Proposition 2 on the November 2026 ballot would change the rules for California’s rainy day fund to build a larger reserve and better protect core public services during budget emergencies, such as an economic downturn. Prop. 2 also would expand the types of state debt that could be repaid with General Fund revenues that must be set aside each year. In addition, Prop. 2 would modify the relationship between certain reserves and California’s state spending cap, or “Gann Limit” — a change that would allow policymakers to build up reserves in years when revenues are strong and the state is at risk of exceeding the limit. The Legislature placed Prop. 2, a constitutional amendment, on the ballot by passing ACA 20.
Prop. 2 would amend the state Constitution to change several of the rules that govern California’s rainy day fund — the state’s primary budget reserve, known as the Budget Stabilization Account (BSA).1California voters created the BSA in 2004 by passing Prop. 58 and reformed the BSA a decade later by approving Prop. 2 of 2014. For an analysis of Prop. 2 of 2014, see California Budget & Policy Center, Proposition 2: Should California Prioritize Paying Down Debt and Significantly Change State Budget Reserve Policies? (September 2014). In addition, Prop. 2 would modestly change the interaction between state reserves and the state spending cap, commonly called the Gann Limit. This section highlights the key changes that Prop. 2 would make if approved by voters in November.
Increases the Maximum Size of the Rainy Day Fund (BSA) to 20% of General Fund Revenues
Current Law
The state Constitution limits the size of the BSA to 10% of estimated General Fund tax revenues.2Specifically, the amount transferred to the BSA in any fiscal year may not result in a balance that exceeds 10% of estimated General Fund “proceeds of taxes.” Proceeds of taxes are estimated for the purpose of calculating the State Appropriations Limit (or Gann Limit) and tend to differ slightly from total General Fund revenues and transfers. When this limit is reached, any dollars that otherwise would go into the BSA must be spent on infrastructure.
Proposition 2
Prop. 2 would double the BSA cap to 20% of estimated General Fund tax revenues. If the 20% cap were ever reached, the dollars that would otherwise be deposited into the BSA would instead be spent on infrastructure, as under current law.
Changes How “Excess” Capital Gains Revenues Are Calculated to Save More in Strong Revenue Years
Current Law
The state Constitution requires some General Fund revenues to be set aside annually and requires additional General Fund revenues to be set aside when certain conditions are met. Generally speaking, 50% of these set-aside revenues are deposited into the rainy day fund, and the other 50% are used to pay down certain state debts.3As noted below, some set-aside revenues are owed to TK-14 education through the Prop. 98 minimum funding guarantee. This portion of set-aside revenues is governed by different rules and does not go toward the rainy day fund or state debt payments. These set-aside revenues are determined in two ways:
1.5% of General Fund revenues are automatically set aside every year. For example, if General Fund tax revenues were estimated to total $250 billion for a fiscal year, the state would need to set aside a total of $3.75 billion (1.5%), with half deposited into the rainy day fund (BSA) and the other half used to pay down certain state debts. Prop. 2 would not change this required annual transfer.
In addition to this fixed annual transfer, the state is required to set aside “excess” capital gains revenues. This requirement is triggered in years when estimated General Fund tax revenues that come from personal income taxes on capital gains exceed a specified target: 8% of total General Fund tax revenues.4Capital gains are the profits realized from selling assets that have increased in value, such as stock shares or real estate. Revenues from capital gains can be volatile from year to year depending on market conditions. When this occurs, a portion of these “excess” capital gains revenues — specifically, the share that is not owed to TK-14 education through the Proposition 98 minimum funding guarantee — is split equally between building the BSA balance and paying down certain state debts.5The share of “excess” capital gains revenues that are owed to TK-14 education via Prop. 98 is subject to a different set of rules. See California Budget & Policy Center, Proposition 2: Should California Prioritize Paying Down Debt and Significantly Change State Budget Reserve Policies? (September 2014), p. 2.
Proposition 2
Prop. 2 would change how “excess” capital gains revenues are calculated in order to set aside more revenue for the rainy day fund and state debt payments. Under Prop. 2, there would be two categories of “excess” capital gains revenues, as follows:
The first category of “excess” revenues would include capital gains revenues that total between 8% and 10% of General Fund tax revenues.
The second category of “excess” revenues would equal 1.5 times the portion of capital gains revenues that are above 10% of General Fund tax revenues. For example, if there are $2 billion in capital gains revenues above the 10% threshold, the state would have to set aside a total of $3 billion ($2.0 billion * 1.5) — $1 billion more than is required under current law.
As under current law, the portion of these “excess” revenues that are not owed to TK-14 education through Prop. 98 would be split equally between the rainy day fund and certain state debt payments.
Expands the Types of State Debt That May Be Paid with Set-Aside Revenues
Current Law
The state Constitution requires that half of General Fund revenues set aside each year be used to repay certain state debts.6The revenues used to calculate this 50% requirement exclude set-aside revenues that are owed to TK-14 education through California’s Prop. 98 minimum funding guarantee. Currently, the state may only use these set-aside revenues to 1) prefund state retiree health benefits and/or 2) pay down unfunded liabilities associated with state‑level pension plans. In prior years, the state was allowed to use these set-aside revenues to pay down certain types of budgetary debt. This included payments owed to K-12 schools and community colleges as of July 1, 2014.7These payments went toward unfunded prior-year Prop. 98 obligations, including so-called “settle-up” obligations, which reflect the reconciliation of estimates of the annual Prop. 98 minimum funding level and the actual Prop. 98 guarantee. However, by 2019-20, the state had repaid all of the outstanding budgetary debt.
Proposition 2
Prop. 2 would update and expand the list of state debts that could be paid with set-aside revenues. Specifically, these funds could be used to:
Repay federal unemployment insurance (UI) loans. Under Prop. 2, revenues set aside for state debt could be used to repay “federal loans made to the Unemployment Fund.” The measure does not specify whether Prop. 2 funds could be used to pay the interest as well as the principal on federal UI loans.
Repay certain TK-14 education obligations. Under Prop. 2, the state could once again use set-aside revenues, during any fiscal year, to make certain payments owed to TK-12 schools and community colleges.8Specifically, Prop. 2 would allow revenues set aside for state debt payments to be used for “unfunded prior fiscal year General Fund obligations” pursuant to the Prop. 98 minimum funding guarantee. These include so-called “settle-up” obligations, which reflect the reconciliation of estimates of the annual Prop. 98 minimum funding level and the actual Prop. 98 guarantee. Under the original Prop. 2 (2014), the state was allowed to use set-aside revenues to pay down unfunded prior fiscal year General Fund obligations pursuant to Prop. 98, but only for debt accrued prior to July 1, 2014. That debt was repaid by the 2019-20 fiscal year. In addition, set-aside revenues could be used to help accelerate the phase-out of an outstanding debt tied to an accounting maneuver that state leaders adopted in the 2023-24 budget to address an issue related to the Prop. 98 minimum funding guarantee.9For a discussion of this accounting maneuver, see Legislative Analyst’s Office, The 2024-25 Budget: The Governor’s Proposition 98 Funding Maneuver (February 15, 2024).
Repay General Fund loans to the Medi-Cal program. The 2025-26 budget transferred $4.4 billion from the state General Fund to the Medical Providers Interim Payment Fund to help cover higher-than-expected Medi-Cal costs. The budget delayed repayment of this loan, with payments starting in 2027-28 and potentially continuing for several years. Under Prop. 2, revenues set aside for state debt could be used to accelerate the paydown of the 2025-26 Medi-Cal loan or other Medi-Cal loans.
Extends the Debt-Paydown Requirement by 10 Years, to 2039-40
Current Law
The state Constitution requires 50% of set-aside revenues to be used to pay down certain state debts through the 2029-30 state fiscal year.10The revenues used to calculate this 50% requirement exclude set-aside revenues that are owed to TK-14 education through California’s Prop. 98 minimum funding guarantee. Starting in 2030-31, these payments become optional, and any set-aside revenues that are not used to pay down debt must be deposited into the rainy day fund.
Proposition 2
Prop. 2 would require 50% of set-aside revenues to go toward paying down state debts for an additional 10 years ending in 2039-40.11The revenues that would be used to calculate this 50% requirement would continue to exclude set-aside revenues that are owed to TK-14 education through California’s Prop. 98 minimum funding guarantee. Starting in 2040-41, these payments would become optional, and any set-aside revenues that were not used to pay down debt would have to be deposited into the rainy day fund.
Changes the Relationship Between Deposits/Withdrawals and the Gann Limit
Current Law
The state Constitution requires that deposits into state reserves be counted as spending for the purpose of calculations required by California’s spending cap. This is the case even though tax dollars transferred to a reserve clearly will not immediately be spent through the budget. This rule was put in place by Prop. 4 of 1979, which created the state spending cap.12For simplicity, this discussion uses the word “spending.” However, Prop. 4 uses the technical phrase “appropriations subject to limitation.” See California Constitution, Article XIIIB, Section 5. This cap is formally known as the State Appropriations Limit, but is more commonly called the Gann Limit.13The spending cap applies to the state as well as to local governments.
In contrast, withdrawals from state reserves as well as expenditures of withdrawn funds do not count as spending for the purpose of the Gann Limit.14California Constitution, Article XIIIB, Section 5. In other words, under current constitutional rules, tax dollars count toward the spending cap when they go into a reserve, but do not count toward the cap when they come out.
As a result, in years when state revenues are growing rapidly and the state is at risk of exceeding the spending cap, state leaders cannot bolster California’s fiscal resilience by further building up reserves, because doing so would put the state over the spending limit.15Revenues that are projected to exceed the spending limit can only be used in a few narrow ways if state leaders want to avoid going over the cap. If the state exceeds the cap for two consecutive years, half must go to taxpayers and the other half must go to TK-14 education on a per-pupil basis.
Proposition 2
Prop. 2 would alter the relationship between deposits/withdrawals and the Gann Limit for two state reserves: the rainy day fund (BSA) and the Projected Surplus Temporary Holding Account.
Prop. 2 would change the interaction between the BSA and the Gann Limit. Under Prop. 2, revenues would not count toward the state spending cap when they go into the rainy day fund, but would count when they are withdrawn.
Prop. 2 would change the interaction between the Projected Surplus Temporary Holding Account and the Gann Limit. The holding account is used to temporarily set aside anticipated surplus revenues for up to one year. Under Prop. 2, revenues deposited into the holding account — up to a cap — would not count toward the Gann Limit, but they would count when they come out. This cap would be equal to 10% of total General Fund tax revenues in the year the transfer is made. For example, if General Fund tax revenues were estimated to total $250 billion, then up to $25 billion could go into the holding account without counting toward the Gann Limit (but would count toward the Gann Limit when withdrawn). However, if the holding account deposit exceeded $25 billion, then the excess amount would count toward the Gann Limit (but would not count when withdrawn).
Changes How a Budget Emergency May Be Declared
Current Law
The state Constitution requires the governor to declare a budget emergency in order to:
Suspend or reduce a required deposit into the rainy day fund (BSA) or the Public Schools System Stabilization Account (PSSSA), or
To declare a budget emergency, the governor signs a proclamation. It may be signed very late in the fiscal year, including after the June 15 constitutional deadline for the Legislature to pass the budget. For example, in 2025, Governor Newsom issued a budget emergency proclamation on June 27 — well after the Legislature passed the budget and just three days before the end of the 2024-25 fiscal year.
This misaligned timing puts the Legislature in the awkward position of passing a budget that assumes a budget emergency before the governor has made it official.
Proposition 2
Prop. 2 would create a simplified pathway for declaring a budget emergency. This alternative pathway is intended to prevent a situation where the governor suggests a budget emergency will be declared, but then fails to issue a proclamation before the Legislature’s June 15 constitutional deadline to pass the budget.
Prop. 2 would allow the governor’s May Revision, which is due out by May 14, to constitute the proclamation of a budget emergency if two conditions were met:
Second, the May Revision would have to propose suspending or reducing a required transfer to the BSA or PSSSA and/or withdrawing funds from one or both of these reserves.
In other words, if voters approve Prop. 2, the governor would no longer have to issue a formal proclamation in order for a budget emergency to be operative.
What Would Proposition 2 Not Do?
While Prop. 2 would make a few changes to California’s rainy day fund as well as modestly revise how the Gann Limit works, the measure would largely leave the current rules in place. In addition, Prop. 2 would not touch the state’s constitutional funding requirement for TK-14 schools and community colleges, known as Prop. 98. For example, Prop. 2:
Maintains the requirement to set aside 1.5% of state General Fund tax revenues each year. Half of these revenues would continue to go into the rainy day fund (BSA), and the other half would continue to be used to pay down certain state debts.
Continues to allow state leaders to reduce or suspend deposits into the rainy day fund to address a budget emergency, and maintains the current definition of “emergency.” BSA deposits could continue to be reduced or suspended in the event of a budget emergency, which would continue to be defined as 1) a disaster or extreme peril or 2) insufficient General Fund revenues to meet a prior-year spending level.
Continues to limit the amount of money that may be withdrawn from the rainy day fund to address a budget emergency. State leaders could continue to withdraw only the amount needed to address a budget emergency, and no more than half of the funds could be taken out in the first year of an emergency.
Continues to prohibit state leaders from suspending debt payments to address a budget emergency. State leaders would continue to be prevented from reducing or canceling required debt payments, even if the state faced a disaster or a severe budget shortfall.
Does not make any changes to the Prop. 98 minimum funding guarantee for TK-14 education. Under the state Constitution, the state is required to set aside a portion of revenues for schools and community colleges each year based on various inputs and formulas. Prop. 2 does not make any changes to the formulas or inputs that determine the annual minimum guarantee calculation.
Maintains the current rules for California’s TK-14 education reserve. Prop. 2 does not change the rules governing the PSSSA, the state’s reserve for TK-12 schools and community colleges. For example, all of the conditions required to trigger a deposit into the PSSSA would remain intact. This includes strong capital gains-related income tax revenue, General Fund revenue growth that translates to strong growth in the Prop. 98 minimum funding guarantee, and no legislative suspension of the guarantee.
Leaves California’s arbitrary spending cap largely untouched. Other than modestly changing the relationship between two state reserves and the Gann Limit, Prop. 2 leaves in place the complex rules that structure California’s spending cap. This cap hinders state leaders’ ability to respond to the needs of Californians even as these needs have changed dramatically since the Gann Limit was created in 1979.
What Would Proposition 2 Mean for California?
This section explores the implications of several key provisions of Prop. 2, specifically:
Raising the rainy day fund cap to from 10% to 20% of General Fund tax revenues,
Setting aside more General Fund revenues during “boom” years,
Expanding the types of state debt that may be paid down with set-aside revenues, including unemployment insurance loans and certain TK-14 education obligations, and
Changing the relationship between two state reserves and the state spending cap (the Gann Limit).
This section also considers the implications of maintaining two current rainy day fund provisions that Prop. 2 would leave in place, specifically:
Continuing to prohibit state leaders from reducing or suspending required debt payments during a budget emergency, and
Maintaining the current definition of what qualifies as a budget emergency.
What Are the Implications of Raising the Rainy Day Fund (BSA) Cap to 20% of General Fund Tax Revenues?
Under Prop. 2, the maximum size of the rainy day fund would double, rising from 10% to 20% of General Fund tax revenues. With a higher cap, the rainy day fund would have the potential to grow substantially larger. This, in turn, would provide a larger “cushion” for the state budget, helping state leaders to better protect vital services when revenues drop during economic downturns and reducing the need for draconian spending cuts that harm Californians.
If the BSA balance were ever to reach the higher 20% cap, the annual General Fund revenues that would otherwise be deposited into the fund (“spillover” revenue) would instead be spent on infrastructure, as under current law. However, with a higher cap, the state would reach the BSA limit less frequently than is currently the case with a 10% cap. Consequently, over time there would be less spillover revenue available for infrastructure investments. On the other hand, the rainy day fund would likely hold a larger balance to help address a budget emergency.
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What Are the Implications of Setting Aside More Revenue in “Boom” Years?
Prop. 2 would require the state to set aside more revenue in years when capital gains revenues spike. This change would allow the state to build up the rainy day fund and pay down certain debts faster, reducing future General Fund cost pressures, while modestly curtailing General Fund revenue available for immediate spending needs.
If Prop 2’s “excess” capital gains provisions had been in place between 2010-11 and 2023-24, California would have had to set aside more General Fund revenue in six of those 14 years. This additional set-aside would have amounted to less than 1% or 2% of total General Fund revenue in each of those six years. Capital gains revenue is difficult to project. However, if a similar pattern held going forward, Prop. 2 could take hundreds of millions of dollars — or even more than $1 billion — in revenue “off the table” in some years. This would reduce resources available to address urgent needs that arise, but would also help to pay down additional state debt and further build reserves to address future emergencies.
Although “excess” capital gains revenue, by definition, is not a predictable and reliable revenue source and cannot be counted on to fund ongoing services, it could be reasonable to use it to temporarily meet critical needs. For example, the state could provide more funding for food banks in the wake of federal food assistance cuts, boost support for local governments to address homelessness, and pay child care providers before or at the time of service delivery (rather than after) — a change that would increase providers’ financial solvency.
In certain years, Prop. 2 would modestly reduce revenue that could otherwise be used to support vital services as communities across the state are reeling from deep federal cuts and mounting affordability pressures that are compounding long-standing unmet needs.
However, meaningfully addressing Californians’ needs requires significant and sustained new revenue — well beyond the relatively modest revenue that Prop. 2 would occasionally divert to reserves and debt payments. This underscores the need to reform California’s outdated tax base whether or not voters approve Prop. 2.
What Are the Implications of Expanding the Types of Debt That May Be Paid Down with Set-Aside Revenues?
The state Constitution requires a portion of General Fund revenues to be set aside each year for certain debt payments (unfunded pension and state retiree health liabilities). This requirement cannot be reduced or suspended even in a budget emergency — a provision that Prop. 2 would leave in place. In recent years, for example, roughly $1 billion to $2 billion in General Fund revenues each year remained “off the table” and were not available to support urgent spending needs.
Prop. 2 would broaden the allowable uses of set-aside revenues to include unemployment insurance (UI) debt. If policymakers were to use these debt-paydown funds to repay the principal on the state’s federal UI loans, then a cost currently borne by businesses would be shifted to the state.
Prop. 2 would also allow set-aside revenues to be used to pay down certain obligations related to TK-14 education and Medi-Cal that otherwise would be paid out of the General Fund. If policymakers were to use debt-paydown funds for these purposes, then General Fund revenue would be freed up for other purposes.
However, set-aside revenues are limited. If state leaders were to use more of these debt-paydown funds for the new purposes allowed by Prop. 2, then fewer (or no) funds would be available to reduce unfunded pension and state retiree health liabilities — costs that would eventually be borne by the General Fund.
