribute to state and local coffers, supporting them is a strategic investment in our collective future. 

The governor’s May Revision also reduces $29 million for the Rapid Response program in 2024-25, which helps sustain humanitarian support to individuals and families seeking safety at the California-Mexico border in partnership with local providers. This reversion in funds comes out of the $79.4 million General Fund reappropriated for the Rapid Response program from the 2021-22 and 2022-23 budget acts to 2023-24 as part of the early action budget deal approved by policymakers in April. The revised budget proposes no additional state funding for this program in 2024-25 despite the glaring need for continued investment. 

Eliminating and delaying vital services to Californians simply due to their immigration status would have a significant negative impact on immigrant communities and our collective prosperity and is a short-sighted approach to closing the state’s budget shortfall.

Governor Does Not Provide Needed Support to Domestic Violence Survivors

Every Californian deserves to live in a world where they feel safe. However, millions of Californians experience domestic and sexual violence every year — women, transgender, and non-binary Californians, and some women of color are most likely to experience this type of violence. 

Domestic and sexual violence prevention programs are proven ways to stop the violence from occurring in the first place by taking a proactive approach and seeking to shift culture on racial and gender inequities. Since 2018, state policymakers have provided small, one-time grants for prevention programs, administered by the California Governor’s Office of Emergency Services. Besides funding for prevention services, the state also receives federal funding through the Victims of Crime Act (VOCA) to help provide essential services to survivors of crime, including survivors of domestic violence. These funds help provide survivors with critical services like emergency shelter, counseling, and financial assistance. 

However, cuts to VOCA at the federal level are resulting in roughly a 45% cut to state grants for organizations that support survivors of crime, decimating the funding of many of these organizations who rely entirely on VOCA funding to provide these critical services.
Additionally, the last round of prevention grants will run out at the end of 2024. Prevention efforts take time, and organizations doing this critical work cannot commit to long term programming without permanent, ongoing funding.

In the May Revision, the governor:

While the governor has failed to include funding to support survivors of domestic and sexual violence among other crimes, a bipartisan group of Assemblymembers have issued an emergency budget request to address the VOCA funding shortfalls, recognizing the importance of protecting the state’s most vulnerable individuals. 

Education

Transitional Kindergarten Expansion Continues While Facilities are Cut

The California Department of Education (CDE) hosts two early learning and care programs: Transitional Kindergarten (TK) and the California State Preschool Program (CSPP). CSPP provides preschool to children ages 3 and 4 for families with low to moderate incomes. TK serves 4-year-olds, and eligibility is based on age alone in public schools and is not dependent on family income. Given the overlap with the child care and development programs administered through the California Department of Social Services, CSPP is included in recent family fee and rate reform wins (see Child Care section). However, as Universal TK continues to roll out and CDSS child care and development programs face cuts and delays, the administration has the opportunity to ensure that all early learning and care programs have the resources they need to prioritize family needs and early educator well-being. 

The governor’s revised budget:

K-14 Education’s Minimum Funding Level Drops Due to Lower Revenue Estimates

Approved by voters in 1988, Proposition 98 constitutionally guarantees a minimum level of annual funding for K-12 schools, community colleges, and the state preschool program. The governor’s May Revision assumes a 2024-25 Prop. 98 funding level of $109.1 billion for K-14 education. Because the Prop. 98 guarantee tends to reflect changes in state General Fund revenues and estimates of General Fund revenue in the May Revision are lower than estimates in the January budget proposal, the governor’s revised spending plan assumes a decrease in the Prop. 98 guarantee in 2023-24 and 2022-23. Specifically, the May Revision assumes a 2023-24 Prop. 98 funding level of $102.6 billion, $3 billion lower than the $105.6 billion funding level assumed in the governor’s January budget proposal. The 2022-23 Prop. 98 funding level of $97.5 billion is roughly $800 million below the $98.3 billion funding level assumed in January, but it is $9.8 billion below the level assumed in the 2023-24 budget agreement – the largest decline in an estimated Prop. 98 guarantee for a prior-year since Prop. 98 was adopted. 

To address this unprecedented drop in the 2022-23 Prop. 98 guarantee, the governor’s May Revision proposes using the same complex accounting maneuver as the one he proposed in January: the revised budget plan attributes $8.8 billion in reduced Prop. 98 spending to the 2022-23 fiscal year, which would help reduce state General Fund spending to the lower revised Prop. 98 minimum funding level. However, the revised spending plan would not take away the $8.8 billion from K-12 schools and community colleges — dollars they received for 2022-23 that have largely been spent. Instead, the governor proposes to shift the $8.8 billion in K-14 education costs — on paper — from 2022-23 to later fiscal years and pay for these delayed expenses using non-Prop. 98 funds. 