What Are the Implications of Using Set-Aside Revenues to Repay Unemployment Insurance Loans?
Prop. 2 would allow state leaders to use set-aside revenues for “federal loans made to the Unemployment Fund.” California owes the federal government roughly $20 billion it borrowed to cover the cost of workers’ unemployment insurance (UI) benefits beginning during the COVID-19 pandemic, when unemployment spiked. Using debt-paydown funds to reduce the principal on California’s UI debt would shift a cost currently borne by businesses to the state and do nothing to fix California’s broken UI system.
Shifting a Cost Currently Borne by Businesses to the State
California’s state government is not required to repay the principal on federal UI loans. Instead, federal law requires businesses to repay the principal through automatic increases in their federal payroll taxes. This makes sense: California’s UI debt is the result of a broken system. For decades, state leaders have not required businesses to contribute enough to cover the true cost of the unemployment benefits their workers need.
Using set-aside revenues to repay the principal on California’s UI loans would shift a cost currently covered by businesses to the state. Moreover, this approach would reduce the amount of debt-paydown funds available for other purposes, such as reducing unfunded pension liabilities — costs that would eventually be borne by the General Fund. As a result, to the extent that state leaders were to use set-aside revenues to pay down UI debt, then more General Fund revenue would be needed to reduce other state debts, diverting dollars away from providing services to Californians.
Doing Nothing to Fix California’s Broken UI System
The UI system is chronically underfunded because California has failed to modernize the system’s financing to ensure that it generates sufficient revenue to cover the cost of the unemployment benefits workers need.
Consequently, federal loans are expected to become “a permanent feature” of the program, with significant implications for the state’s budget. California typically uses General Fund dollars to pay the interest on these loans, which could total around $1 billion annually in the coming years. Using state dollars to pay the interest on UI loans reduces resources that could otherwise be used to address Californians’ affordability challenges or other needs.
Using debt-paydown funds to reduce the principal on California’s UI debt could modestly reduce the state’s annual interest payments in the near term. However, until state leaders address the broken UI financing system, California is expected to remain locked in a perpetual cycle of debt, necessitating ongoing federal loans and putting constant pressure on the state’s General Fund to cover the annual interest owed.
What Are the Implications of Using Set-Aside Revenues to Repay Certain School and Community College (TK-14) Education Obligations?
Prop. 2 would give state leaders a new option to use set-aside revenues to repay certain TK-14 education obligations. Specifically, the measure would allow state leaders to use these funds to 1) cover Prop. 98 “settle up” payments, as needed, and 2) more quickly phase out an outstanding debt tied to an accounting maneuver that state leaders adopted in the 2023-24 budget to address an issue related to the Prop. 98 minimum funding guarantee. These new options mean that:
State Leaders Could Use Debt-Paydown Funds to Help Address Increases in Prop. 98 Funding Estimates
When state leaders enact a budget, they provide an estimate of the Prop. 98 minimum funding guarantee for that fiscal year. This initial estimate is updated in subsequent years to reflect changes in revenue estimates and other inputs. The updated inputs sometimes increase the Prop. 98 guarantee, which requires the state to provide additional funding through “settle-up” payments.
The state usually recognizes any increases to the Prop. 98 guarantee in subsequent years and provides the required settle-up payments from the state’s General Fund at that point. In some years, however, settle-up payments have been delayed, most recently for fiscal years 2024-25 and 2025-26, partly due to the state’s limited General Fund capacity to fund that growth.
Prop. 2 would allow set-aside revenues to be used to cover any current or future Prop. 98 settle-up obligations. This change would provide state leaders with an additional funding source for making these payments, which they could use at their discretion, potentially in combination with General Fund dollars. However, using debt-paydown funds for this purpose would compete with other allowable uses, such as prefunding state retiree health benefits.
In addition, using debt-paydown funds to make settle-up payments would not necessarily retire this obligation more quickly. Under current law, there is no required schedule for making settle-up payments, and Prop. 2 does not create one. If set-aside revenues were treated as the sole or primary source for settle-up payments, it could take longer to fully pay down these obligations because the amount of set-aside revenues may not align with the size of the obligation in a given year, especially when state revenues decline and the set-aside shrinks.
State Leaders Could Accelerate the State’s Recognition of $6.2 Billion in TK-14 Costs Incurred in 2022-23
In 2023, tax filing deadlines were extended due to winter storms, and state leaders overestimated the amount of tax revenue that would be received later in the year. As a result, the state provided $6.2 billion more to schools and community colleges than the Prop. 98 minimum funding guarantee actually required.
State leaders did not reduce the minimum guarantee to account for the lower revenues. Instead, they set up a schedule to recognize those dollars for accounting purposes in future budgets, starting in 2027-28 and ending in 2039-40. The annual cost is $500 million for the first 12 years, with a smaller amount in the 13th year.
Recognizing these costs will directly reduce General Fund revenues that would otherwise be available in those years for state funding priorities outside of the Prop. 98 guarantee. The sooner this $6.2 billion debt is recognized, the sooner the annual General Fund cost ends and those dollars become available for other purposes.
Prop. 2 would allow state leaders to use set-aside revenues to recognize this $6.2 billion debt, which would mitigate the General Fund impact as well as potentially clear the outstanding balance more quickly. However, using debt-paydown funds for this purpose would compete with other allowable uses, such as reducing state retiree pension liabilities.
What Are the Implications of Changing the Relationship Between Reserves and the State Spending Cap (Gann Limit)?
Prop. 2 would allow state policymakers to save more in strong revenue years to better protect vital public services during economic downturns. This is because deposits into two key reserves would no longer count as spending for the purpose of calculations required by California’s spending cap (the Gann Limit). Instead, these deposits would count toward the Gann Limit only when they are withdrawn.
This change would allow state leaders to build up reserves in years when revenues are strong and the state is close to reaching the spending cap, removing a key drawback of the Gann Limit. This change would also modestly increase “room” under the cap by up to a few billion dollars a year, potentially delaying how long it takes for the state to surpass the limit.
These changes are important. The Gann Limit is an arbitrary cap that hinders state leaders’ ability to respond to the needs of Californians, which have changed dramatically since late 1970s when the cap was established. Meeting the essential needs of residents and building up reserves to address future needs should not be hamstrung by an arbitrary spending cap approved by an earlier generation of voters.
Prop. 2 would allow policymakers to keep the state under the Gann Limit by making deposits into two reserves — the BSA and the Projected Surplus Temporary Holding Account (“holding account”). Several factors, including which of these accounts were used for this purpose, would determine when the deposited funds could be withdrawn and how they could be spent. Specifically:
For deposits into the holding account, state law currently requires the funds to be withdrawn within a year — a rule that could be changed by the Legislature.
If withdrawing funds from the holding account would cause the state to exceed the spending cap, then policymakers would lose flexibility over how the funds could be used (their use would be governed by the Gann Limit’s restrictive rules).
Otherwise, if withdrawing the funds would not cause the state to exceed the limit, policymakers would have full control over the funds.
For deposits into the BSA, the portion that was constitutionally required to be deposited could not be withdrawn unless a budget emergency was operative. Any discretionary deposits, on the other hand, could be withdrawn at any time.
If withdrawing funds from the BSA would cause the state to exceed the spending limit, then policymakers would lose flexibility over how the funds could be used (their use would be governed by the Gann Limit’s restrictive rules).
Otherwise, if withdrawing the funds would not cause the state to exceed the limit, policymakers would have full control over the funds.
Although Prop. 2 would take a modest step toward loosening the constraints of the Gann Limit, the limit itself would remain in place and continue to artificially restrict policymakers’ ability to meet state residents’ needs and create an equitable California.
What Are the Implications of Continuing to Prohibit State Leaders from Reducing or Suspending Debt Payments During a Budget Emergency?
Prop. 2 would leave in place the rules that prevent state leaders from reducing or canceling required annual debt payments.17In contrast, under current law, required deposits into the rainy day fund can be reduced or suspended during a budget emergency — a flexibility that Prop. 2 would maintain. In other words, paying down debt would continue to be prioritized over using those funds to address a disaster or to meet Californians’ basic needs during tough budget years when state revenues are down.
Moreover, under Prop. 2, this prohibition on reducing or suspending debt payments would remain in place for an additional 10 years, through 2039-40, after which these payments would be optional. Under current law, debt payments are required through 2029-30, after which they become optional.
The current rules unreasonably constrain state leaders’ options when there is a budget deficit. As recently as 2025, for example, the state faced a $15 billion budget problem. However, state leaders could not pause the required debt payments, taking a potential budget-balancing tool off the table. As a result, additional budget “solutions,” like freezing Medi-Cal enrollment for certain immigrants and reducing payments to health care clinics, were enacted to close the budget gap, even as the debt payments went forward.
By failing to allow state leaders to reduce or suspend required debt payments, Prop. 2 misses an opportunity to create another budget-balancing tool that could help to close deficits without resorting to harmful cuts.
What Are the Implications of Maintaining the Current Definition of “Budget Emergency”?
Under Prop. 2, state leaders could continue to reduce or suspend a required deposit into the rainy day fund and/or withdraw funds to help address a budget emergency. Prop. 2 also maintains the current definition of a “budget emergency,” which reflects either 1) a disaster or extreme peril or 2) insufficient resources to meet a specified prior-year General Fund spending level.
The current definition of “budget emergency” leaves out federal funds. As such, it fails to recognize the impact of federal funding cuts on California’s ability to support vital public services. For example, H.R. 1, the 2025 federal budget reconciliation bill — the so-called “One Big Beautiful Bill Act” signed into law by President Trump — slashed federal funding for basic needs to help offset the cost of tax breaks for the wealthy and profitable corporations.
Millions of Californians will lose health care and food assistance due to H.R. 1. Yet, these massive federal cuts to vital public services do not count as a “budget emergency.” As a result, state leaders cannot tap the rainy day fund to help mitigate — if only temporarily — the impact of these federal funding losses and reduce the harm that H.R. 1 is inflicting on Californians.
By failing to broaden the definition of a “budget emergency” to include federal funding losses, Prop. 2 misses an opportunity to help state leaders reduce the harm of substantial federal cuts to vital public services.
The California Budget & Policy Center is a nonpartisan research and analysis nonprofit and does not endorse or oppose ballot measures. This analysis reflects the institutional position of the Budget Center, developed and reviewed by our policy leadership team.
Specifically, the amount transferred to the BSA in any fiscal year may not result in a balance that exceeds 10% of estimated General Fund “proceeds of taxes.” Proceeds of taxes are estimated for the purpose of calculating the State Appropriations Limit (or Gann Limit) and tend to differ slightly from total General Fund revenues and transfers.
3
As noted below, some set-aside revenues are owed to TK-14 education through the Prop. 98 minimum funding guarantee. This portion of set-aside revenues is governed by different rules and does not go toward the rainy day fund or state debt payments.
4
Capital gains are the profits realized from selling assets that have increased in value, such as stock shares or real estate. Revenues from capital gains can be volatile from year to year depending on market conditions.
The revenues used to calculate this 50% requirement exclude set-aside revenues that are owed to TK-14 education through California’s Prop. 98 minimum funding guarantee.
7
These payments went toward unfunded prior-year Prop. 98 obligations, including so-called “settle-up” obligations, which reflect the reconciliation of estimates of the annual Prop. 98 minimum funding level and the actual Prop. 98 guarantee.
8
Specifically, Prop. 2 would allow revenues set aside for state debt payments to be used for “unfunded prior fiscal year General Fund obligations” pursuant to the Prop. 98 minimum funding guarantee. These include so-called “settle-up” obligations, which reflect the reconciliation of estimates of the annual Prop. 98 minimum funding level and the actual Prop. 98 guarantee. Under the original Prop. 2 (2014), the state was allowed to use set-aside revenues to pay down unfunded prior fiscal year General Fund obligations pursuant to Prop. 98, but only for debt accrued prior to July 1, 2014. That debt was repaid by the 2019-20 fiscal year.
The revenues used to calculate this 50% requirement exclude set-aside revenues that are owed to TK-14 education through California’s Prop. 98 minimum funding guarantee.
11
The revenues that would be used to calculate this 50% requirement would continue to exclude set-aside revenues that are owed to TK-14 education through California’s Prop. 98 minimum funding guarantee.
12
For simplicity, this discussion uses the word “spending.” However, Prop. 4 uses the technical phrase “appropriations subject to limitation.” See California Constitution, Article XIIIB, Section 5.
13
The spending cap applies to the state as well as to local governments.
14
California Constitution, Article XIIIB, Section 5.
15
Revenues that are projected to exceed the spending limit can only be used in a few narrow ways if state leaders want to avoid going over the cap. If the state exceeds the cap for two consecutive years, half must go to taxpayers and the other half must go to TK-14 education on a per-pupil basis.
In contrast, under current law, required deposits into the rainy day fund can be reduced or suspended during a budget emergency — a flexibility that Prop. 2 would maintain.
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Governor Gavin Newsom released the revised 2026-27 California state budget on May 14, projecting positive year-end balances for 2026-27 and 2027-28 and increasing state reserves. In contrast to the governor’s January proposal, which projected a small deficit for 2026-27, the May Revision reflects a stronger fiscal position for the state due to revenue projections that exceed the earlier forecast by $16.8 billion over the three-year budget window.
Stronger-than-expected revenues do not solve all of the state’s challenges. The 2026-27 state budget is Governor Newsom’s last opportunity to fully respond to the damaging federal cuts enacted through H.R. 1. The state is losing billions of dollars in federal funding and struggling with substantial new costs, and Californians are facing new restrictions on access to health care, food assistance, and more.
Despite improving revenues, the $246.6 billion General Fund spending plan is $1.8 billion lower than what the governor proposed in January and reflects concerns about economic uncertainties, geopolitical conflicts and impacts on energy prices, and other external factors that could change the overall fiscal outlook of the state. In addition, the administration and the Legislative Analyst’s Office (LAO) project that rising costs of maintaining state programs and services will outpace revenues in future years, resulting in structural deficits without other state actions. As a result, the May Revision proposes a mix of revenue, spending, and reserve solutions to balance the budgets for 2026-27 and 2027-28.
Revenue
The governor’s proposed revenue solutions include permanently capping business tax breaks at $5 million or 50% of total tax liability (whichever is higher) and adding a new digital software tax.
Reducing inequitable tax breaks that disproportionately benefit the largest and most profitable corporations and adding the new digital software tax are common-sense revenue solutions that modernize our state’s tax system, respond to external changes, and ensure the state can continue to make investments in Californians.
Spending
While the governor’s revenue solutions are a positive initial step, the May Revision mostly fails to address the harmful impacts of H.R. 1, which include well over 1 million Californians losing health coverage through Medi-Cal and more than 3 million households at risk of losing all or some of their nutrition assistance through CalFresh. Similar to this year’s budget (2025-26), the governor’s proposal would compound rather than mitigate that harm by making additional state-level cuts to Medi-Cal, targeting certain immigrants, increasing monthly premiums, and adding onerous paperwork and work requirements that make it more difficult for Californians with low incomes to access benefits for which they are eligible.
The lack of a robust state response to H.R. 1 adds to the ongoing affordability crisis confronting millions of Californians. While the May Revision purports to maintain many prior year expansions, it also allows an array of investments in housing affordability and homelessness to sunset, with no additional funding in 2026-27, and further delays expansion of needed child care spaces and rate reform for undercompensated child care providers.
The governor’s revised budget protects and maintains some of the progress made in prior budget years, including policy advances in behavioral health, cash assistance, food assistance, universal school meals, and expansion of before and after school programs.
Notably, one part of the revised proposal that would see significant new investments is education. The improving near-term state revenue outlook results in higher estimates for the Proposition 98 minimum funding guarantee for transitional kindergarten (TK), school-based state preschool, K-12 schools, and community colleges compared to the governor’s January proposal and the current year budget. In addition, the governor proposes nearly $10 billion in new or expanded investments in TK-12 and community colleges, on top of maintaining existing programs and services.
Reserves and Other Issues
The governor’s revised budget projects nearly $30 billion in reserves at the end of 2026-27. In addition, the revised budget proposes depositing nearly $10 billion into the Projected Surplus Temporary Holding Account in 2026-27, then allocating these funds in 2027-28 — assuming they materialize.
The administration projects that the state prison population will moderately increase in the near term due to the passage of Prop. 36 in November 2024, which increased penalties for certain drug and theft offenses, including by reversing some of Prop. 47’s (2014) sentencing reforms. However, the administration projects that the prison population will resume its long-term decline due to other justice system reforms that remain in effect. Yet, the May Revision does not include any additional closures of state prisons, as recommended by the LAO.
Outlook
In terms of future budget years, California’s projected structural budget imbalance reflects a revenue problem rooted in a decades-old tax and governance structure. The May Revision shines a light on how investing in the needs of Californians and protecting them from federal attacks will fall short without revenue solutions.
The governor’s proposed cap on business tax credits is a positive step toward addressing the state’s long-term revenue imbalance and reducing inequitable tax breaks that disproportionately benefit large, profitable corporations. The need for a cap underscores the inequities in the state’s ‘shadow budget’ that foregoes billions of state revenues that could otherwise be invested in the health and well-being of Californians.
In the near term, the governor and Legislature should also close the Water’s Edge tax break, which allows large multinational corporations to shift state profits to offshore tax havens, which could raise up to around $3 billion annually. As state leaders confront the challenges of federal cuts and economic uncertainty, they have a responsibility to make the state’s tax system more fair in order to invest in and protect the state’s communities.
This First Look report outlines key elements of the May Revision budget proposal and explores how the governor prioritizes spending, revenue, and reserve proposals amid ongoing federal cuts and affordability challenges. The report also highlights alternative proposals included in the Senate budget plan released in April.
What is the May Revision?
The May Revision, also known as the May Revise, is an update to the governor’s proposed state budget, released by May 14 each year. It includes new estimates of the state’s revenues, updates proposed spending based on the latest information, and may change, add to, or remove policy proposals from the January budget proposal.
The administration’s economic outlook is an important aspect of the budget because aggregate changes in economic indicators, such as jobs and wages, affect how much revenue the state will generate. The revised budget projects weaker economic growth in the near term for both California and the US due to new developments, such as higher global energy prices due to the Iran war, which are expected to lead to higher inflation and reduced purchasing power, weakening consumer demand and overall economic activity. The ongoing impact of tariffs, which are projected to continue to raise costs for businesses and consumers in the near term, is another key factor behind the administration’s weaker economic outlook. On top of this, the revised budget projects that California’s job market will remain weak, with essentially no aggregate job growth expected in 2026 or 2027.
Californians Begin to See Harm from Budget Cuts as Corporations Enjoy Massive New Tax Breaks
The administration’s outlook is useful for understanding how economic conditions might impact budget revenues, but it’s also important to consider how economic conditions and recent policy choices are affecting everyday Californians who count on services funded by the budget.
Communities across the state have been facing mounting affordability pressures for years due to persistently high inflation and insufficient investments in affordable housing, child care, and other essentials. Roughly 1 in 6 Californians struggle to afford food, housing, and other basic needs, based on the California Poverty Measure. Economic instability is especially common among young adults ages 18 to 24, with nearly 1 in 4 experiencing poverty, as well as older adults age 65+, with nearly 1 in 5 in poverty.
Now the economic challenges facing Californians are worsening as deep federal budget cuts to health care and food assistance, together with recent state cuts to health care, begin to take effect, targeting people with low incomes, immigrants, communities of color, and other marginalized communities. This includes:
The elimination of CalFresh food assistance for Californians with humanitarian immigration statuses that began April 1, 2026 and the expansion of harsh time limits to more groups of Californians beginning June 1, 2026. These cuts will take food away from children, seniors, and people with disabilities and could lead to increased poverty and food insecurity across every legislative district.
The elimination of full scope Medi-Cal and CHIP coverage for immigrants with humanitarian status starting October 1, 2026, with several additional cuts that will reduce access to health care starting January 1, 2027. This follows on the heels of state cuts taking effect this year that will reduce access to Medi-Cal, including an enrollment freeze applying to undocumented adults that began January 1. State and federal cuts to health care threaten to leave millions of people without coverage and harm Californians in every legislative district.
As Californians begin to feel the harm of deep federal budget cuts, large corporations are beginning to enjoy the benefits of $1 trillion in federal tax breaks over the next 10 years that are partly funded through those cuts. At least 88 of the largest corporations in the US paid no federal corporate income tax in their most recent fiscal year, including several headquartered in California, even though they had significant pretax profits, reflecting at least in part the federal corporate tax breaks enacted last year, combined with those enacted during president Trump’s first term. The richest 1% of US residents are also slated to receive $1 trillion in federal tax cuts over the next 10 years, while low- and middle-income families will pay higher taxes, at a time when affordability challenges continue to increase and income inequality in the US and California are already extreme.
These federal policy choices will widen already extreme inequities in California, making it even more imperative that state leaders take bold action to counter wealth and income concentration and safeguard essential services that contribute to the health, well-being, and economic security of all Californians.
Proposed Budget Assumes a $16.8 Billion Improvement in the Revenue Outlook Over the January Projections
The governor’s budget proposal assumes that state General Fund revenues across the three-year budget window — covering fiscal years 2024-25 through 2026-27 — will be $16.8 billion higher than projected in the January budget proposal, before accounting for the estimated $1.3 billion revenue increase from the governor’s tax policy proposals (see Tax Policy section). This largely reflects continued growth in personal income tax collections, driven mainly by a strong stock market, which results in income gains for high-income Californians, who pay higher tax rates under the state’s progressive tax system.
The administration’s revenue projections are lower than the Legislative Analyst’s Office (LAO) estimates, which recently projected that General Fund revenues from the state’s three largest revenue sources — personal income taxes, corporate taxes, and sales taxes — will be $25 billion higher than the governor’s January projections across the three-year budget window, also due mainly to personal income taxes.
Both the administration and the LAO acknowledge that the current stock market trends may not be sustained, particularly as stock market gains have been driven primarily by what may be an “AI bubble” that could burst, which would negatively impact the state’s revenues in the future. Additionally, the administration notes additional risks to the economic and revenue forecasts stemming from the Iran war and the potential for prolonged elevations in oil and gas prices as well as the impacts of tariffs.
The administration’s revenue forecast accounts for a moderation in stock market growth but not a significant downturn. If such a downturn were to occur this year, the administration estimates that revenues could be $15 billion to $20 billion lower than the current estimates across the budget window, even without an economic recession. However, revenue estimation is highly uncertain and there is no way of knowing with certainty when such a reversal in the stock market might occur and when the impacts on the California budget would materialize.
While the increased revenue projections improve the budget condition, it’s important to keep in mind that around half of new revenues are constitutionally required to go to K-14 education spending (see Proposition 98 section), budget reserves, and debt repayments (see Reserves section).
H.R. 1 and the Federal Budget
H.R. 1, the harmful Republican mega bill passed in July 2025, will deeply harm Californians by cutting funding for essential programs like health care, food assistance, and education.
See how California leaders can respond and protect vital supports.
Governor Proposes Tax Policy Changes to Generate Ongoing Revenue
Tax revenues are the foundation of a well-functioning state that ensures its residents can access the basics like affordable housing, health care, and child care, offers quality cradle to career education, and provides businesses with the resources they need to thrive, such as a skilled workforce and public infrastructure. But California’s revenue and governance structure hasn’t kept pace with a dramatically changed world.
California is facing multiple challenges that impact the state budget and the lives of Californians: growth in state revenues is projected to lag behind the growing costs of meeting the needs of Californians, and deep federal cuts to health care and food assistance enacted last year through H.R. 1 are continuing to go into effect, with many of the harshest policies set to begin later this year and in 2027. Meanwhile, profitable corporations and wealthy households have been gifted with federal tax breaks through H.R. 1 and the previous round of Trump tax cuts in 2017. The state will need significant additional revenues in order to maintain existing critical services, blunt the harms of the federal cuts, and continue making progress on better meeting Californians’ needs.
The governor’s revised budget takes steps to increase ongoing state revenues and ensure highly profitable corporations are paying their fair share in state taxes, but much more will be needed. The budget includes tax policy changes that, on net, are estimated to raise about $1.3 billion in 2026-27 and $2.5 billion in future years. This does not include the impacts of the Managed Care Organization tax, which allows the state to draw down additional federal funding to support the Medi-Cal program (see Medi-Cal Provider Taxes & Fees section).
Instituting a permanent limit on business tax credits.
Starting in tax year 2027, when the current temporary business tax credit limit will have expired, the total amount of tax credits a business can claim in any year is limited to 50% of the taxes it would owe before applying credits or $5 million, whichever is higher. This helps ensure that highly profitable corporations are not able to reduce their taxes down to the $800 minimum tax. The administration estimates this limit would increase General Fund revenues by $850 million in 2026-27 and around $1.7 billion ongoing and would likely impact fewer than 100 companies that have California profits of more than about $57 million.
However, the new limit would not impact businesses’ ability to claim refunds for the tax credits that were limited by the temporary $5 million cap during tax years 2024 through 2026. These refunds are expected to cost the state $6.8 billion spread across fiscal years 2026-27 through 2034-35. Additionally, the limit would not apply to film tax credit recipients electing to either use the credit against their sales tax liability or to take it as a refundable credit.
The governor’s proposal is a critical first step to ensuring more corporations pay their fair share in state taxes. According to the Department of Finance, in 2023 there were 342 corporations with California profits above $100 million, of which 80 (23%) reduced their tax liability by at least half, and around 20 of those corporations were able to nearly zero out their tax bills.
Setting a cap at the higher of 50% of tax liability or $5 million means small businesses will not be affected, but some very profitable corporations with large stockpiles of tax credits will be able to cut their taxes by far more than $5 million a year. For instance, a corporation with $500 million in California taxable income would regularly have a tax bill of $44.2 million, but under the new limit it would be able to reduce that by half if it has available credits, down to $22.1 million. Policymakers may consider whether a smaller percentage cap would be more appropriate, which would raise additional annual revenue by requiring corporations to spread tax credit usage out across a longer time period. State leaders should also reconsider allowing businesses to claim refunds for the tax credits limited by the temporary $5 million cap during the 2024-26 period to align with this new policy and avoid unnecessary state revenue losses.
Applying the sales tax to software purchases downloaded or accessed online.
Currently, the state’s sales and use tax only applies to sales of physical goods — not digital goods or services — even as the economy has become increasingly digital and service-based. This has resulted in declining sales tax revenues relative to the economy. Software purchased on a CD or thumb drive is taxable, but software downloaded or accessed remotely is not. Most other states already tax electronically delivered software, and many other states tax additional digital goods and services. The administration proposes expanding the sales tax to include prewritten (not custom) software, regardless of how it is accessed.
The state’s 7.25% sales and use tax is separated into several different components supporting different funds. About 3.7% goes to the state’s General Fund and the remainder goes into funds to support local health and human services and public safety — including services that were “realigned” from the state to counties in 1991 and 2011 — as well as general county and city operations and local transportation programs. Additionally, counties, cities, and special districts can impose their own sales tax add-ons. The proposal is estimated to generate $450 million in General Fund revenues in 2026-27 and around $900 million ongoing. Additionally, it will increase local tax revenues by an estimated $560 million in 2026-27 and $1.1 billion ongoing.
Cutting the first-year $800 minimum franchise tax to $400 for certain businesses.
This change would apply only to businesses not organized as corporations, such as limited liability companies (LLCs) and partnerships. Corporations are already fully exempt from the minimum tax in their first year of operations, and while this creates an inequity between different types of businesses, the Legislative Analyst’s Office has recommended policymakers eliminate the first year minimum tax exemption entirely because it is not well-targeted to help small businesses and is unlikely to significantly impact new business formation. The governor estimates that the proposal to halve the minimum tax for non-corporate business would cost about $100 million annually, while the LAO estimated that eliminating the first-year exemption for corporations could raise $100 million to 150 million annually.
Allowing the deferral of state taxes on gains in “Trump Accounts.”
Last year’s H.R. 1 introduced a new type of tax-deferred savings account for children dubbed “Trump Accounts,” which are similar to traditional Individual Retirement Accounts. The governor proposes applying the same state tax treatment to Trump Accounts as the federal government, except that the additional tax on early withdrawals would be 2.5% instead of the federal 10% — in line with California’s additional tax on early withdrawals from other tax-advantaged savings accounts.
The administration estimates this will cost $1 million General Fund in 2026-27 and increase to $3 million by 2029-30. While this does not have large budget implications, Trump Accounts — like most tax advantaged savings accounts — disproportionately benefit higher-income families who have the means to make significant contributions into the accounts, likely increasing wealth inequality. This is distinct from a “baby bond” program targeted to lower-income families who have fewer wealth-building opportunities, which aim to narrow wealth gaps.
Maintaining the January proposal to extend the California Competes tax credit.
The current credit program is set to expire after 2027-28, and the governor proposed extending it for an additional five years. California Competes credits, discussed here, are allocated on a competitive basis to businesses that commit to making investments and creating jobs in the state, and the annual allocation would continue to be capped at $180 million. The budget impacts of the credit extension will begin in 2028-2029.
The governor’s tax proposals would generate greatly needed long-term revenue to support state services, and would ensure more profitable corporations are reasonably contributing to state tax revenues. But given the growing unmet needs of Californians, additional revenues will be needed to protect and expand critical state services. Another complementary reform to ensure large multinational corporations are not essentially zeroing out their state tax bills is eliminating the “water’s edge” loophole that allows corporations to avoid up to around $3 billion in state taxes each year by stashing profits in offshore tax havens.
Senate leadership has called for additional revenues, proposing to raise around $5 billion to $8 billion to support the Medi-Cal program by requiring large employers to make a “Fair Share Contribution” to support the costs of providing Medi-Cal for their workers when the employer is not offering them affordable health insurance.
Building a real California for All, and responding to federal cuts, will require policymakers to embrace bold revenue solutions to cover the increasing costs of providing existing services due to inflation and a changing population and better meet the growing needs of Californians.
Revised Budget Projects Nearly $30 Billion in Reserves, Sets Aside Nearly Another $10 Billion for Next Year
California has several state reserve accounts that set aside funds 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 revenue in a given year exceeds 8% of General Fund tax revenue. 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.
In order to access the funds in the BSA and PSSSA, the governor must declare a state budget emergency — an action that was taken in the enacted current-year (2025-26) budget in response to the state’s projected budget deficit.
Dive Deeper Into California’s Budget Reserves
For a deeper understanding of California’s reserve accounts, explore the Budget Center’s companion resources:
The BSA and the PSSSA are not California’s only reserve funds. The 2018-19 budget agreement created the Safety Net Reserve Fund, which is intended to hold funds to be used to maintain benefits and services for CalWORKs and Medi-Cal participants in the event of an economic downturn, and which was completely spent down in response to recent years’ budget deficits. Subsequently, in 2024, the state created the Projected Surplus Temporary Holding Account, which is intended to hold anticipated surplus revenues for up to one year before spending them. 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 governor’s revised budget projects $29.9 billion in reserves at the end of 2026-27. Specifically, the proposal:
Projects a BSA balance of $15.1 billion;
Projects the PSSSA balance at $10.3 billion;
Leaves the Safety Net Reserve with a zero balance; and
Projects an SFEU balance of $4.5 billion.
In addition, the revised budget proposes depositing $9.7 billion into the Projected Surplus Temporary Holding Account in 2026-27, then allocating these funds in 2027-28. As required by law, funds can only remain in this account for up to one year, after which they must be returned to the General Fund or spent. Senate democrats’ recent budget proposal also included setting aside $10 billion in 2026-27 to be used in 2027-28.
The revised budget also maintains the governor’s January proposal to suspend a “true-up” deposit into the BSA in 2025-26. State leaders suspended annual deposits into the BSA in 2024-25 and 2025-26 and withdrew funds to help address budget shortfalls. The state is now required to make a “true-up” deposit into the BSA, estimated at $5.4 billion in 2025-26, based on updated revenue estimates. The governor proposes suspending this deposit, but his revised budget reflects a deposit into the BSA of roughly $3.6 billion in 2026-27.
Finally, the revised spending plan makes the constitutionally required deposits into the PSSSA and includes a discretionary deposit of $1.6 billion (see section on Prop. 98).
Administration Highlights Ongoing Discussions Around Modifying the BSA
The governor’s revised budget highlights that the administration intends to continue discussions with the Legislature around potentially putting a constitutional amendment on the ballot to ask voters to make changes to strengthen the BSA. Both the Senate and Assembly democrats’ recent budget frameworks expressed the intent to increase the maximum size of the fund and make it easier to save more when state revenues are up. In addition, the Senate, which included significantly more detail in its plan, proposes to:
Increase the maximum size of the fund to 30% of General Fund tax revenues, up from 10%.
Reduce the annual revenue set-aside to 1% of General Fund tax revenue, from 1.5%, but require “additional spiking revenues” to be set aside.
Modestly increase the share of set-aside revenues deposited into the rainy day fund, while modestly reducing the share going toward debt payments, but extend the required annual debt payments beyond the current 2030 date and allow federal unemployment insurance loans to be repaid from this source of funds.
Change the relationship between deposits into and withdrawals from reserves and the state’s spending limit (Gann limit), making it easier for policymakers to build up reserves during years when state revenues are strong and the state is at risk of exceeding the limit.
Although building up reserves is important to protect against future downturns and manage fluctuations in state revenues, as state leaders further refine the specific changes to put before voters it will be important to balance saving for a rainy day with meeting the urgent needs Californians have today.
Health
Governor’s Revised Budget Misses the Mark on Health Care
Access to health coverage makes it possible for people to receive regular checkups, fill a prescription, and get treatment when they are sick or injured. Health coverage also supports financial security by helping people avoid high medical costs and debt.
Medi-Cal, California’s Medicaid program, provides free or low-cost coverage to more than one in three Californians, including children, pregnant individuals, seniors, and people with disabilities. As a cornerstone of the state’s health care system, Medi-Cal helps millions of Californians access care and maintain financial stability while also supporting hospitals, clinics, health care workers, and local economies across the state.
Last year, federal and state policymakers made deep cuts to Medi-Cal that reversed progress toward a more inclusive and equitable health system. Republicans in Congress and the Trump administration enacted the deepest health care cuts in US history. At the state level, policymakers approved significant cuts to Medi-Cal in the 2025 Budget Act that marked a major shift away from the state’s commitment to expanding health care access for all Californians. While the governor’s May Revision takes some steps to reduce harm caused by recent federal cuts, it continues policies that put Californians’ health coverage and access to care at risk.
May Revision Reflects Impact of Federal Policy Changes
The governor’s May Revision reflects implementation of new federal policy changes under H.R. 1 — the harmful Republican megabill signed by President Trump last year. The revised budget includes about $1.5 billion in new General Fund spending related to H.R. 1 in 2026-27 and reduced General Fund spending of $1.9 billion by 2029-30. The administration projects Medi-Cal disenrollment of 44,000 people in 2026-27, growing to 1.3 million people by 2029-30 due to H.R. 1.
The governor’s May Revision reflects the following actions and policy changes related to implementation of H.R. 1:
Denying full-scope Medi-Cal coverage to immigrants with humanitarian status.
Full-scope Medi-Cal provides comprehensive health coverage, while restricted scope Medi-Cal only covers emergency and pregnancy-related services. Due to H.R. 1, many groups of immigrants will no longer be eligible for full-scope Medi-Cal starting October 1, 2026. The governor’s revised budget delays this shift until July 2027, allowing about 200,000 immigrants with humanitarian status to keep full-scope Medi-Cal for nine additional months. The administration estimates this delay would result in a General Fund cost of $668.1 million in 2026-27. However, the governor’s proposal ultimately leaves these immigrants with very limited services in the long term. Starting January 1, 2027, there will also be a transition for this group to a fee-for-service delivery system.
Loss of federal funding for emergency care for immigrants.
Starting October 2026, California will no longer receive a 90% federal funding match for emergency services provided to immigrants who would otherwise qualify for the Affordable Care Act (ACA) expansion if not for their immigration status. Instead, the federal match will be reduced to 50%. As a result, the May Revision includes $669 million General Fund in 2026-27 to backfill the lost federal funds and maintain current emergency care services, with the state expected to face ongoing General Fund costs in future years that would fluctuate annually.
Implementation of work requirements.
The May Revision projects reduced Medi-Cal spending by $357.6 million ($90.3 million General Fund) in 2026-27 and $9.6 billion ($2.4 billion General Fund) by 2029-30 due to new federal work requirements for adults in the ACA expansion population starting January 1, 2027. This group generally refers to low-income adults under age 65 without dependents. Work requirements create additional paperwork and administrative barriers that often cause people to lose health coverage even when they are still eligible.
Reduced Medi-Cal retroactive coverage.
Starting January 2027, many people will receive less help paying for medical care they received before applying for Medi-Cal. Currently, Medi-Cal covers up to three months of past care, which is important for people who delay applying due to illness, paperwork, or other barriers. This policy change cuts that to just one month for ACA expansion adults and two months for all other applicants. The administration estimates this change would result in a General Fund reduction of $34.6 million ($14.7 million General Fund) in 2026-27, increasing to $75.5 million ($32.1 million General Fund) annually in 2029-30 and ongoing.
Increased eligibility checks.
Under H.R. 1, California will be required to check eligibility for adults in the ACA expansion population twice a year instead of once a year. Based on recent federal guidance, California is now expected to begin implementing the six-month renewals in March 2026, but coverage losses due to this change are not expected until October 2027. The administration still expects that, over time, these eligibility checks will cause many people to lose coverage — an estimated 278,600 people by 2029-30. As a result, the May Revision projects reduced total Medi-Cal spending of $747.3 million ($186.4 million General Fund) in 2027-28 and $2.5 billion ($633 million General Fund) by 2029-30.
Another federal policy change will require California to transition about 2 million undocumented adults and certain other immigrants from managed care into a fee-for-service Medi-Cal delivery system beginning January 1, 2027. This change stems from federal guidance issued in September 2025 that restricts how states can use federal Medicaid funds for immigrants who are not eligible for federally funded Medicaid coverage.
A key consequence of this change is that these Californians will lose access to Enhanced Care Management and Community Supports. These services pair intensive care coordination with non-clinical supports such as housing assistance, medically tailored meals, recuperative care, and other services that help people meet basic needs. The May Revision reflects a reduction of $583.8 million ($471.6 million General Fund) in 2026-27 and $1.5 billion ($1.2 billion General Fund) ongoing tied to this federal policy change.
Governor’s Revised Budget Continues Rolling Back Health Care for All
The 2025 Budget Act included significant state-imposed cuts to Medi-Cal, including freezing new enrollment for undocumented adults, imposing new Medi-Cal premiums on certain immigrants, and reducing payments to Medi-Cal providers. The governor’s revised budget builds on those actions with additional cuts and cost-shifting proposals that are not required under federal law. Together, these changes would further reduce access to health care and supportive services for immigrants, seniors, people with disabilities, and individuals managing chronic health conditions.
case Study: How a Tax on Wealthy Households Funds Schools, Health Care & More
Voters asked the top 2% of earners to contribute more — generating $9 to $10 billion per year for education, tax credits for families with low incomes, and a stronger, more resilient state budget.
The revised budget includes cuts that specifically target immigrant Californians:
Higher Medi-Cal premiums for certain immigrants from $30 to $50 per month. As part of the 2025 Budget Act, state leaders imposed $30 monthly premiums on undocumented adults and certain other immigrants effective January 2027 — a cost that would not apply to other Medi-Cal members. The governor’s revised budget increases this premium by $20 per month, making coverage unaffordable for many low-income Californians. This would reduce General Fund spending by $427.3 million in 2026-27 and $314.3 million annually in 2029-30.
Applying federal work requirements to immigrants who receive state-funded Medi-Cal. The governor’s revised budget maintains his previous proposal to impose the harmful federal work requirements on immigrants who receive health care through state-only Medi-Cal — even though there is no federal requirement to do so. Instead of protecting immigrant Californians, the governor is choosing to impose additional harm.
The May Revision also includes cuts that would affect seniors and people with disabilities. Specifically, the revised budget:
Reinstates Medi-Cal asset limits, which were eliminated in January 2024 and partially reinstated in January 2026. This proposal would once again require seniors and disabled adults to limit their assets — such as savings, cash, second vehicles, and other financial resources — to $2,000 for an individual or $3,000 for a couple in order to qualify for Medi-Cal, effective no sooner than January 1, 2027. Asset tests can penalize modest savings and create complicated eligibility rules for seniors and people with disabilities, forcing some people to spend down limited resources in order to qualify for and maintain Medi-Cal coverage, including long-term services and supports. The administration estimates this proposal would result in about 25,000 people losing Medi-Cal in 2026-27 and an additional 37,000 in 2027-28 — a total of 62,000 people losing coverage within the first two years. These changes would reduce General Fund spending by $278.3 million in 2026-27 and $495.6 million ongoing, including impacts to In-Home Supportive Services.
Maintains cuts to In-Home Supportive Services (IHSS).
Maintains cuts to In-Home Supportive Services (IHSS), a program that helps seniors, individuals who are blind, and people with disabilities remain safely in their homes by providing assistance with daily activities and personal care. The governor maintains a proposal to shift additional IHSS costs to counties by changing how the state funds growth in IHSS service hours. This proposal could create pressure to reduce or limit service hours, leaving some Californians without the support they need. The revised budget also maintains a proposal to eliminate the IHSS backup provider system, which helps connect recipients with backup caregivers when their regular provider is unavailable. These proposals would reduce General Fund spending by $233.6 million beginning in 2027-28 and $3.5 million in 2026-27.
Lowers payment rate caps for PACE providers (Program of All-Inclusive Care of the Elderly).
Lowers payment rate caps for PACE providers (Program of All-Inclusive Care of the Elderly), which provide comprehensive, community-based care to seniors with complex health and social needs. The revised budget would implement a lower payment rate cap beginning January 1, 2027, except for new entrants in their first two years. The 2025 Budget Act already included a payment rate cap for PACE organizations at the mid-point rate beginning in 2027, and the revised budget would further reduce payments to the lower bound rate. Lower payment rates may make it more difficult for providers to meet individualized care needs or expand services for older adults who rely on the program. The administration estimates this proposal would reduce General Fund spending by $33.7 million in 2026-27 and $80.9 million ongoing.
The revised budget also proposes broader cuts to Medi-Cal services and supports that many Californians rely on to manage chronic conditions, access care, remain safely housed, and meet daily health and basic needs, including:
Eliminating acupuncture as a Medi-Cal benefit. This change would reduce General Fund spending by $5.4 million in 2026-27 and $13.1 million ongoing.
Cutting Enhanced Care Management. New eligibility and utilization management rules would take effect January 1, 2027. These changes would reduce General Fund spending by $41.4 million in 2026-27 and $99.2 million ongoing.
Reducing access to Community Supports. The revised budget would change referral pathways, eligibility criteria, service definitions, and utilization management rules for select Community Supports services effective January 1, 2027. These changes would reduce General Fund spending by $26.9 million in 2026-27, $58.8 million in 2027-28, and $51 million ongoing.
Making changes to Applied Behavioral Analysis (ABA) services, transportation services, and a Medi-Cal managed care quality incentive. The revised budget proposes new utilization management requirements, including stricter reviews and prior authorization requirements, that would apply to ABA and Medi-Cal transportation services. The governor also proposes to eliminate an incentive program that rewards health plans for meeting quality benchmarks and improving care outcomes. Together, these proposals would reduce General Fund spending by $68 million in 2026-27, increasing to $552 million by 2029-30.
Redirecting Medi-Cal funds to the General Fund. The governor proposes to move medical loss ratio remittances — funds returned by Medi-Cal managed care plans when they do not spend enough on patient care — away from Medi-Cal. This would reduce General Fund spending by $25 million ongoing beginning in 2027-28.
New Health Investments
Although the May Revision does not introduce bold new investments to reverse harmful state and federal actions, it does include smaller, but meaningful investments. Specifically, the revised budget:
Maintains funding for reproductive health care providers. This one-time $60 million General Fund investment for the 2025-26 fiscal year would help reproductive health centers facing federal funding cuts tied to abortion services.
Provides funding to maintain HIV services and support LGBTQ+ community centers. This one-time $60 million investment from the AIDS Drug Assistance Program Rebate Fund in 2026-27 includes support for HIV-related services affected by federal cuts and LGBTQ+ community centers experiencing funding losses.
Invests in menopause awareness and education. This one-time $3 million General Fund investment would support a statewide public awareness campaign on perimenopause and menopause.
Provides short-term support for struggling hospitals. The revised budget includes up to $50 million General Fund in 2026-27 for hospitals facing immediate financial distress. This proposal builds on recent state action to provide $25 million General Fund for this purpose.
Supports Sickle Cell Centers of Excellence. The May Revise includes $30 million General Fund over five years to support treatment and care for individuals living with sickle cell disease.
Additional Support for Covered California Members
For those who earn too much to qualify for Medi-Cal, Covered California — the state’s health insurance marketplace established through the Affordable Care Act (ACA) — serves as a vital resource. Covered California allows individuals and families to purchase health insurance, often with financial assistance to lower monthly costs. Over 1.9 million Californians rely on the state’s health insurance marketplace for their health coverage.
Health care costs are rising for many Californians, particularly after the expiration of enhanced federal premium tax credits that helped lower monthly premiums. As costs increase, some enrollees are shifting to lower-premium plans with higher deductibles and out-of-pocket costs in order to maintain coverage, potentially making it harder to afford care when they need it.
The governor’s revised budget includes an additional $110 million from the Health Care Affordability Reserve Fund to expand the state premium subsidy program for Covered California enrollees with incomes up to 200% of the federal poverty level. This proposal builds on actions state leaders took last year, when the governor and Legislature approved $190 million in state premium assistance for people with incomes up to 165% of the federal poverty level.
Federal policymakers should restore enhanced premium tax credits to help keep health coverage affordable at a time when many individuals and families already struggle with high health care costs. State leaders should also continue pursuing strategies to improve access to affordable coverage through Covered California.
Revised Budget Largely Sustains Behavioral Health Initiatives
Millions of Californians rely on services for mental health and substance use treatment, known as behavioral health care. Many of these individuals face housing insecurity, justice system involvement, or child welfare placement. Strengthening the state’s behavioral health system is essential to guaranteeing that every Californian can access the care they need, regardless of race, age, gender identity, sexual orientation, or where they live.
State policymakers have significantly invested in behavioral health treatment, workforce capacity, housing supports, and care coordination in previous years. The May Revision largely maintains these initiatives and continues implementation of Proposition 1, while relying heavily on non–General Fund funding sources and shifting some future costs to counties. At the same time, federal cuts and threats to behavioral health waivers create uncertainty for the long-term stability of California’s behavioral health system.
Maintaining Previous Behavioral Health Initiatives
In recent years, the state has invested about $8.5 billion across multiple departments to expand behavioral health treatment capacity and infrastructure. These investments include:
$4.2 billion for the Children and Youth Behavioral Health Initiative.
$2.9 billion for the Behavioral Health Bridge Housing and Behavioral Health Continuum Infrastructure programs.
$1.4 billion for Mobile Crisis Response.
Policymakers have also committed nearly $8 billion over five years to Behavioral Health Community-Based Organized Networks of Equitable Care and Treatment (BH-CONNECT), a multi-year initiative focused on improving access to behavioral health services for Medi-Cal members with significant needs, including children and youth involved in child welfare, people involved in the justice system, and individuals at risk of or experiencing homelessness. The May Revision largely maintains these major behavioral health initiatives, but does not propose significant new investments to further expand the system.
Proposition 1 Implementation
The revised budget continues implementation of Proposition 1 (Prop. 1), which voters approved in March 2024. Prop. 1 amended California’s Mental Health Services Act — now Behavioral Health Services Act (BHSA) — and authorized a $6.38 billion bond to fund behavioral health treatment, residential facilities, and supportive housing for veterans and Californians with behavioral health needs. Counties will begin operating under the revised funding structure under the BHSA in July 2026.
The May Revision proposes $315.9 million from the Behavioral Health Services Fund (BHSF) in 2026-27 for several state departments to implement the state-directed activities. These funds support behavioral health prevention and workforce programs and continue implementation of the BH-CONNECT Workforce Initiative. Of the $315.9 million BHSF proposed for 2026-27:
$174.8 million is for the Department of Public Health,
$131.1 million is for the Department of Health Care Access and Information, and
$10 million is for the Commission for Behavioral Health.
The revised budget relies on the BHSF in place of the General Fund for BH-CONNECT workforce activities, shifting $211.9 million in 2026-27, $229.1 million in 2027-28, and $226.4 million by 2029-30.
Crisis Response and Behavioral Health Care in Prisons
The May Revision includes behavioral health proposals related to community-based crisis response services and mental health care in state prisons. Specifically, the revised budget:
Maintains a proposal to make Medi-Cal mobile crisis services optional for counties beginning April 1, 2027.
The proposal follows the expiration of enhanced federal funding for these services in December 2026. The budget includes $431.5 million total funds — including Proposition 35 funds, federal funds, 988 funds, and General Fund support — to continue the benefit across 2025-26 and 2026-27 before shifting approximately $170 million in annual ongoing costs to counties beginning in 2027-28. Counties may face difficult tradeoffs as they absorb these ongoing costs, particularly amid broader behavioral health funding pressures and rising demand for services.
Includes funding for court-appointed receivership overseeing prison mental health services.
The revised budget includes $12.6 million in 2026-27 — supported by the Mental Health Services Deposit Fund, General Fund, and Behavioral Health Services Act funding — for staffing and clinician recruitment and retention. The proposal also includes funding allocations in future years, along with separate funding for resource teams and crisis intervention teams in state prisons.
Protecting and Strengthening California’s Behavioral Health System
County behavioral health departments continue to warn that Prop. 1 largely redirects existing mental health funding rather than providing significant new ongoing resources. At the same time, federal cuts under H.R. 1 and threats to federal behavioral health waivers could destabilize funding for behavioral health care, housing supports, and recovery services while increasing demand for county-based services. As California continues implementing major behavioral health reforms, state leaders should ensure counties and providers have the stable, ongoing resources needed to maintain access to care and support Californians with behavioral health needs.
Revised Budget Proposes New MCO Tax, Highlights Challenges to Hospital Fee
A key source of funding for Medi-Cal comes from taxes and fees assessed on health care providers, including private hospitals and health plans (also called managed care organizations, or MCOs). These taxes and fees are used to draw down additional federal funding for Medi-Cal, which allows California to reimburse providers, cover basic Medi-Cal costs that would otherwise be funded by General Fund dollars, and fund higher Medi-Cal payments to health care providers.
Provider taxes and fees need federal approval and must be periodically renewed. In California, most of the revenue raised by provider taxes/fees comes from two sources:
The MCO tax
The MCO tax currently generates over $7 billion per year in net revenue. MCO tax proceeds are used to boost Medi-Cal provider payment rates as well as to cover basic Medi-Cal costs, reducing California’s General Fund costs for the program.
The Hospital Quality Assurance Fee
The hospital fee raises over $5 billion per year. These revenues support supplemental payments to private hospitals and also cover basic Medi-Cal costs, reducing the state’s General Fund costs.
H.R. 1 changed federal rules to limit states’ use of provider taxes and fees. California’s current MCO tax expires at the end of 2026, and if the state receives federal approval for a new tax — which is not guaranteed — MCO tax revenue will decline substantially due to H.R 1’s restrictions as well as constraints imposed by Proposition 35, which California voters approved in 2024.
In addition, California’s hospital fee is in flux in the near term, but ultimately, revenue from the fee will also decline over the long term due to H.R. 1.
The governor’s revised 2026-27 spending plan acknowledges challenges to both the MCO tax and the hospital fee and proposes respective actions for each program. Specifically, the May Revision:
Proposes a new MCO tax to comply with H.R. 1 restrictions.
Under the governor’s plan, the state will seek federal approval for a new MCO tax to take effect on January 1, 2027.
Budget documents available over the weekend did not provide specifics about the structure of a new MCO tax. However, one document indicated that the proposed tax would have two components:
A tax that is “substantially similar” to the current MCO tax and complies with Prop. 35.
A tax that is “substantially dissimilar” to the current MCO tax and that is not subject to Prop. 35.
The governor estimates the new tax would provide $575 million in 2026-27, $2.3 billion each in 2027-28 and 2028-29, and $1.7 billion in 2029-30 to support Medi-Cal and maintain provider payment rate increases for primary, maternal, and non-specialty mental health care.
Notably, these amounts are substantially less than what the current MCO tax provides and assume the federal government will approve this renewal.
Highlights the Trump administration’s rejection of California’s recent proposal to update the Hospital Quality Assurance Fee program.
After the federal government notified California that the state’s initial proposal for the hospital fee program would not be approved, California submitted a new waiver request in March. The newest request is still awaiting federal approval, although the revised budget notes that the 2025 hospital fee program is expected to provide $5.5 billion in payments to hospitals.
Counties Need More Support to Manage Federal Health Care Changes
The revised budget includes some additional funding to help counties implement major federal health policy changes tied to H.R. 1 and Medi-Cal eligibility operations, including new work requirements and more frequent eligibility checks. To help manage the increased administrative workload associated with these federal changes, the May Revision proposes a one-time increase of $262 million ($74 million General Fund) in 2026-27 for county administration. In addition, the May Revision includes $33 million for optional “surge staffing” support that counties could request for administrative activities such as data entry, application and renewal processing support, and responding to general call center inquiries. This funding is intended to provide supplemental administrative support capacity rather than directly expanding county eligibility staffing.
However, counties have indicated they will need significantly more funding to administer the new requirements effectively and help prevent eligible people from losing Medi-Cal coverage due to paperwork burdens or administrative barriers. Counties have also requested substantial additional support to address broader H.R. 1 impacts on county indigent care programs, public hospitals, behavioral health systems, and eligibility operations.
As more Californians lose Medi-Cal coverage due to new federal requirements and administrative hurdles, counties will likely face growing costs to provide care for uninsured residents who still need health services but can no longer access coverage.
State Leaders Can Protect Health Care Access Instead of Cutting Services
The governor and Legislature should work together to pursue alternatives to the harmful cuts that the May Revision outlines, many of which would disproportionately harm Californians who already face significant barriers to care, including immigrants, older adults, disabled people, and people with behavioral health needs.
Legislative leaders have already put forward proposals that would better protect access to health care and supportive services for Californians while helping address the state’s fiscal challenges. These proposals demonstrate that California has options beyond reducing coverage, limiting benefits, and shifting costs onto counties and low-income Californians.
At a time when federal policymakers are already undermining access to coverage and care, state leaders should prioritize policies that protect access to health care and support the long-term health and economic well-being of Californians.
Housing
May Revise Falls Short in Protecting California Renters
Access to a stable and affordable home is foundational to a healthy and prosperous life — especially for the more than 44% of Californians who rent their homes. Yet renters, predominantly Californians with low incomes, continue to face the greatest housing affordability challenges and are often left with little recourse when they’re on the brink of losing their homes or facing eviction. This hardship is also deeply unequal, as immigrants, and Black, Pacific Islander, and Latinx Californians are more likely to rent and have unaffordable costs due to longstanding racist and discriminatory policies that have blocked access to economic mobility and homeownership.
Yet the Governor’s May Revise does little to address California renters’ immediate housing stability needs or strengthen protections for those at risk of losing their homes. Notably, the May Revision:
Does not provide funding for the expanded Renter’s Tax Credit included in the 2025-26 Budget Act.
Provides no additional support for renters displaced by disasters, including the 2025 Los Angeles wildfires.
Includes no new investments targeted for eviction legal defense or the judicial Homelessness Prevention program, even though formal evictions in California have surpassed pre-pandemic levels.
At the same time, the administration is proposing $100 million ($56 million General Fund and $44 million in existing National Mortgage Settlement Funds) for a new Disaster Rebuilding Fund to reduce borrowing costs and facilitate access to private financing for impacted homeowners. While these efforts are commendable, there is no comparable state assistance for renters who were also displaced or destabilized.
The May Revision does include six permanent positions and $838,000 in 2026-27, 2027-28, and 2028-29 for the Civil Rights Department (CRD) to reduce complainant wait time and increase settlements of employment and housing complaints. CRD enforces California’s Fair Employment and Housing Act (FEHA) which prohibits discrimination based on a protected characteristic, such as gender, race, national origin, sexual orientation, gender identity, or religion.
Still, the lack of investment in targeted legal eviction prevention is especially concerning given that evictions reached a high in 2024, the Homelessness Prevention program is nearly depleted, and more Californians are being pushed into homelessness faster than the state’s response systems can keep up (see Homelessness section). Plus, many legal aid providers that offer eviction defense are increasingly stretched, with some forced to shift limited capacity toward immigration-related legal services as federal enforcement pressures drive the need for assistance (see Immigration section).
May Revision Adds Red Tape to Homelessness Funding Without New Investments
California has both the resources and the responsibility to ensure every resident has a stable, dignified place to call home. In 2025, homeless service providers served over 358,000 Californians experiencing homelessness — demonstrating both the scale of need and the increased capacity of the state’s response systems. This progress was driven largely by prior one-time state investments that fund critical homelessness prevention and resolution services. These investments have produced real, measurable results, including the fact that over 110,000 Californians have been moved into permanent housing since 2023.
However, the May Revise maintains the administration’s stance from their January proposal on not including any additional or ongoing funding to address homelessness beyond what was promised last year. The revision reflects $500 million for Round 7 of the Homeless Housing, Assistance and Prevention Grant program (HHAP) in 2026-27. This is in contrast to the Senate’s budget plan which proposed an additional $500 million for HHAP Round 7, bringing the total to $1 billion. The Senate plan also went further by proposing an additional $1 billion for HHAP Round 8, for which the May Revise proposes no funding.
The administration stated HHAP Round 7 will require additional accountability measures, including having a pro-housing designation, local matching funds, and a compliant housing element. While encouraging local governments to become partners in addressing homelessness has merit, tying service provider funding to decisions outside of their control — such as a local government having a pro-housing designation or a compliant housing element — is problematic. Depending on the specific details of the proposal, a matching fund requirement may also be insurmountable for many localities currently facing budget deficits.
Additionally, the May Revision maintains the proposed reductions for the Bringing Families Home (BFH), Home Safe, and Housing and Disability Advocacy programs. Both BFH and Home Safe will sunset soon without additional funding, despite strong evidence they are effective.
Starting January 1, 2027, the May Revision would narrow ECM eligibility, redefine services, and adjust payments — effectively reducing access to intensive care coordination for Medi-Cal members with complex health and social needs. These changes would reduce General Fund spending by $41.4 million in 2026-27 and $99.2 million ongoing.
Cuts to Medi-Cal Community Supports (CS).
Starting January 1, 2027, the revised budget would tighten eligibility, referral pathways, service definitions, and utilization management criteria. These changes could reduce access to services that help members maintain stable housing, recover from illness, and meet other basic needs. It is also unclear how these changes would interact with the upcoming Behavioral Health Services Act Integrated Plans as CS are a core component. The administration estimates these changes would reduce General Fund spending by $26.9 million in 2026-27, $58.8 million in 2027-28, and $51 million ongoing.
Federal Threats to Homelessness
Lastly, the administration does not address the ongoing threats to federal rental assistance programs or the Continuum of Care program. It also includes no funding for Californians holding Emergency Housing Vouchers set to expire by the end of the year as Congress failed to provide enough funding to fully transition all recipients onto standard housing vouchers.
The Administration Fails Again to Prioritize Funding for Affordable Housing
Every Californian deserves a safe, affordable home — an attainable reality in a state as resourceful as California. Over the past seven years, state policymakers have made notable progress in streamlining housing development and have invested in affordable housing. However, state General Fund dollars have comprised only a small share of funding to support affordable housing development, and this share has drastically declined in recent years. This harmful trend continues as the revised budget, as with the January proposal, once again proposes no new state funds for affordable housing.
Instead, the May Revision continues to emphasize the new California Housing and Homelessness Agency (CHHA), set to launch in July, as its answer to the housing shortage. The administration includes resources to support the continuity of operations as the agency reorganizes, including transferring positions and other needs. It also proposes:
Statutory language making affordable housing projects ineligible for competitive state funding if the local government serving as lead or co-applicant imposes development impact fees on the project. These provisions would apply to funding notices issued after July 1, 2027.
Reappropriating $7 million of unawarded Infill Infrastructure Grant Program funds to assist construction of additional infill infrastructure and housing projects.
This stands in stark contrast with the Senate’s budget plan which would provide $1 billion for affordable housing programs, including the Multifamily Housing Program and state Low Income Housing Tax Credits — both of which are critical to building homes for Californians with the lowest incomes. The Senate plan also proposes $1 billion for homeownership programs, including the California Dream for All program which provides shared appreciation loans for certain first-time homebuyers, and the CalHOME program to help in the construction of affordable housing. The governor’s May Revision fails to fund these programs.
The administration is also silent on the California Air Resources Board (CARB) proposed regulations for the Cap-and-Invest program, which would drastically reduce revenue for the Greenhouse Gas Reduction Fund, effectively zeroing out funding for the Affordable Housing and Sustainable Communities program (AHSC). AHSC was restructured by the administration and the Legislature just last year to provide more funding for certain affordable housing projects. It also does not express support for the Affordable Housing Bond Act of 2026, currently moving through the Legislature, which can provide critical funds to several nearly depleted affordable housing programs — a bond Assembly Democrats explicitly support.
Economic Security
Governor’s Budget Falls Short in Preparing for Significant CalFresh Cuts
The Supplemental Nutrition Assistance Program (SNAP) — known as CalFresh in California — is the state’s most powerful tool in the fight against hunger. The federal Republican megabill, H.R. 1, introduced historic cuts to the SNAP program, which will reduce household monthly benefits for the 5.5 million Californians who depend on CalFresh to put food on the table.
Additionally, roughly 1 million Californians are at risk of losing their CalFresh assistance entirely due to expanded time limits and eligibility restrictions tied to immigration status. The revised budget proposes some funding to mitigate the harm, but falls significantly short of addressing the need. Specifically, the revised budget includes:
$30 million one-time funding for counties to support additional workload associated with implementing the burdensome CalFresh time limits expanded by H.R. 1. This amount is less than one-third of what counties anticipate spending in the 2026-27 fiscal year, according to a recent budget hearing, to prepare for the time limit implementation that will begin June 1, 2026.
$30 million one-time funding to support local food banks. The one-time funding would be in addition to the $8 million baseline funding the CalFood program receives, however it is a decrease from the annual $60 million allocation the program has received in recent years. In contrast, the Senate Democrats’ recent budget proposal included $100 million for CalFood to support local food banks.
The revised budget also maintains the commitment to expand the California Food Assistance Program (CFAP) to all income-eligible Californians ages 55 and older in October 2027, but makes no commitment to further expand the program to support humanitarian immigrants under the age of 55 and people impacted by the time limits. The May Revision also maintains full funding for universal school meals and the SUN Bucks program. However, the expected rise in food insecurity as people begin to lose their food assistance requires much bolder action than this revised budget provides.
Revised Budget Maintains Funding for CalWORKs and Refundable Tax Credits
California’s cash assistance programs provide critical support for families, youth, and children with low incomes across the state. As California continues to face high poverty rates and millions of people are struggling to afford basic needs, programs such as the California Work Opportunity and Responsibility to Kids (CalWORKs) program and the state’s refundable tax credits remain essential tools for promoting economic mobility and reducing hardship. The governor’s revised spending plan maintains funding for these key supports but does not propose significant new investments to further strengthen assistance for California families with low incomes.
CalWORKs remains one of California’s core anti-poverty programs, providing modest cash assistance and supportive services to families with low incomes, particularly Black and Latino families who face longstanding inequities in income and wealth. The revised budget largely preserves funding for this program at previous years’ levels, but does include a 1.8% increase to CalWORKs grants, estimated to cost $59.6 million in 2026-27. This increase is required under AB 85 (2013), which links annual grant increases to growth in certain 1991 realignment revenues deposited into the Child Poverty and Family Supplemental Support Subaccount, and does not require a General Fund appropriation.
case Study: Clever Strategy Allowed California to Raise New Revenue Following Federal Tax Cuts
In 2019, California selectively conformed to parts of the federal Tax Cuts and Jobs Act, enacted during President Trump’s first term, and raised over $1 billion in new, ongoing annual revenue — boosting K-14 education and expanding tax credits for working families.
At the same time, recent federal attacks and proposals that threaten funding streams supporting CalWORKs and other basic needs programs, like sunsetting funding for key housing support programs (see Homelessness section), underscore the importance of protecting and strengthening California’s core supports for children and families with low incomes. As economic pressures persist, maintaining existing investments alone will not be sufficient to ensure families can meet their basic needs and achieve long-term stability, highlighting the need for California to strengthen its tax base over the long-term to support investments that build toward economic security for all Californians.
Revised Budget Plan Slashes Programs and Services for Older Adults and Californians with Disabilities
All Californians should be supported and treated with dignity in their communities regardless of their age, ability, race, gender, or economic status. However, Californians with disabilities and older adults face significant barriers, with increased risks of not meeting their basic needs, experiencing poverty, and becoming homeless. In addition, older adults and people with disabilities are already facing increased instability due to new harmful policies from the Republican megabill H.R.1 that threaten their access to health care and food assistance.
Despite this reality, the governor’s revised budget disproportionately reduces the funding for and accessibility of programs that support older adults and Californians with disabilities, even though the services provided through programs like In-Home Supportive Services (IHSS) provide a lifeline to hundreds of thousands of Californians.
Maintains multiple harmful cuts from the January proposal to In-Home Supportive Services (IHSS) totaling almost $240 million in reductions across 2026-27 and 2027-28.
IHSS helps nearly 900,000 seniors, adults with disabilities, and children with low incomes live with dignity in their own homes. The proposed cuts to IHSS will limit the ability of recipients to access care if their usual provider is unavailable, restrict the number of hours of care recipients can receive, and shift costs to counties that are already straining under new responsibilities from H.R.1 (see Health section). IHSS recipients are likely to face uncertainty around benefits and may be unable to access the level of care they need, while providers — the majority of whom are related to recipients — may suffer from decreased incomes. These cuts come amidst the federal deferral of funds for IHSS, compounding the threat to the critical services provided by the program. State leaders should be protecting all vulnerable Californians from these threats, as reflected by the Senate’s budget plan, which proposes maintaining IHSS programs as they are, demonstrating a commitment to preserving programs that serve older adults and people with disabilities.
Reinstates Medi-Cal asset test limits for older adults and Californians with disabilities.
This proposal would bring back the Medi-Cal asset test limit for older adults and people with disabilities. This provision limits applicants to only $2,000 for an individual and $3,000 for a couple, instead of the current $130,000 per individual, in order to qualify for Medi-Cal (see Health section). These groups are the only ones subject to this punitive requirement, which could result in thousands of Californians being pushed off of Medi-Cal or force households to purposely reduce their resources to adhere to this strict limit. The administration estimates this proposal would reduce General Fund spending by$278.3 million in 2026-27 and $495.6 million ongoing, including impacts to IHSS.
Proposes multiple harmful provisions that will severely limit older immigrants’ access to Medi-Cal.
These harmful proposals, which include raising monthly premiums and denying full-scope Medi-Cal coverage to immigrants with humanitarian status, come at a time when immigrants are being targeted by the federal government (see Immigrant Californians section).
Eliminates $70 million General Fund in 2026-27 and ongoing for the Adult Protective Services (APS) expansion.
Adult Protective Services provides services to older adults and Californians with disabilities who require assistance to meet their needs or are victims of abuse, neglect, or exploitation. The governor’s May Revision rolls back funding for the age eligibility expansion approved in the Budget Act of 2021. This means only Californians ages 65 and older, instead of ages 60 and older, would be eligible for APS. This change would limit the scope of the program and restrict access to services that help the most vulnerable members of these communities.
Enforces a lower rate cap for Program of All-Inclusive Care for the Elderly (PACE) organizations.
The PACE model of care allows older adults to receive specialized short- and long-term care in their home, allowing them to remain independent and live safely in their community. Cuts to this service could push older adults into more fragmented systems of care that may not be suitable for their needs, lowering their quality of care (See Health section). The administration estimates this proposal would reduce General Fund spending by $33.7 million in 2026-27 and $80.9 million ongoing.
Other proposals in the revised spending plan include:
Maintaining the current investment in the Supplemental Security Income/State Supplementary Payment (SSI/SSP) program.
SSI/SSP is the largest cash assistance program serving low-income older adults and Californians with disabilities. However, current assistance levels fall short of ensuring recipients can meet their basic needs. These benefits are a key source of income for these communities and are becoming even more important as access to other federal and state programs is becoming more limited.
Investments in the Department of Developmental Services (DDS) to improve program administration.
This department provides individuals with intellectual and developmental disabilities a variety of services that allow them to achieve their goals. The revised budget makes multiple investments in DDS including:
$15 million ($12.4 million General Fund) to update the rate model methodology for certain early intervention services.
$11.4 million ($9.1 million General Fund) in 2026-27, $9.4 million ($7.1 million General Fund) in 2027-28, and $2.8 million ($2.4 million General Fund) ongoing to improve the intake process and develop a standardized assessment for clinical needs to improve consistency across the state.
$1.1 million ($779,000 General Fund) to address increased administrative burden on regional centers from federal changes in 2024.
Programs like Medi-Cal, IHSS, and SSI/SSP help to ensure that older adults and Californians with disabilities can receive the support they deserve and are able to meet their basic needs. The combined state and federal threats to multiple core programs could be devastating to the people in these communities that rely on them. The Senate budget framework reflects a stronger commitment to preserving these services and demonstrates the role state leaders should assume in protecting all Californians through the budget.
Child Care Expansion at an Indefinite Standstill Despite Substantial Need
Publicly funded child care plays an integral role in the healthy development of children and California’s economy. However, child care is a broken market in which families cannot afford to pay the cost of what it takes to provide care. As a result, child care is unaffordable for families, and pay is unsustainably low for providers.
California’s publicly funded child care programs play a critical role in helping to bridge this market failure by offering eligible families child care at low/no-cost, with family fees capped at 1% of a family’s income. The demand for these programs far exceeds the supply, with only 16% of children eligible for programs actually enrolled. Moreover, recent and ongoing federal threats to California’s child care funding increases the urgency for state leaders to provide needed resources to these essential programs.
Regarding child care funding and subsidized spaces, the governor’s revised budget:
Funds California Department of Social Services (CDSS) child care and development programs at $7.5 billion.
This amount is relatively unchanged from the January proposed budget. However, there are notable shifts in funding for individual child care programs. Specifically, the revised budget:
Cuts funding for the AP program and shifts the funds to General Child Care. The governor proposes to sweep, or take back, tens of millions of “unspent” AP program dollars despite counties’ high need for these AP program spaces. These AP dollars would be used to partially reverse cuts to the General Child Care program (CCTR) — cuts that the governor included in his January proposed budget. The CCTR cuts proposed in January were due to two factors: 1) a $75 million decrease in 2025-26 federal Child Care and Development Fund (CCDF) dollars and 2) a 2026-27 decrease in funding provided by Proposition 64, California’s voter-approved cannabis tax that dedicates a portion of its annual revenues to child care. However, the May Revision estimates that Prop. 64 revenues will be higher than assumed in January. With higher Prop. 64 revenues and the funds shifted from the AP program, the May Revision reduces the proposed cut to the number of CCTR spaces from 4,176 to approximately 1,007.
Does not fulfill promised 44,000 subsidized child care spaces.
In 2021-22, the governor committed to adding approximately 206,800 new child care spaces by 2026-27. Expansion was delayed and paused in 2023-24 and 2024-25; however, the 2024-25 budget did solidify a plan for rolling out the remaining spaces. Per this plan, as outlined in Senate Bill 163, the administration committed to funding 12,000 spaces in the CCTR program and 32,000 spaces in the Alternative Payment (AP) program, with the remaining spaces awarded in 2027-28. Similar to the January proposed budget, the revised budget does not provide funding for these promised spaces. Moreover, the revised budget does not include a plan for when these promised spaces will be funded, walking back the administration’s commitment to child care expansion. Contrary to the revised budget, the Senate’s budget plan would fund the promised 44,000 spaces, recognizing the importance of continuing to expand these critical child care programs. The Early Learning section provides more detail on how this proposal would be funded.
Includes modest funding for child care infrastructure.
While the revised budget does not expand child care spaces, it does include $11.8 million to support infrastructure improvements for child care providers, specifically targeting communities impacted by the 2025 wildfires, reflecting funding through Prop. 64 dollars redirected from the California Natural Resources Agency on a one-time basis. Additionally, the revised budget includes a $28 million one-time federal funding award to support provider relief efforts from disasters occurring in 2023 and 2024.
In addition to funding for subsidized spaces, California needs a stable child care provider workforce to sustain and expand programs. However, California child care providers continue to receive low wages, exacerbating racial and gender inequities and threatening to destabilize the system. In an effort to improve child care provider pay, in April 2023 the state began the process of developing an alternative methodology to pay providers based on the “true cost of care.” The state’s version of the alternative methodology was completed during summer 2025, and the state has since moved on to a process for determining how the “cost of care” estimates will result in a “single rate structure” for paying child care providers. Fundamental to this process is ensuring that the final rates reflect fair and just pay for providers. Related to provider pay, the revised budget:
Reduces the proposed cost-of-living adjustment (COLA) for child care providers.
The January proposed budget included a 2.41% COLA to the cost of care plus monthly rate supplements. The revised budget reduces this 2.41% to a 2.01% COLA. Notably, a 4.31% “super COLA” is included in the revised budget for TK-12 schools (see Education sectionEducation section). Thus, even though child care programs and TK classrooms both educate 4-year-olds, child care programs see a decrease in their COLA whereas TK-12 schools see an increase.
Halts implementing prospective pay for providers.
Prospective pay refers to paying child care providers in advance of or at delivery of child care services, supporting financial solvency and increasing workforce retention. Shortly before the revised budget was released, the federal administration reversed its requirement for states to pay providers prospectively. While states still have the option to do so, the revised budget reverts previously appropriated funding for prospective pay, signaling that the state is not moving forward with implementing prospective pay during the 2026-27 fiscal year.
Lacks clarity on timeline for implementing rates based on a single rate structure.
The 2025-26 budget appropriated $21.8 million for rate reform support costs, and the proposed budget does not include any additional funding for rate reform for CDSS. Given that CCPU and the state are not completely aligned on a single rate structure, it is unclear when rate reform is likely to be implemented or how much the state may need to spend to pay providers based on this new structure. As an effort to improve clarity, Assembly Bill 1981 proposes to require CDSS to provide the Chairperson of the Joint Legislative Budget Committee with an anticipated timeline for implementing the new rates under a single rate structure.
Revised Budget Continues to Impose Harm on Immigrants
Immigrants and their families are deeply ingrained in the state’s social fabric. They are members of the state’s workforce, pay taxes, attend schools, own businesses, and raise families who invest in local communities. Over one-half of all California workers are immigrants or children of immigrants, and more than 2 million Californians are undocumented, according to estimates. Undocumented immigrants in California make significant contributions to state and federal revenues, contributing $8.5 billion in state and local taxes in 2022, despite their exclusion from most public benefits.
Since 2025, state and federal policies have targeted immigrants, limiting their access to health care, food assistance, and other critical services, all while their lives have been severely under threat due to an unprecedented increase in immigration detention and deportation.
At a time when the federal government is increasingly attacking immigrant communities, it is more critical than ever that California state leaders ensure the safety and well-being of all people, especially undocumented immigrants, and maintain prior commitments to making an equitable state for everyone. In the revised budget, the governor continues to strip health care from immigrant Californians. Specifically, the 2026-27 revised budget:
Increases Medi-Cal premiums for certain immigrants.
Increases Medi-Cal premiums for certain immigrants from $30 to $50 per month — a cost that no other Medi-Cal members would have to pay. These premiums were originally proposed as part of the 2025 Budget Act and are set to go into effect in July 2027 for undocumented adults and certain other groups of immigrants, and now the governor is proposing making the premiums even higher. This will make health care even more unaffordable for many low-income Californians and lead to disenrollment (see Health section).
Denies full-scope Medi-Cal to immigrants with humanitarian status.
Shifts certain immigrants to fee for service Medi-Cal.
Due to recent federal guidance, California is now required to transition about 2 million undocumented adults and certain other immigrants from managed care into a fee-for service Medi-Cal delivery system effective January 1, 2027. While almost all services will still be available in the new delivery system, a key change is that they will lose access to Enhanced Care Management and Community supports, which pair care coordination with non-clinical supports such as housing assistance (see Health section).
In contrast to the governor’s revised budget, the Senate budget plan takes meaningful action to protect immigrant Californians. California Senate Democrats propose to delay both the elimination of dental benefits for certain groups of immigrants and the implementation of $30 monthly premiums to January 1, 2028. They also reject the governor’s proposal to deny full-scope Medi-Cal for immigrants with humanitarian status.
The governor’s revised budget does include some small, but meaningful, support for immigrants. The May Revision:
Maintains previous commitments to expand the California Food Assistance Program (CFAP) to include undocumented adults age 55 and older beginning in October 2027. However, it does not include any expansion to other age groups or account for the immigrant exclusions in H.R. 1 (see Food Assistance Section).
Provides one-time funding for immigration legal services. The governor’s revised budget includes $20 million in one-time General Fund dollars to help Californians who are facing immigration court proceedings. This legal aid comes at a critical time when immigrants’ lives continue to be under increased threat and immigration enforcement activity is heightened, though this is notably less than the $50 million in legal aid proposed in the Senate budget plan (see Protecting Renters section).
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Growth in Education Funding Continues Resource Expansion for Schools
Education begins in the earliest years, preparing children and youth to transition into the TK-12 and higher education systems. Publicly funded education programs play a critical role in the development, learning, and well-being of children and youth in California. Investing in them through these programs helps to ensure that children and youth are prepared for school and adulthood.
Growth in revenue estimates boosts funding to schools and community colleges through the Proposition 98 Guarantee. The revised budget proposal maintains significant new investments included in January and includes additional investments that expand services, help schools and colleges address rising costs, and strengthen prior initiatives. Given the instability of federal funds and other federal actions, these investments help ensure the state continues its commitment to addressing key educational challenges confronting Californians.
However, there are still major challenges ahead to ensure the state provides the resources to meet student needs, needs that also extend beyond education. Federal cuts to vital health care and safety net programs put students and families at greater risk of being able to make ends meet, thus putting their educational success at a greater risk. The May Revision does little to help address these federal cuts (see Health and Economic Security sections). Balancing across helping Californians meet basic needs and adequately funding TK-14 education is especially challenging considering the context of the current federal climate and state budget landscape.
Growth in Revenue Estimates Significantly Increases the Prop. 98 Guarantee
Approved by voters in 1988, Proposition 98 constitutionally guarantees a minimum level of annual funding for TK-12 schools, community colleges, and the state preschool program. The Prop. 98 guarantee reflects changes in state General Fund revenues, which means that increases or decreases to revenue estimates adjust the minimum guarantee funding levels. For example, when the state revenues increase due to policy changes or overall economic growth, funding available for TK-12 schools and the community colleges generally increases.
Under the 2026-27 revised budget proposal, Prop. 98 estimates increase by $24.5 billion across the three-year budget window compared to the estimates in the June 2025 enacted budget (this overall growth figure differs from Department of Finance’s figure of $28 billion because the Budget Center uses the 2026-27 projection from June 2025, as opposed to the 2025-26 estimate in June 2025). This growth is primarily driven by growth in revenues (see Revenues section), which also require the state to restore prior reductions and to increase deposit amounts into the Public School System Stabilization Account (also referred to as the Prop. 98 reserve).
The chart below shows updated projections of the guarantee as of the 2026 May Revision compared to projections in the January budget proposal and the June 2025 enacted budget.
Prop. 98 updated estimates and proposed adjustments in the revised spending plan include the following:
For 2024-25, the guarantee is revised up to $124.9 billion from prior estimates. Given revenue growth, this updated minimum guarantee level also reflects a higher maintenance factor payment, which is fully repaid under May Revision estimates. The maintenance factor represents the funding gap created when the state suspended Prop. 98 in 2023-24, and stronger revenues have allowed the state to fully close that gap.
For 2025-26, the guarantee is revised up to $125.1 billion from previous estimates. The governor maintains a proposal to fund the guarantee at a lower level than what the formulas require. In the revised spending plan, the governor reduces the size of the “settle-up” payment to $3.9 billion from $5.6 billion, which would provide schools and community colleges $121.1 billion rather than $125.1 billion. This approach serves two purposes: it helps prevent an overappropriation if revenues drop, and it helps balance the budget on the non-Prop. 98 side.
The 2026-27 estimate also increased compared to prior estimates — $1.6 billion higher in May compared to the January budget proposal. Also, compared to previous estimates, a withdrawal from the Prop. 98 reserve is no longer necessary to meet the guarantee in 2026-27.
The revised spending plan also adjusts deposits and withdrawals for the Prop. 98 reserve. Across the three-year budget window, the constitutionally required deposits increase to $8.7 billion. Moreover, the revised proposal also includes a discretionary deposit of $1.6 billion for a total reserve balance of $10.3 billion. See Reserves section for more on budget reserves.
Transitional Kindergarten and State Preschool Largely Continue as Planned
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 (and temporarily to 2-year-olds until July 2027). TK serves 4-year-olds, and eligibility is based on age and is not dependent on family income. Together, CSPP and TK are cornerstones of CDE’s Universal Preschool plan, intended to bring more early learning and care options to 3- and 4-year-olds in California. However, as California strives to create a mixed delivery system that centers the needs of families, the administration has the opportunity to spend resources and implement policies in a way that integrates CSPP and TK with the broader early learning system to best support families with young children.
Fully funds Transitional Kindergarten and maintains commitment to reduced ratios.
As a final step to universal TK, the 2025-26 school year allowed all children who turn 4 by September 1 to enroll in TK. Moreover, the 2025-26 budget reduced student-to-teacher ratios from 1:12 to 1:10. The proposed budget maintains the complete rollout of TK and the reduced ratios. TK is primarily funded through the Proposition 98 Guarantee (see Proposition 98 section).
Augments but generally maintains CSPP funding for both community and school-based programs.
The January proposal reflected an increase of $136 million as compared with the 2025-26 budget, including $1 billion for community-based CSPP and $2 billion for school-based CSPP. This proposal is inclusive of the temporary expansion of CSPP eligibility to 2-year-old children until July 1, 2027. The revised budget largely maintains the proposed CSPP funding but contains the following augmentations:
A $910,000 one-time General Fund increase each fiscal year — 2026–27 through 2028–29 — for CDE to receive services from the Office of State Audits and Evaluations to provide support for CSPP audits.
Notably, the Senate’s budget plan to right-size CSPP funding and move community-based CSPP into Proposition 98 is not included in the revised budget. This proposed shift was intended to free-up General Fund dollars to partly fund the promised 44,000 child care and development program spaces (see Child Care section). The Senate’s proposal would result in additional General Fund dollars for much needed child care and development program spaces; however, there are considerations underlying this proposal that require further discussion.
Aligns with the California Department of Social Services (CDSS) child care and development programs on changes to provider pay.
Specifically, the cost-of-living adjustment (COLA) reduction from 2.41% to 2.01% (as discussed in the Child Care section) also applies to CSPP providers. Additionally, prospective pay implementation is suspended for CSPP providers (in addition to CDSS child care providers). Lastly, the revised budget includes $552,000 ongoing General Fund for CDE to implement the new single rate structure. These implementation dollars are not mirrored for CDSS child care and development programs (see Child Care section).
May Revision Boosts Education Funding with Ongoing and One-Time Resources
The largest share of Proposition 98 funding goes to California’s school districts, charter schools, and county offices of education (COEs), which provide instruction to 5.9 million students. Education funding flows primarily through the Local Control Funding Formula (LCFF), an allocation mechanism that provides school districts, charter schools, and COEs a base grant per student, adjusted to reflect the number of students at various grade levels, as well as additional grants for the costs of educating English learners, students from low-income families, and foster youth. Other funds flow through a number of categorical programs such as the Expanded Learning Opportunities Program, special education, and other shorter-term investments.
Given growth in available resources for schools, the May Revision expands the investments included in the January budget proposal. The revised spending plan provides a higher than required cost-of-living-adjustment (COLA) to the school funding formula, provides a higher increase to special education, and substantially increases a one-time discretionary block grant for school districts. Notable adjustments in the May Revision include:
$2.5 billion to fund COLAs for the LCFF and other non-LCFF categorical programs.
The governor’s spending plan includes about $2.2 billion to provide a 4.31% COLA for the LCFF. The higher COLA reflects a statutorily required level of 2.87% ($1.3 billion) and a discretionary addition of 1.44% ($907 million), for a total of 4.31%, referred to as a “super COLA.” The discretionary amount is meant, in part, to provide resources needed to implement the pregnancy leave proposal. This proposal would require districts to provide TK-12 employees with up to 14 weeks of paid pregnancy disability leave starting in 2026-27. The revised budget plan also includes $261 million to provide a 2.87% COLA for other school programs, including the LCFF Equity Multiplier, Special Education, and Child Nutrition, among other categorical programs.
$2.2 billion to further increase per student funding for special education.
The January proposal included $509 million to ensure districts, charter schools, and county offices receive the same rate per pupil, and the increased investment of $1.8 billion would increase that per pupil rate to $1,340.
The May Revision also maintains other major ongoing investments, including $1 billion to sustain the California Community Schools Partnership Program and $62.4 million to further strengthen the Expanded Learning Opportunities Program (ELOP).
The revised spending plan also includes additional investments to support districts with increased costs and strengthen the education workforce, mostly through one-time investments. Those include:
A $5 billion one-time discretionary block grant for schools.
This investment reflects an increase of $2.2 billion for this grant compared to the January proposal. This grant would provide districts, charter schools, and COEs with additional dollars intended (but not required) to support:
Addressing school districts’ rising costs
Providing professional development for teachers, including literacy training to better support multilingual students, math and English Language Arts frameworks, and developmentally appropriate instruction for TK-3 teachers and administrators
Strengthening teacher recruitment and retention efforts
Expanding career pathways and dual enrollment for high school students.
More than half a billion dollars to support the education workforce through a mix of different investments.
The vast majority of these dollars are one-time resources. The largest is an allocation of $429 million to extend the Literacy Coaches and Reading Specialists Grant program, which provides funding to train literacy coaches and specialists, support students who need targeted reading intervention, and develop school literacy programs. Another notable proposal is an increase of $17.8 million for the Golden State Teacher Grant program — $16.2 million of that is ongoing. This program, administered by the California Student Aid Commission, provides grants to teacher candidates if they commit to serve in a high priority school. The intent of this increase, which is funded through federal sources, is to provide grants to prospective special education teachers.
Overall, the May Revision directs substantial additional resources toward California’s schools, with investments spanning ongoing increases to the school funding formula, special education, and a range of one-time workforce and programmatic grants.
May Revision Builds on Community College Investments
A portion (about 11%) 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.
Allocates $476 million to provide a higher COLA for the community colleges funding formula and other programs.
This includes$439 million to provide a 4.31% COLA for the Student Centered Funding Formula. This updated estimate includes a statutorily required COLA of 2.87% and a 1.44% discretionary increase. This discretionary increase is intended to provide the resources needed to satisfy the requirement to provide employees with 14 weeks of paid pregnancy disability leave. The May Revision also provides a higher COLA (2.87%) for other categorical programs.
Slightly increases funding for enrollment growth.
The revised budget provides $89.2 million for enrollment growth.This includes $33.9 million for a 0.5% growth in 2026-27 and an additional $55.3 million for a 1% growth in 2025-26.
Includes additional one-time investments.
The governor’s revised plan includes an additional investment of $9.7 million for the Adult Learner Demonstration Project, which “services to assist low-income adult workers move into stable and higher-paying jobs.” Additionally, the May Revision includes a modest increase of $607,000 for a flexible block grant, bringing the total to $100.6 million.
The budget also maintains other one-time and ongoing investments from the January budget proposal. That includes $38.1 million to increase funding for Calbright College, California’s online community college and $78 million to further expand a common cloud data platform and continue implementation of credit for prior learning efforts as part of the Master Plan for Career Education.
Justice System
Budget Projects Drop in Prison Population, Fails to Propose Prison Closures
Roughly 89,500 adults 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 a series of justice system reforms adopted by state policymakers and the voters since the late 2000s, including Proposition 47, which California voters passed in 2014. (See Prop. 47 investments section.)
Despite this substantial progress in reducing incarceration, American Indian, Black, and Latinx Californians are disproportionately represented in state prisons — a disparity that reflects racist practices in the justice system as well as the social and economic disadvantages that communities of color continue to face due to historical and ongoing discrimination and exclusion.
Among all incarcerated adults, most — around 86,400 — are housed in state prisons designed to hold roughly 71,100 people. This overcrowding equals about 122% 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 3,200 people in facilities that are not subject to the cap, including fire camps, community-based facilities that provide rehabilitative services, and Department of State Hospitals facilities.
Provides $14.2 billion General Fund for the California Department of Corrections and Rehabilitation (CDCR) in 2026-27, up from $13.8 billion as proposed in January.
Under the governor’s revised budget, CDCR’s share of overall state General Fund spending would drop below 6% in 2026-27. By comparison, CDCR’s budget comprised more than 9% of General Fund spending in 2013-14, the fiscal year before voters passed Prop. 47. (See Prop. 47 investments section.)
Projects that the prison population will decline in the coming years.
The average daily number of adults incarcerated in state prisons is projected to decline to around 87,600 in 2026-27. By June 30, 2030, the number of incarcerated adults is projected to fall further to about 85,210. This decline provides state leaders with an opportunity to close additional prisons in the coming years.
Fails to advance a plan to continue downsizing the state prison system.
In recent years, California has closed (or is in the process of closing) four state prisons, deactivated 42 housing units across 11 prisons, deactivated facilities in multiple prisons, and eliminated in-state and out-of-state contracted prison capacity. CDCR estimates that all of these changes combined will result in cumulative state savings of $4.9 billion by 2027-28. Further scaling back the state prison system would free up additional state revenue that could help incarcerated individuals successfully transition back to their communities as well as support crime survivors, reduce poverty, increase housing stability, and address substance use and mental health issues.
Revised Budget Includes No New Funding to Address Proposition 36’s Unfunded Mandate
In 2024, voters approved Proposition 36, increasing penalties for certain drug and theft offenses. For example, Prop. 36 reversed some of the sentencing reforms put in place by Prop. 47 of 2014. In addition, Prop. 36 established a new process allowing prosecutors to charge people with a “treatment-mandated felony” for possessing illegal drugs. Yet, even with Prop. 36, most of the justice system reforms adopted by state policymakers and voters over the past couple of decades remain in effect.
By increasing punishment for drug and theft crimes, Prop. 36 has created new costs — including for incarceration, probation, and the courts — at the state and local levels. However, Prop. 36 amounts to a huge unfunded mandate that leaves state and local policymakers holding the bag. The measure provided no new revenue to pay for these additional state and local costs — even though Californians were promised that Prop. 36 would provide evidence-based treatment, housing solutions, and programs to increase community health and safety. Instead, Prop. 36 assumes that state and local officials can accommodate the measure’s costs in their already strained budgets.
As a result, state and local leaders have to decide how to pay for the unfunded costs created by Prop. 36 even as they struggle to close budget deficits for the upcoming fiscal year and beyond.
The governor’s revised budget:
Does not provide new funds to help address Prop. 36’s unfunded costs at the state or local levels. Instead, the governor suggests that some of the savings generated by Prop. 47 could be used to pay for Prop. 36 court-ordered treatment programs (see Prop. 47 investments section). This approach — shifting Prop. 47 dollars to pay for Prop. 36 programs — would displace important mental health and substance use services that otherwise would be funded through Prop. 47.
May Revision Projects Decline in Proposition 47 Savings in Coming Years
Passed by voters in 2014, Proposition 47 reduced penalties for six nonviolent drug and property crimes from felonies to misdemeanors. As a result, state prison generally has not been a sentencing option for these crimes. Instead, people convicted of a Prop. 47 offense have served their sentence in county jail and/or received probation.
However, with the passage of Prop. 36 in November 2024, some of Prop. 47’s sentencing reforms have been reversed. Key changes enacted by Prop. 36 as well as their potential impact are described at the end of this section.
How Prop. 47 Savings Are Determined and Allocated
By decreasing state-level incarceration beginning in 2014, Prop. 47 reduced the cost of the prison system relative to the expected cost if Prop. 47 had not been approved by voters. The state 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.
California Has Allocated $908 Million in Prop. 47 Funds Through 2025-26
From 2016-17 through the current fiscal year (2025-26), California has allocated $908 million in state prison savings attributable to Prop. 47. These funds have been invested in local programs that support healing and keep communities safe.
For example, research has found 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. Individuals enrolled in these programs had a recidivism rate of just 15.3% — two to three times lower than is typical for people who serve prison sentences (recidivism rates range from 35% to 45% for these individuals).
May Revision Estimates $89 Million in Prop. 47 Savings to Invest in Local Communities in 2026-27
The budget estimates $89.1 million in Prop. 47 savings due to reduced state-level incarceration — dollars that will be invested in local communities starting in 2026-27. (These savings are attributable to the 2025-26 fiscal year, but will become available for expenditure in 2026-27.) With these additional funds, Prop. 47’s total investment in California’s communities will reach almost $1 billion, up from the current $908 million (through 2025-26).
Prop. 47 Savings Will Decline Due to Prop. 36
With the passage of Prop. 36 in November 2024, voters increased penalties for certain drug and theft offenses, including by reversing some of Prop. 47’s sentencing reforms (see Prop. 36 Impacts section). For example, Prop. 36 allows simple drug possession, petty theft, and shoplifting to be charged as felonies in certain circumstances. Under Prop. 47’s rules, these crimes were generally misdemeanors.
The administration estimates that the longer sentences allowed by Prop. 36 will increase the prison population by 592 in 2025-26 and by about 1,550 upon full implementation. (The overall prison population is projected to continue to decline due to the offsetting impact of justice system reforms that remain in effect.) At the same time, the annual savings from Prop. 47 is expected to drop substantially, falling from $91.5 million in 2025-26 to $89.1 million in 2026-27 to $77.3 million in 2027-28 — a nearly 16% decline over this period. Prop. 36 is a key contributor to this sizable drop.
In short, because of Prop. 36, tens of millions of dollars that would otherwise have supported behavioral health treatment and other critical services over the coming years is expected to be shifted back to the state prison system.
Revised Budget Includes One-Time Funds to Address Crime and Support Survivors
The May Revision includes several one-time General Fund investments to support victims of crime, including:
$25 million to backfill declining federal support for crime survivors. Federal funds provided through the Victims of Crime Act (VOCA) help to support critical services like counseling, emergency shelter, and financial assistance for crime survivors, including survivors of domestic and sexual violence. Declining federal VOCA funding has reduced support for organizations that provide these services. The governor’s proposed one-time funding would “significantly alleviate” the service reductions that “would otherwise be necessary,” according to budget documents.
$10 million to combat human trafficking. These funds would be competitively awarded through a “vertical prosecution” grant program aimed at preventing human trafficking. In a vertical prosecution, a single prosecutor handles the case from the outset. This provides several benefits, including the opportunity for the prosecutor to establish rapport with the victims and better understand the details of the case.
$10 million to help solve cases involving missing and murdered indigenous people (MMIP). These funds would be awarded on a competitive basis to federally recognized Indian tribes to support efforts to publicize, investigate, and solve MMIP cases. The state has provided $37 million to support MMIP grants in recent years.
Other Key Issues
Governor Hints at Coming Effort to Protect Elections Against Federal Threats
Election threats are also coming from within California: The Riverside County Sheriff recently confiscated and attempted to recount 650,000 ballots citing baseless claims of voter fraud pushed by conspiracy theorists.
Countering these threats and protecting Californians’ right to vote requires a range of responses, including new state investments. The state typically provides only a small amount of funding to support elections, which are overseen by California’s 58 counties. (The state does pay most or all of the cost of one-off elections, such as a gubernatorial recall, but those are rare.) Instead, counties and other local governments cover most typical election expenses using property taxes and other locally generated revenues. In other words, even though the state reaps substantial benefits from county oversight of elections, it fails to pay its fair share of those costs.
The 2026 midterms won’t be a “business as usual” election, so state funding should not be stuck in the past. This year, additional state funds are needed to support:
Outreach and education to encourage Californians to vote early,
Expanded access to vote centers and ballot boxes,
Expedited ballot processing,
Statewide law enforcement coordination to protect against election interference, including attempts by rogue county sheriffs to seize ballot boxes, and
Cybersecurity, election monitoring, and post-election litigation.
While the May Revision does not include additional state funding for elections, it does indicate that the governor and legislative leaders will — through the budget process — “identify ways to continue to protect democracy” in California. This suggests that in the coming weeks, state leaders will unveil new funding commitments and other changes that aim to defend against election interference, support county election administration, and protect Californians’ right to vote.
SACRAMENTO, CA — Following the release of Governor Newsom’s 2026-27 revised budget proposal, the California Budget & Policy Center (Budget Center), a nonpartisan research and analysis nonprofit, responded with the following statement from its executive director, Chris Hoene: “Governor Gavin Newsom’s final state budget plan is an opportunity to cement his legacy and approach to … Continued
California’s state budget reserves, including the “rainy day fund” and other reserve accounts, serve as a financial safety net for services like education, health care, and child care during economic downturns. The rules for depositing and withdrawing funds are complex, and policymakers should consider reforms, such as excluding reserve deposits from the Gann Limit spending cap, to strengthen the state budget’s resilience during a recession.
Introduction
California has several state budget reserves. These reserves help to maintain essential public services — like education, health care, and child care — when revenues fall short, such as during recessions. Reserves aren’t for everyday spending, but rather a financial safety net for the state.
This report describes California’s state budget reserves, explains how funds can be accessed and used, and discusses proposals to reshape these reserves that have been floated in recent years.
state budget Reserves in a nutshell
The Budget Stabilization Account (BSA), or “rainy day fund,” holds revenues to support any program funded through the state budget.
The Public School System Stabilization Account (PSSSA), or schools reserve, periodically holds revenues to support K-12 schools and community colleges.
The Safety Net Reserve periodically holds revenues intended to support the CalWORKs and Medi-Cal programs.
The Special Fund for Economic Uncertainties (SFEU) holds revenues to cover unexpected state budget costs during a fiscal year.
The Projected Surplus Temporary Holding Account can be used to temporarily set aside some anticipated surplus revenues and avoid spending funds that may not materialize.
Budget Stabilization Account (BSA): California’s Largest Reserve
The BSA is California’s largest state budget reserve. Deposits into and withdrawals from this “rainy day fund” are based on complex rules that were added to the state Constitution by Proposition 2 of 2014.1Prop. 2 was placed on the November 2014 statewide ballot by the Legislature; voters approved the measure by a more than 2-to-1 margin. Prop. 2’s rules are found in the California Constitution (Article XVI, Sections 20 to 22). Key rules include the following:
An annual deposit is required. Prop. 2 requires that 1.5% of General Fund revenues be set aside every year. Until 2029-30 half of these revenues must be deposited into the BSA and the other half must be used to pay down certain state debts.2Revenues that are set aside for paying down state debts may be used for several types of debt, including reducing unfunded liabilities associated with state-level pension plans and prefunding other retirement benefits, such as retiree health care. Beginning in 2030-31, the entire amount must be deposited into the BSA, although state leaders will have the option of redirecting up to one-half of each year’s deposit to pay down debts.
In some years, the state must set aside additional General Fund revenues. This occurs in years when estimated General Fund revenues that come from personal income taxes on capital gains exceed 8% of total General Fund proceeds of taxes.3A capital gain is the increase in the value of an asset — like stock market shares — between the date of purchase and the date of sale. This increase represents income to the asset holder and is subject to the personal income tax in California. The share of these “excess” capital gains revenues that is not owed to K-12 schools and community colleges under the state’s Prop. 98 funding guarantee must be used for BSA deposits and debt repayments, following the same requirements as the mandatory 1.5% deposit. Since Prop. 2 was enacted, capital gains tax revenues have exceeded the 8% threshold in most years, but could fall below the threshold in years when there are downturns in the stock market.
State leaders may also make discretionary deposits. In addition to the mandatory annual deposits required by Prop. 2, policymakers have the option of saving additional, discretionary revenue in the BSA.
The required annual deposit may be reduced or suspended in the event of a “budget emergency. If the governor declares a budget emergency, the state may reduce or suspend the required BSA deposit with a majority vote of each house of the Legislature.4In contrast, the portion of General Fund revenues that is required to be used for debt payments cannot be reduced or suspended under any circumstances. Prop. 2 defines a budget emergency as a situation where:
Conditions of disaster or extreme peril are present5A budget emergency that is declared in response to a disaster or extreme peril must meet the definition provided in Article XIII B, Section 3(c)(2) of the state Constitution. This section refers to the existence of “conditions of disaster or of extreme peril to the safety of persons and property within the State, or parts thereof” and defines these conditions as being “caused by such conditions as attack or probable or imminent attack by an enemy of the United States, fire, flood, drought, storm, civil disorder, earthquake, or volcanic eruption.”; or
The state has insufficient resources to maintain General Fund expenditures at the highest level of spending in the three most recent fiscal years, adjusted for state population growth and the change in the cost of living.6General Fund expenditures for the prior three fiscal years would be based on the level of spending “estimated at the time of enactment” of the budget bill for each fiscal year. The change in the “cost of living” would be measured using the California Consumer Price Index.
BSA funds may be withdrawn in the event of a budget emergency, but the entire balance cannot be removed at once. If the governor declares a budget emergency and the Legislature agrees with a majority vote of each house, funds may be taken out of the BSA.7The BSA balance may be reduced for another reason unrelated to a budget emergency. Specifically, Prop. 2 requires revisions to prior calculations of “excess” capital gains revenues — once in each of the two subsequent years — as updated revenue estimates become available. If a revision of “excess” capital gains revenues determines that a prior-year deposit to the BSA was greater than required, then the amount of funds equal to the over-deposit must be withdrawn from the reserve and returned to the General Fund. Alternatively, if a prior-year deposit was smaller than required, then funds must be added to the BSA to make up the difference. This after-the-fact “true-up” process does not apply to the portion of “excess” capital gains revenues that is used to pay down state debts each year. The true-up process also does not apply to the 1.5% of General Fund revenues that are required to be set aside each year. However, the entire balance cannot be removed immediately. Only the amount needed to address the budget emergency may be withdrawn, subject to the additional limitation that a withdrawal may not exceed 50% of the BSA balance in the first year of a budget emergency. In the second consecutive year of a budget emergency, all of the funds remaining in the BSA may be withdrawn.
Funds that are taken out of the BSA may go toward any purpose determined by the Legislature. For example, these dollars could be used for health care services, subsidized child care for working families, cash assistance for people with low incomes, K-12 schools, and any number of other public services and systems.
Funds in the BSA cannot exceed 10% of General Fund tax revenues. Prop. 2 caps the balance of the BSA. Once the balance — excluding any discretionary deposits — reaches 10% of General Fund tax revenues, any revenue that would otherwise have been required to go into the reserve must be instead spent on infrastructure, which includes housing. Prior to 2026, the BSA balance reached the cap twice — in 2022-23 and 2023-24 — but then dropped below the cap as state leaders withdrew funds in some years to address budget shortfalls.
Public School System Stabilization Account (PSSSA): The Reserve for K-12 Schools & Community Colleges
Prop. 2 of 2014 also established the PSSSA, the state’s budget reserve for California’s K-12 schools and community colleges. Prop. 2 does not require an annual deposit into this reserve. Moreover, Prop. 2 restricts the circumstances under which transfers to the PSSSA can occur. For a PSSSA deposit to be required, all of the following conditions must be met:
General Fund revenues that come from personal income taxes on capital gains are relatively strong;8Specifically, capital gains revenues must exceed 8% of total General Fund proceeds of taxes.
Growth in General Fund revenues leads to relatively strong growth in the state’s annual minimum funding guarantee for K-12 schools and community colleges;9A PSSSA deposit can only occur in so-called “Test 1” years under the state’s Prop. 98 minimum funding guarantee for K-12 schools and community colleges. Test 1, which guarantees K-14 education a percentage of General Fund revenues. However, even in certain Test 1 years, the amount of growth in state per capita personal income from the prior year can prevent a deposit to the PSSSA. and
The Legislature does not suspend the annual K-14 education minimum funding guarantee.
Even under these restricted circumstances, Prop. 2 limits the size of the deposit to the schools reserve when such a deposit is required.10For example, Prop. 2 specifies that transfers to the PSSSA may not exceed the difference between the Test 1 funding level under Prop. 98 and the “Test 2” funding level, which is determined by year-to-year growth in state per capita personal income. Prop. 2 also limits the size of the deposits to the PSSSA by prioritizing funding for K-14 education cost-of-living adjustments over deposits to the PSSSA.
Deposits to the PSSSA may be reduced or suspended in the event of a budget emergency under the same rules that govern reductions or suspensions of deposits to the BSA (see the prior section of this report). Similarly, funds may be withdrawn from the schools reserve if the governor declares a budget emergency and the Legislature agrees with a majority vote of each house.11Prop. 2 requires funds to be withdrawn from the PSSSA, even without a declaration of a budget emergency, when prior-year PSSSA deposits were greater than required. Prop. 2 also requires a withdrawal of funds from the PSSSA in any year when the Prop. 98 minimum funding guarantee is less than the prior-year Prop. 98 funding level, adjusted for changes in student attendance and the cost of living. In this case, the required withdrawal would be limited to the amount needed to reach the prior year’s funding level. Prop. 2 defines change in “cost of living” as the higher of 1) the percent change in California per capita personal income from the preceding year or 2) the cost-of-living adjustment applied to school district and community college district general purpose apportionments.
In contrast to the rules governing the withdrawal of funds from the BSA, all of the PSSSA funds may be withdrawn in one year. Moreover, funds withdrawn from the PSSSA must be used to support K-12 schools and community colleges.
Safety Net Reserve: Funds to Protect the Medi-Cal and CalWORKs Programs
The Safety Net Reserve was created in 2018 to set aside funds to help cover the costs of two programs that often see increases in enrollment during recessions: Medi-Cal and California Work Opportunity and Responsibility to Kids (CalWORKs).12The Safety Net Fund is authorized in California Welfare and Institutions Code, Section 11011. Both of these programs serve Californians with low incomes — with Medi-Cal delivering health coverage, and CalWORKs providing modest cash assistance to families with children. During economic downturns, more people become unemployed and temporarily rely on these programs to cover their basic needs, increasing state costs.
The Safety Net Reserve is not a constitutional reserve, so there are no binding requirements governing deposits or withdrawals. This means that funds can be transferred into and withdrawn from the reserve at the discretion of the Legislature. In fact, state policymakers voluntarily deposited $900 million in the Safety Net Reserve before draining all of those funds in 2024 to help address a $55 billion state budget problem.
Moreover, while state law specifies that the funds are to be used only for Medi-Cal and CalWORKs costs during economic downturns, state policymakers could decide to modify this language and use the funds for other purposes. However, in establishing this reserve, policymakers clearly recognized the need to protect critical services for Californians with low incomes from budget cuts — cuts that would undermine Medi-Cal and CalWORKs at the very time that these programs are needed most.
Dive Deeper Into California’s Budget Reserves
For a deeper understanding of California’s reserve accounts, explore the Budget Center’s companion resources:
Special Fund for Economic Uncertainties (SFEU): The Discretionary Reserve
The SFEU is the state’s discretionary General Fund budget reserve, meaning policymakers have a great deal of latitude in spending the funds in the reserve.13The SFEU (originally called the “Reserve for Economic Uncertainties”) was created through the 1980-81 Budget Act and is authorized in California Government Code, Section 16418. The amount of money in the SFEU is equal to the difference between General Fund resources and General Fund spending in a given fiscal year.14Specifically, the SFEU balance is equal to the General Fund balance carried over from the prior year, plus revenues and transfers, minus expenditures and encumbrances. Legislative Analyst’s Office, The 2020-21 Budget: Structuring the Budget (February 10, 2020), p. 11.
The SFEU acts as a buffer against unanticipated revenue shortfalls or spending increases. Due to California’s constitutional balanced-budget requirement, which requires the state to enact a budget in which spending does not exceed available resources, the projected SFEU balance cannot be less than zero at the time the annual budget is adopted. However, if state revenues come in lower than projected and/or spending unexpectedly rises, the SFEU balance will decline, and may become negative as spending begins to exceed revenues.
The Legislature can appropriate funds from the SFEU at any time and for any purpose. Additionally, in the event of a disaster, the governor can allocate funds from the SFEU without the prior approval of the Legislature. Specifically, when the governor declares a state of emergency, the Department of Finance (DOF) can transfer funds from the SFEU into a subaccount called the Disaster Response-Emergency Operations Account (DREOA).15The amount that may be transferred to the DREOA is limited to the amount necessary to cover disaster-related claims that exceed the available balance in the account. California Government Code, Section 8690.6(d). These funds are allocated to state agencies for costs that are “immediate and necessary to deal with an ongoing or emerging crisis.”16The DOF is required to notify the Joint Legislative Budget Committee as well as the fiscal committees in each house before any funds may be allocated from the SFEU in response to a disaster. Funds in the DREOA can be spent for disaster response costs that occur within 120 days of the Governor’s emergency proclamation. The DOF can extend this time period in up to 120-day increments upon notifying the Legislature, subject to certain limitations. California Government Code, Section 8690.6.
Projected Surplus Temporary Holding Account: A Place to Set Aside Anticipated Surplus Revenues
State leaders created the Projected Surplus Temporary Holding Account in 2024. This account gives policymakers a place to temporarily set aside anticipated surplus revenues, “ensuring that funds are only spent once they are realized.”17Office of Governor Gavin Newsom, press release (September 30, 2024).
State leaders have broad authority to determine whether or how to use this holding account. The only requirement is that revenues that go into the account cannot remain there for longer than one year. If state revenues materialize as projected, the revenues in the account may be spent for any purpose or transferred back to the General Fund for future use.18California Government Code, Section 16418.7.
This holding account is a “pilot budgeting project” that expires at the end of 2030, although state leaders could approve an extension as well as potentially modify the rules.
What’s Next for California’s State Budget Reserves?
The rules that govern California’s budget reserves can be amended by voters or state policymakers. Changing the reserve rules established by Prop. 2 (2014) would require voters to approve a constitutional amendment.19Amendments can be placed on a statewide ballot through a citizens initiative or by the Legislature. Other reserve rules can be changed by state policymakers without the need for voter approval.
In recent years, state policymakers and others have advanced proposals to revise California’s reserve policies, although none have moved beyond the conceptual stage. Common proposals for changing state reserve policies include the following:
Proposals to increase the share of state General Fund revenue deposited into the Budget Stabilization Account (BSA), or rainy day fund.
Proposals to require a substantially larger share of General Fund revenue to go into the BSA raise concerns. Such changes would reduce annual funding available to address Californians’ growing needs. While saving for a rainy day is important, it shouldn’t come at the cost of meeting people’s needs today.
If policymakers want to increase state reserves, they can do so without requiring more revenue to be deposited into the BSA. State leaders currently have the authority to make discretionary deposits into the rainy day fund and other reserves, like the Safety Net Reserve. Discretionary deposits can be made periodically and can be accessed more easily than the BSA’s mandatory deposits, which are subject to stricter withdrawal conditions.
State leaders also can build up the rainy day fund through policies that increase General Fund revenue. This is because higher revenue would automatically boost annual deposits into the BSA under current Prop. 2 rules.
Proposals to allow the balance of the BSA to grow beyond 10% of annual state General Fund revenue.
Increasing the maximum size of the BSA above the current 10% cap would be an acceptable change — but only if the proportion of General Fund revenue that must be deposited into the BSA does not also increase substantially. Raising the 10% cap while also shifting a larger share of revenue into the rainy day fund would leave less funding to support the critical services that Californians need.
Proposals to exclude reserve deposits from California’s spending cap, or “Gann Limit.”
Excluding reserve deposits from California’s spending cap would be a sensible change. Currently, deposits into the BSA and other state budget reserves are classified as “expenditures” under the Gann Limit, which voters created by passing Prop. 4 in 1979.
Counting reserve deposits as “spending” increases the likelihood that the state will exceed the spending cap in years when revenues are strong. When revenues go over the Gann Limit, state leaders lose the ability to spend those dollars in ways that address Californians’ most pressing needs. Therefore, excluding deposits from the limit would allow state policymakers to build up budget reserves in years when revenues are particularly strong — which is exactly when the state is most likely to exceed the spending cap.
Changes to the rainy day fund or the Gann Limit would require amending the state Constitution. This means that voters would have the last word on the most significant proposals to modify California’s state budget reserves.
Prop. 2 was placed on the November 2014 statewide ballot by the Legislature; voters approved the measure by a more than 2-to-1 margin. Prop. 2’s rules are found in the California Constitution (Article XVI, Sections 20 to 22).
2
Revenues that are set aside for paying down state debts may be used for several types of debt, including reducing unfunded liabilities associated with state-level pension plans and prefunding other retirement benefits, such as retiree health care.
3
A capital gain is the increase in the value of an asset — like stock market shares — between the date of purchase and the date of sale. This increase represents income to the asset holder and is subject to the personal income tax in California.
4
In contrast, the portion of General Fund revenues that is required to be used for debt payments cannot be reduced or suspended under any circumstances.
5
A budget emergency that is declared in response to a disaster or extreme peril must meet the definition provided in Article XIII B, Section 3(c)(2) of the state Constitution. This section refers to the existence of “conditions of disaster or of extreme peril to the safety of persons and property within the State, or parts thereof” and defines these conditions as being “caused by such conditions as attack or probable or imminent attack by an enemy of the United States, fire, flood, drought, storm, civil disorder, earthquake, or volcanic eruption.”
6
General Fund expenditures for the prior three fiscal years would be based on the level of spending “estimated at the time of enactment” of the budget bill for each fiscal year. The change in the “cost of living” would be measured using the California Consumer Price Index.
7
The BSA balance may be reduced for another reason unrelated to a budget emergency. Specifically, Prop. 2 requires revisions to prior calculations of “excess” capital gains revenues — once in each of the two subsequent years — as updated revenue estimates become available. If a revision of “excess” capital gains revenues determines that a prior-year deposit to the BSA was greater than required, then the amount of funds equal to the over-deposit must be withdrawn from the reserve and returned to the General Fund. Alternatively, if a prior-year deposit was smaller than required, then funds must be added to the BSA to make up the difference. This after-the-fact “true-up” process does not apply to the portion of “excess” capital gains revenues that is used to pay down state debts each year. The true-up process also does not apply to the 1.5% of General Fund revenues that are required to be set aside each year.
8
Specifically, capital gains revenues must exceed 8% of total General Fund proceeds of taxes.
9
A PSSSA deposit can only occur in so-called “Test 1” years under the state’s Prop. 98 minimum funding guarantee for K-12 schools and community colleges. Test 1, which guarantees K-14 education a percentage of General Fund revenues. However, even in certain Test 1 years, the amount of growth in state per capita personal income from the prior year can prevent a deposit to the PSSSA.
10
For example, Prop. 2 specifies that transfers to the PSSSA may not exceed the difference between the Test 1 funding level under Prop. 98 and the “Test 2” funding level, which is determined by year-to-year growth in state per capita personal income. Prop. 2 also limits the size of the deposits to the PSSSA by prioritizing funding for K-14 education cost-of-living adjustments over deposits to the PSSSA.
11
Prop. 2 requires funds to be withdrawn from the PSSSA, even without a declaration of a budget emergency, when prior-year PSSSA deposits were greater than required. Prop. 2 also requires a withdrawal of funds from the PSSSA in any year when the Prop. 98 minimum funding guarantee is less than the prior-year Prop. 98 funding level, adjusted for changes in student attendance and the cost of living. In this case, the required withdrawal would be limited to the amount needed to reach the prior year’s funding level. Prop. 2 defines change in “cost of living” as the higher of 1) the percent change in California per capita personal income from the preceding year or 2) the cost-of-living adjustment applied to school district and community college district general purpose apportionments.
12
The Safety Net Fund is authorized in California Welfare and Institutions Code, Section 11011.
13
The SFEU (originally called the “Reserve for Economic Uncertainties”) was created through the 1980-81 Budget Act and is authorized in California Government Code, Section 16418.
14
Specifically, the SFEU balance is equal to the General Fund balance carried over from the prior year, plus revenues and transfers, minus expenditures and encumbrances. Legislative Analyst’s Office, The 2020-21 Budget: Structuring the Budget (February 10, 2020), p. 11.
15
The amount that may be transferred to the DREOA is limited to the amount necessary to cover disaster-related claims that exceed the available balance in the account. California Government Code, Section 8690.6(d).
16
The DOF is required to notify the Joint Legislative Budget Committee as well as the fiscal committees in each house before any funds may be allocated from the SFEU in response to a disaster. Funds in the DREOA can be spent for disaster response costs that occur within 120 days of the Governor’s emergency proclamation. The DOF can extend this time period in up to 120-day increments upon notifying the Legislature, subject to certain limitations. California Government Code, Section 8690.6.
17
Office of Governor Gavin Newsom, press release (September 30, 2024).
18
California Government Code, Section 16418.7.
19
Amendments can be placed on a statewide ballot through a citizens initiative or by the Legislature.
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California has several budget reserves that help to manage annual state revenues and protect services when the state faces a budget deficit. California’s Constitution and state law govern when funds may be withdrawn from the state’s reserves, the amount that can be withdrawn, and how funds may be used.
TWO RESERVE ACCOUNTS ARE ESTABLISHED IN THE STATE CONSTITUTION:
Budget Stabilization Account (BSA)
Public School System Stabilization Account (PSSSA)
Three reserve accounts are established in state law:
Safety Net Reserve
Special Fund for Economic Uncertainties (SFEU)
Projected Surplus Temporary Holding Account
The following table answers five key questions about California’s budget reserves:
Is the state required to make an annual deposit?
Can a required deposit be reduced or suspended — and by who?
When can the funds be withdrawn?
Is there a limit on the amount of funds that can be withdrawn?
How can the funds be used by the state?
Dive Deeper Into California’s Budget Reserves
For a deeper understanding of California’s reserve accounts, explore the Budget Center’s companion resources:
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Watch to learn more
Just like households save for emergencies, California sets aside money in budget reserves. Budget reserves are California’s way of preparing for the unexpected, saving a little today to protect vital public services tomorrow.
Dive Deeper Into California’s Budget Reserves
For a deeper understanding of California’s reserve accounts, explore the Budget Center’s companion resources:
In this video, we break down how California’s state reserves work, including the four main reserve accounts: the Budget Stabilization Account (the state’s “rainy day fund”), the Public School System Stabilization Account, the Safety Net Reserve, and the Special Fund for Economic Uncertainties.
Learn how these reserves are funded, when they can be used, and why balancing savings with current investments is key to supporting Californians’ well-being.
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Communities across California face many challenges during President Trump’s second administration, from deep federal budget cuts that threaten to undermine Californians’ health, economic security, and well-being, to mounting affordability pressures and persistent inflation that have exacerbated communities’ longstanding unmet need for more affordable housing, health care, and child care. People with low incomes, immigrants, communities of color, and other marginalized Californians are bearing the brunt of these challenges, as harmful and discriminatory federal policies compound existing inequities based on race and wealth.
State leaders have an opportunity to chart a different path for California, and they have both the responsibility and the ability to respond. This report shows that:
Policymakers have the tools to better meet Californians’ needs and the evidence to prove it. Recent progress — from improvements in health coverage, to gains in affordable housing and declines in homelessness, to increased child care enrollment and lower child poverty — shows that when the state invests in people’s essential needs, quality of life improves.
Progress is now under threat from federal cuts and policy rollbacks. Federal cuts are targeting the very programs that have improved Californians’ lives, hitting the most vulnerable communities hardest and widening existing inequities.
Policymakers have the resources and revenue solutions to fight back. California has the fourth-largest economy in the world and is home to a large share of the nation’s wealthy as well as some of the largest, most profitable corporations, all of which benefit from the state’s public services and infrastructure. Yet California loses billions of dollars each year due to tax breaks and loopholes that benefit corporations and the wealthy — resources that could be better spent meeting the needs of California families.
H.R. 1 and the Federal Budget
H.R. 1, the harmful Republican mega bill passed in July 2025, will deeply harm Californians by cutting funding for essential programs like health care, food assistance, and education.
See how California leaders can respond and protect vital supports.
Tax Revenue Funds the Public Investments That Improve Californians’ Lives
Every Californian deserves affordable housing, health care, and child care, well-paying jobs, and the resources to build a secure future — and public investment is how we get there. Recent experience shows that when policymakers invest in meeting people’s essential needs, Californians’ quality of life improves. In recent years:
California’s uninsured rate fell to a historic low following investments to expand access to health coverage
In 2014, California fully implemented federal health care reform, which, along with more recent state initiatives to expand full-scope Medi-Cal to all income-eligible Californians regardless of immigration status, helped the state reach a historically low uninsured rate of 5.9% in 2024.
case Study: How a Tax on Wealthy Households Funds Schools, Health Care & More
Voters asked the top 2% of earners to contribute more — generating $9 to $10 billion per year for education, tax credits for families with low incomes, and a stronger, more resilient state budget.
Expanding Medi-Cal to undocumented children led to significant improvements in their health
Undocumented children in California became eligible for full-scope Medi-Cal in 2016, and coverage was fully expanded to cover all income-eligible Californians in 2024. Research shows that after the expansion to undocumented children took effect, the percentage of non-citizen children who reported being in excellent health increased by 10 percentage points from 20% to 30%, suggesting that investing in health coverage for all contributed to significant improvements in people’s health.
More Californians are exiting homelessness — thanks to public investments
This is in large part due to significant state investments in the Homeless Housing, Assistance and Prevention (HHAP) program, which allows communities across California to fund solutions tailored to their local needs. In 2024 alone, homeless service providers assisted over 330,000 Californians experiencing homelessness. HHAP has helped drive a 24% decline in youth homelessness since 2019 and supported more than 90,000 Californians in moving into permanent housing since 2023. These and other state homelessness investments have led to a statewide 9% drop in unsheltered homelessness in 2025.
California has doubled the production of new affordable homes in recent years
According to the California Housing Partnership, California produced more than 17,900 units in 2024. This increase was largely driven by major state investments in various affordable housing programs between 2019 and 2023, which helped thousands of developments pencil out and open their doors. More homes are still needed — but the gains are spreading, with more counties becoming affordable for California households with middle and lower incomes.
Enrollment in publicly funded child care has steadily increased following the partial expansion of subsidized child care spaces
In 2021, the Newsom administration promised to expand affordable child care to more than 200,000 children. Around 60% of that promise has been fulfilled: the share of eligible children enrolled in publicly funded child care grew from 11% in 2022 to 16% in 2024. That means thousands more children are getting the care that supports their healthy development and thousands more families have the economic security to thrive.
California’s child poverty rate dropped by 40% in one year following the significant temporary expansion of the federal Child Tax Credit
In 2021, the federal Child Tax Credit was increased and made fully refundable, allowing millions of families with very low incomes to access the full credit for the first time. This expansion drove a 40% drop in California’s child poverty rate and was associated with reductions in food insecurity and racial income inequities. This demonstrates that poverty is a policy choice and that a significant expansion of California’s own tax credits could have a widespread impact for families and individuals experiencing poverty.
case Study: Clever Strategy Allowed California to Raise New Revenue Following Federal Tax Cuts
In 2019, California selectively conformed to parts of the federal Tax Cuts and Jobs Act, enacted during President Trump’s first term, and raised over $1 billion in new, ongoing annual revenue — boosting K-14 education and expanding tax credits for working families.
There are still 1.8 million children in California who are eligible for publicly funded child care but not enrolled, underscoring the state’s need to fulfill its promise or risk forcing tens of thousands of families to make the impossible decision between going to work or caring for their child.
When COVID-era investments expired, the child poverty rate rapidly increased, and California continues to have the highest poverty rate of the 50 states, tied with Louisiana, pointing to the need for state leaders to do more to help Californians meet basic needs.
Yet recent and projected budget shortfalls make clear that California’s tax system isn’t generating enough resources even to maintain recent progress — let alone build on it. And now, deep federal funding cuts and other harmful actions are upending California’s progress toward a more equitable future.
Federal Cuts Are Threatening California’s Hard-Won Progress
The progress California has made didn’t happen by accident — it took sustained public investment. Now federal cuts are targeting the very programs that made that progress possible, and the communities bearing the greatest burden are those that were already struggling most.
If state leaders fail to raise additional revenue and expand public investments, here’s what’s at risk for California families:
Up to 2 million Californians may lose their Medi-Cal coverage
Federal cuts to health care could cause up to 2 million Californians with low and modest incomes, who are disproportionately Latinx and other Californians of color, to lose their Medi-Cal coverage. While this will impact all Californians, immigrants’ access to care is specifically restricted, including the elimination of health insurance coverage for many immigrants, such as refugees, asylees, and trafficking survivors. This is estimated to leave 200,000 Californians without crucial health insurance they need to survive. Recent state action to restrict coverage for immigrants will add to the harm by reversing progress made towards providing health care for all.
As people lose health insurance, clinics and hospitals — especially in rural areas — will face additional financial strain, leading to overcrowded clinics, fewer options for care in local communities, and higher premiums, among other ripple effects that will impact the entire health care system. Proposed additional state cuts to health care access for immigrants would further exacerbate the harm by causing even more Californians to lose coverage.
Over 3 million California households are at risk of losing some of all food assistance
Federal cuts to food assistance could put more than 3 million households with very low incomes, disproportionately Black, Latinx, and other people of color, at risk of losing some or all assistance. The harshest cuts target some of the most marginalized state residents, including refugees, asylees, and other humanitarian immigrants, as well as former foster youth, veterans, and people experiencing homelessness. Without state action to offset the cuts, food insecurity and poverty will rise, and an entire ecosystem of jobs and businesses connected to the food economy will be damaged.
At least 75,000 Californians could fall into homelessness
Federal threats to housing and homelessness programs, combined with inadequate state support, could undermine California’s progress in reducing homelessness and supporting housing stability for Californians with the lowest incomes, a large share of whom are older adults and people with disabilities. Harmful changes to federal Continuum of Care funding are expected, and current federal appropriations still fall short of covering nearly 15,000 California families with an Emergency Housing Voucher — putting homelessness services and households who have already secured housing at risk of falling back into homelessness. At the same time, a proposed federal rule targeting mixed-status households could put roughly 7,190 California families at risk of losing HUD-assisted housing, most of which include children, and impose new red-tape on more than 820,000 U.S. citizens in California. Proposed cuts to HHAP and the failure to provide new General Fund investments in affordable housing add to these challenges.
State Leaders Have Common-Sense Options to Raise Revenues and Protect Californians From Federal Harm
The choices state leaders make will determine who bears the burden and who benefits from H.R. 1. Maintaining the status quo means choosing to protect tax breaks for corporations and the wealthy at the expense of everyone else. Without bold action, people with low incomes, immigrants, communities of color, and other marginalized Californians will be left to bear the full brunt of federal cuts. California has commonsense options to minimize the harm, including:
Closing the “water’s edge” loophole, the most costly state corporate tax break
The “water’s edge” loophole allows global corporations that shift US profits to tax havens to avoid $3 to $4 billion in state taxes each year, at the expense of everyday people. This tax break rewards large profitable corporations that engage in aggressive tax planning by making it appear they are less profitable in the US and in California than they actually are — something small domestic businesses and individuals working for a living cannot do.
Putting reasonable limits on corporate tax credits and deductions
Reasonable caps on corporate tax credits and deductions would ensure corporations cannot use them to reduce their tax bill to the mere state $800 minimum tax. Policymakers can continue the temporary limit on business tax credits put in place by the 2024-25 budget agreement — which capped the use of credits to $5 million per business each year from 2024 through 2026 — and reverse course on the provision allowing businesses to claim refunds for the credits that exceeded the cap after the temporary limit expires. These refunds are estimated to cost the state $6.8 billion across fiscal years 2026-27 and 2034-35, a time when millions of Californians will be dealing with the harms of the federal budget cuts and the state will be ill-positioned to protect Californians without substantially raising revenue.
Ensuring that wealthy individuals inheriting valuable assets don’t escape taxation
This can be done by eliminating the state’s “basis step-up” tax break so that people inheriting assets pay tax on the full increase in value of those assets when they sell them and reinstating an estate or inheritance tax on large estates or inheritances. Most California estates go untaxed due to California’s lack of a state-level estate or inheritance tax and the overly generous exemption from the federal estate tax, which allows wealthy families to pass up to $30 million to their heirs tax-free ($15 million per individual). The basis step-up tax break is estimated to cost the state around $5 billion each year — although revenue gains from repealing it would start small and accrue over time. The potential revenue from enacting an estate or inheritance tax — which would have to be approved by state voters — would depend on the design, but by one estimate could raise between about $900 million and $3.6 billion, depending on the size of estates that would be subject to the tax.
The Path Forward: Equitable Revenue, Public Investment, and a California Where Everyone Thrives
Strengthening California’s revenue base is long overdue — and now, as the federal government abandons its responsibility to support the health and well-being of all Americans, it is more urgent than ever. California can and must chart a different course. By ensuring the most profitable corporations and wealthiest Californians pay their fair share, state leaders can generate the resources needed to protect communities from federal harm, build on hard-won progress, and move toward a California where everyone can thrive.
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