The May Revision also reflects withdrawals of $5.8 billion in 2023-24 and $2.6 billion in 2024-25 from the Public School System Stabilization Account (PSSSA) – the state budget reserve for K-12 schools and community colleges (see Reserves section). Because the revised 2023-24 PSSSA balance of $2.6 billion is not projected to exceed 3% of the total K-12 share of the Prop. 98 minimum funding level in 2023-24, current law would allow K-12 school districts to maintain more than 10% of their budgets in local reserves in 2024-25.

Budget Proposal Relies on Reserves to Support K-12 School Funding Formula

The largest share of Prop. 98 funding goes to California’s school districts, charter schools, and county offices of education (COEs), which provide instruction to 5.9 million students in grades kindergarten through 12. The governor’s May Revision maintains the proposal made in his January budget to withdraw funds from the Public School System Stabilization Account (PSSSA) – the state budget reserve for K-12 schools and community colleges – to support the Local Control Funding Formula (LCFF), the state’s main K-12 education funding formula. Specifically, the governor’s revised spending plan:

Revised Budget Increases Reserve Withdrawals for Community Colleges Funding

A portion of Proposition 98 funding provides support for California’s Community Colleges (CCCs), the largest postsecondary education system in the country, which serves high percentages of students of color and students with low incomes. CCCs prepare more than 1.8 million students to transfer to four-year institutions or to obtain training and employment skills. 

The 2024-25 revised spending plan increases withdrawal amounts from the Prop. 98 reserve for CCC apportionments and provides additional resources to fund an increase in the cost-of-living adjustment (COLA). 

Specifically, the governor’s revised budget includes:

Revised Proposal Maintains Deferrals for the CSU and UC Systems

California supports two public four-year higher education institutions: the California State University (CSU) and the University of California (UC). The CSU provides undergraduate and graduate education to nearly 460,000 students at 23 campuses, and the UC provides undergraduate, graduate, and professional education to more than 290,000 students across 10 campuses. 

The governor’s revised budget includes additional cuts to higher education and maintains funding deferrals for both of the state’s public university systems. 

The January proposal included:

The May Revision maintains these proposals and also include the following cuts in higher education:

• An ongoing reduction of nearly $14 million General Fund for the Proposition 56 General Fund backfill that supports Graduate Medical Education programs at the UC. 
• An ongoing cut of $13 million General Fund for the UC Labor Centers. This funding provides support for economic research and labor education across various UC campuses. 
• A reduction of $485 million General Fund of unspent one-time dollars for the Learning-Aligned Employment Program. The program provides resources for students at public colleges and universities to earn money while learning in a field related to their educational and career interests (see Workforce section).
• A $60 million General Fund cut for the Golden State Teacher Grant Program. This program provides awards to students in professional preparation programs and who are working toward a teaching credential. 

May Revision Abandons Commitments to Expand Student Financial Aid

The budget shortfall and proposed solutions significantly impacts access to financial aid opportunities for California students. The May Revision does not include funding for the anticipated reform to the Cal Grant program and reduces funding for the Middle Class Scholarship (MCS). 

Specifically, the revised spending plan:

Overall, these budget choices have consequences for college affordability, degree attainment, and overall student well-being. Students pursuing postsecondary education confront significant hardship to afford basic necessities, and they are often forced to make difficult decisions that impact their college experience and degree completion.

Justice System

May Revision Calls for Deactivating Prison Housing Units, but Not Prison Closures

More than 93,000 adults who have been convicted of a felony offense are serving their sentences at the state level, down from a peak of 173,600 in 2007. This sizable drop in incarceration is largely due to justice system reforms adopted since the late 2000s, including Proposition 47, which California voters passed with nearly 60% support in 2014. Despite this substantial progress, American Indian, Black, and Latinx Californians are disproportionately represented in state prisons — a racial disparity that reflects racist practices in the justice system as well as structural disadvantages faced by communities of color.

Among all incarcerated adults, most — about 90,000 — are housed in state prisons designed to hold roughly 75,500 people. This overcrowding equals 119% of the prison system’s “design capacity,” which is below the prison population cap — 137.5% of design capacity — established by a 2009 federal court order. California also houses around 3,000 people in facilities that are not subject to the cap, including fire camps, in-state “contract beds,” and community-based facilities that provide rehabilitative services.

The May Revision:

Revised Budget Continues to Provide Over $100 Million to Address Retail Theft

Retail theft is defined in several ways in California law:

Retail theft rose following the isolation and social breakdown caused by the COVID-19 pandemic. In California, commercial burglary and robbery rates continued to exceed their pre-pandemic (2019) levels as of 2022, the most recent year for which statewide data are available. In contrast, California’s statewide shoplifting rate remains below the 2019 level despite a recent increase.

In January, Governor Newsom proposed to provide $119 million in 2024-25 to address organized retail theft and other crimes. This was the same amount of General Fund support provided in the current fiscal year (2023-24) despite the large budget shortfall the state is facing.

The May Revision modestly reduces the total funding level from $119 million to $115.4 million. This reflects a $3.6 million cut to the Vertical Prosecution Grant Program, which would see its funding reduced from $10 million to $6.4 million in 2024-25. The governor does not propose cuts in 2024-25 to other components of his organized retail theft package, which includes $85 million for local law enforcement agencies and $24 million for state-level task forces and prosecution teams.

Revised Budget Estimates Proposition 47 Savings of $95 Million for Local Investments

Overwhelmingly approved by voters in 2014, Prop. 47 reduced penalties for six nonviolent drug and property crimes from felonies to misdemeanors. Consequently, state prison generally is no longer a sentencing option for these crimes. Instead, individuals convicted of a Prop. 47 offense serve their sentence in county jail and/or receive probation.

By decreasing state-level incarceration, Prop. 47 reduced the cost of the prison system relative to the expected cost if Prop. 47 had not been approved by voters. The Department of Finance is required to annually calculate these state savings, which are deposited into the Safe Neighborhoods and Schools Fund and used as follows:

• 65% for behavioral health services — which includes mental health services and substance use treatment — as well as diversion programs for individuals who have been arrested, charged, or convicted of crimes. These funds are distributed as competitive grants administered by the Board of State and Community Corrections.
• 25% for K-12 school programs to support vulnerable youth. These funds are distributed as competitive grants administered by the California Department of Education.
• 10% to trauma recovery services for crime victims. These funds are distributed as competitive grants administered by the California Victim Compensation Board.

As of the 2023 Budget Act, the state has allocated roughly $720 million in savings attributable to Prop. 47 — funds that have been invested in local programs that support healing and keep communities safe. For example, a recent evaluation shows that people who received Prop. 47-funded behavioral health services and/or participated in diversion programs were much less likely to be convicted of a new crime. Specifically, individuals enrolled in these programs had a recidivism rate of just 15.3% — two to three times lower than is typical for people who have served prison sentences (recidivism rates range from 35% to 45% for these individuals).

The May Revision estimates that Prop. 47 has generated an additional $94.8 million in state savings due to reduced state-level incarceration. These dollars will be allocated through the 2024 Budget Act, increasing Prop. 47’s total investment in California’s communities to more than $800 million since these savings were first allocated through the 2016 Budget Act.

Workforce & Climate Change

Governor Proposes Additional Cuts to Several Workforce Programs

The revised budget proposes to cut spending on several workforce development programs to help address the multi-year budget problem. (See Health Workforce section.) Specific cuts include:

In addition, the revised budget cuts $485 million General Fund in unspent one-time funds for the Learning-Aligned Employment Program in 2022-23. This program places eligible students at public colleges and universities in employment opportunities related to their area of study or career objectives. (See higher education sections.)

Revised Budget Proposes Further Cuts to Prior Environment Commitments

Californians across the state have increasingly seen the effects of climate change through devastating fires, droughts, and floods, but communities of color and low-income communities are often hit hardest by these catastrophes due to historical and ongoing displacement and underinvestment. Additionally, these communities are more likely to be exposed to environmental pollutants for the same reasons. 

Significant investments in climate resilience were made through recent years’ budgets. Most of the commitments were one-time investments intended to be made across several years, so there are significant unspent funds remaining. In January, the governor proposed budget solutions that included $2.9 billion in reductions and $1.9 billion in delays of climate investments committed in previous budget agreements. Several of these proposals were included, or partially included in the early action agreement between the governor and the Legislature.

The May Revision proposes around $1 billion in additional reductions to climate and environment programs for 2022-23 as well as further reductions to planned spending beyond the current budget window. Reductions are proposed in areas including but not limited to clean energy and transportation, water and drought resilience, and wildfire resilience.

Significant new reductions that may disproportionately impact low-income and under-resourced communities include: