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Report

Guide to the County Budget Process

November 2024 | By Scott Graves

San Francisco City Hall

Every year, California’s 58 counties adopt local budgets that provide a framework and funding for critical public services and systems — from health care and safety net services to elections and the justice system.

But county budgets are about more than dollars and cents.

A county budget expresses our values and priorities as residents of that county and as Californians. At its best, a county budget should reflect our collective efforts to expand opportunities, promote well-being, and improve the lives of Californians who are denied the chance to share in our state’s wealth and who deserve the dignity and support to lead thriving lives.

Because county budgets touch so many services and our everyday lives, it is critical for Californians to understand and participate in the annual county budget process to ensure that county leaders are making the strategic choices needed to allow every Californian — from different races, backgrounds, and places — to thrive and share in our state’s economic and social life.

This guide sheds light on county budgets and the county budget process with the goal of giving Californians the tools they need to effectively engage local decision-makers and advocate for fair and just
policy choices.

Key Takeaways

the bottom line

  1. County budgets are about more than dollars and cents.
    • Crafting the annual spending plan provides an opportunity for county residents to express their values and priorities.
  2. County and state budgets are inherently intertwined because counties are legal subdivisions of California and perform functions as agents of the state.
    • To a large degree, county budgets reflect funding and policy choices made by the governor and the Legislature as well as by federal policymakers.
    • However, county budgets also reflect local choices, as counties allocate their limited “discretionary” dollars to local priorities.
  3. Counties’ ability to raise revenue to support local services is constrained.
    • For example, counties cannot increase the property tax rate to boost support for county-provided services.
    • Counties may increase other taxes to establish or improve local services, but only with voter approval.
  4. Both state law and local practices shape the county budget process.
    • State law establishes minimum guidelines that counties must adhere to in developing their budgets.
    • Counties can — and often do — exceed these state guidelines in crafting their budgets and sharing them with the public.
  5. The county budget process is cyclical, with decisions made throughout the year.
    • The public has various opportunities for input during the budget process.
    • This includes writing letters of support or opposition, testifying at budget hearings, and meeting with supervisors, the county manager, and other county officials.
    • In short, Californians have the opportunity to stay engaged and involved in their county’s budget process year-round.

California’s Counties: The Basics

California Has 58 Counties That Vary Widely In Population and Size

California’s counties range widely in population.

  • 10 counties have more than 1 million residents, and 21 counties have fewer than 100,000 residents.
  • Los Angeles County has the largest population of any county in the state (9.8 million).
  • Alpine County has the smallest population (less than 1,200).

California’s counties also differ considerably in size.

  • San Bernardino is California’s largest county (20,057 square miles).
  • San Francisco — which has the state’s only consolidated city and county government — is the smallest county (47 square miles).

California’s Constitution requires the state to be divided into counties. Counties’ powers are provided by the state Constitution or by the Legislature.

  • The Legislature may take back any authority or functions that it delegates to the counties.

There are 44 general-law counties and 14 charter counties.

  • Unlike general-law counties, charter counties have a limited degree of independent authority over certain rules that pertain to county officers. However, charter counties lack any extra authority with respect to budgets, revenue increases, and local regulations.

Counties Have Multiple Roles in Delivering Public Services

Other Types of Local Agencies Also Deliver Public Services

Counties provide public services alongside other agencies that operate at the local level. A wide array of local services are delivered by:

  • More than 2,000 independent special districts, which provide specialized services such as fire protection, water, or parks.
  • More than 900 K-12 school districts, which are responsible for thousands of public schools.
  • More than 480 cities, which provide policing, fire protection, and other municipal services.
  • More than 70 community college districts, which oversee 113 community colleges.

Counties Are Governed By an Elected Board of Supervisors

The Board of Supervisors consists of five members in all but one county.

  • The City and County of San Francisco has an 11-member Board and an independently elected mayor.

Because counties do not have an elected chief executive (except for San Francisco), the Board’s role encompasses both executive and legislative functions.

  • These functions include setting priorities, approving the budget, controlling county property, and passing local laws.

Boards also have a quasi-judicial role.

  • For example, Boards may settle claims and hear appeals of land-use and tax-related issues.

A Number of Other County Officers Also Are Elected

Along with an elected Board of Supervisors, the state Constitution requires counties to elect:

  • An assessor.
  • A district attorney.
  • A sheriff.

Although not required by the state Constitution, a few other key county offices are typically filled by election, rather than by Board appointment. These include:

  • The auditor-controller.
  • The county clerk.
  • The treasure-tax collector.

The County Manager Oversees the Daily Operations of the County Government

The top administrator in each county is appointed by the Board of Supervisors.

  • Counties have various titles for this position. This guide uses the generic term “county manager.”
  • San Francisco, with an independently elected mayor, does not have a county manager position.

The county manager:

  • Prepares the annual budget for the Board’s consideration.
  • Coordinates the activities of county departments.
  • Provides analyses and recommendations to the Board.
  • May hire and fire department heads, if authorized to do so.
  • May represent the Board in labor negotiations.

Key Facts About County Revenues and Spending

County Budgets Reflect State and Federal Policy Priorities and Local Policy Choices

To a large degree, county budgets reflect state and federal policy and funding priorities.

  • As agents of the state, counties provide an array of services that are supported with state and federal dollars and governed by state and federal rules.
  • This means that a large share of any county budget will reflect priorities that are set in Sacramento and in Washington, DC.

County budgets also reflect the policy and funding priorities of local residents and policymakers.

  • Counties can use a portion of their locally generated revenues to fund key local services and improvements.

County Revenues = State Funds + Federal Funds + Local Funds

County revenues consist of state and federal dollars along with locally generated funds.

  • State and federal revenues pay for health and human services, roads, transit, and other services.
  • Local revenues, particularly property tax dollars, are important because they are mostly “discretionary” and can be spent on various local priorities.

In 2022-23, almost two-thirds of county revenues statewide came from the state government, the federal government, and local property taxes.

County Budgets Support a Broad Range of Public Services and Systems

In 2022-23, nearly half of all county spending across the state funded the local justice system or public assistance.

  • The local justice system includes the district attorney, adult and youth detention, policing provided by the sheriff’s department, and probation.
  • Public assistance includes spending on cash aid for Californians with low incomes, including families with children in the CalWORKs welfare-to-work program.

Large shares of county spending in 2022-23 also supported either 1) public ways and facilities, health, and sanitation (18.5%) or 2) enterprise activities (16%), which include airports, hospitals, and golf courses.

The State Rules That Determine Counties' Revenue-Raising Authority

State Rules Establish Counties' Authority to Raise Revenue

Counties can levy a number of taxes and other charges to fund public services and systems.

  • The rules that allow counties to create, increase, or extend various charges are found in state law — as determined by the Legislature — as well as in the state Constitution.

Statewide ballot measures approved by voters since the late 1970s have constrained counties’ ability to raise revenues.

  • These measures are Proposition 13 (1978), Prop. 62 (1986), Prop. 218 (1996), and Prop. 26 (2010).

Counties Can Increase the Property Tax Rate Solely to Pay for Voter-Approved Debt

Prop. 13 (1978) limits the countywide property tax rate to 1% of a property’s assessed value.

  • Each county collects revenues raised by this 1% rate and allocates them to the county government, cities, and other local jurisdictions based on complex formulas.
  • Revenues from the 1% rate may be used for any purpose.

Local jurisdictions may increase the 1% rate to pay for voter-approved debt, but not to increase revenues for services or general operating expenses.

  • Most voter-approved debt rates are used to repay bonds issued for local infrastructure projects.
  • At the county level, bonds must be approved by a two-thirds vote of both the Board of Supervisors and the voters.

Counties Can Raise Other Taxes, But Only With Voter Approval

In contrast to counties’ limited authority over property taxes, counties may levy a broad range of other taxes to support local services. These include taxes on:

  • Retail sales.
  • Short-term lodgings.
  • Businesses.
  • Property transfers.
  • Parcels of property.

However, county proposals to increase taxes generally must be approved by local voters. These voter-approval requirements vary depending on whether the proposal is a “general” tax or a “special” tax.

Counties Also Can Levy Charges That Are Not Defined as "Taxes"

In addition to taxes, counties can establish, increase, or extend other charges to support local services. These are:

  • Charges for services or benefits that are granted exclusively to the payer, provided that such charges do not exceed the county’s reasonable costs.
  • Charges to offset reasonable regulatory costs.
  • Charges for the use of government property.
  • Charges related to property development.
  • Certain property assessments and property-related fees.
  • Fines and penalties

The state Constitution, as amended by Prop. 26 (2010), specifically excludes these charges from the definition of a “tax.”

Charges that are not defined as “taxes” can be created, increased, or extended by a simple majority vote of the Board of Supervisors. A countywide vote is not required.

However, Prop. 218 (1996) does require the Board of Supervisors to consult property owners regarding two types of charges.

  • Property assessments, which pay for specific services or improvements, must be approved by at least half of the ballots cast by affected property owners, with ballots weighted according to each owner’s assessment liability.
  • Property-related fees — except for water, sewer, and garbage pick-up fees — must be approved by 1) a majority of affected property owners or 2) at least two-thirds of all voters who live in the area.

The County Budget Process: State Rules and Local Practices

State Law Shapes the County Budget Process

Counties develop and adopt their annual budgets according to rules outlined in state law.

  • Rules pertaining specifically to county budgets are found in the County Budget Act (Government Code, Sections 29000 to 29144).
  • The Ralph M. Brown Act (Government Code, Sections 54950 to 54963) includes additional rules that county officials must follow when discussing official county business.

State law delineates:

  • The process by which county budgets must be developed and shared with the public and the information that must be included in these budgets.

Local Practices Also Shape the County Budget Process

Counties have some discretion in how they craft their annual spending plans.

  • For example, the Board of Supervisors may hold more public hearings than state law requires and/or convene informal public budget workshops. Some counties also begin developing their budgets earlier than others do.

Counties have some leeway in how they structure their budgets and share them with the public.

  • County budgets may include more information and provide a higher level of detail than the state requires.
  • Counties may make their spending plans and other budget-related materials widely accessible to the public in multiple formats, including online.

Three Versions of Annual County Budget

At all stages, the county budget must be balanced (funding sources must equal financing uses).

The Recommended Budget is the county manager's proposed spending for the next fiscal year, as submitted to the Board of Supervisors.
The Adopted Budget is the budget as formally adopted by the Board by October 2 or — at county option — by June 30.
The Final Budget is the adopted budget adjusted to reflect all revisions made by the Board during the fiscal year.

Counties Must Adopt Their Budgets Using One of Two Models

State law provides two models for adopting the annual county budget.

  • One model — called the “two-step” model in this guide — requires the Board of Supervisors to first approve an interim budget by June 30 and then formally adopt the budget by October 2.
  • The other model — called the “one-step” model in this guide — allows the Board to formally adopt the budget by June 30 of each year, with no need to first approve an interim budget. This alternative process was created by Senate Bill 1315 (Bates, Chapter 56, Statutes of 2016).

Each county decides which model to follow in adopting its annual budget.

The Board of Supervisors must approve — on an interim basis — the Recommended Budget, including any revisions that it deems necessary, on or before June 30.

  • The Board must consider the Recommended Budget, as proposed by the county manager, during a duly noticed public hearing.
  • The Recommended Budget must be made available for public review prior to the public hearing.
  • At this stage, the Recommended Budget is essentially a preliminary spending plan, which authorizes budget allocations for the new fiscal year (beginning on July 1) until the Board formally adopts the budget.

Two-Step Model (Step 2): Board Adopts the County Budget by October 2

The Board of Supervisors must formally adopt the county budget on or before October 2.

  • On or before September 8, the Board must publish a notice stating 1) that the Recommended Budget is available for public review and 2) when a public hearing will be held to consider it. At this stage, the budget reflects the preliminary version
    approved by the Board along with any changes proposed by the county manager.
  • The public hearing must begin at least 10 days after the Recommended Budget is made available to the public.
  • The Board must adopt a balanced budget, including any additional revisions that it deems advisable after the public hearing has concluded, but no later than October 2.

One-Step Model: Board Adopts the County Budget by June 30

The Board of Supervisors must formally adopt the county budget on or before June 30, with no need to initially approve the Recommended Budget on a preliminary basis.

  • On or before May 30, the Board must publish a notice stating that 1) the Recommended Budget (as proposed by the county manager) is available for public review and 2) when a public hearing will be held to consider it.
  • The public hearing must begin at least 10 days after the Recommended Budget is formally released to the public, but no later than June 20.
  • The Board must adopt a balanced budget, including any revisions that it deems advisable, after the public hearing has concluded, but no later than June 30.

County Budget Actions Require a Simple Majority Vote or a Supermajority Vote

State law allows the Board of Supervisors to make certain budget decisions by majority vote.

  • These include approving the Recommended Budget and/or the Adopted Budget as well as eliminating or reducing appropriations.

However, a four-fifths supermajority vote of the Board is required for a number of budget actions, including to:

  • Appropriate unanticipated revenues.
  • Appropriate revenues to address an emergency.
  • Transfer revenues between funds or from a contingency fund after the budget has been formally adopted.
  • Increase the general reserve at any point during the fiscal year.

The Timeline of the County Budget Process

The County Budget Process is Cyclical and Interacts With the State Budget Process

County budgets are developed, revised, and monitored throughout the year.

Because counties perform functions required by the state and receive significant state funding, county budgets are shaped by state budget choices.

  • County officials must take into account decisions made as part of the state’s annual budget process. Federal policy and funding decisions also affect county budgets.

The budget process varies somewhat across counties.

  • For example, counties can hold more public hearings than required, and some counties start developing their budgets earlier than others do.

Appendix

How to Find Your County's Budget

Counties generally make their budget documents available on the internet.

  • Online budget materials are typically located in a “budget and finance” section of the county’s website or the county manager’s webpage.
  • Perhaps the fastest way to find a county’s budget is by using an internet search engine and entering a phrase like “Kern County budget.”

In addition, counties make their budget documents available in county buildings and local libraries.

Additional Resources

California Budget

You may also be interested in the following resources:

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Why We Focus on the State Budget

Every year, California’s governor and Legislature adopt a state budget that provides a framework and funding for critical public services and systems — from child care and health care to housing and transportation to colleges and K-12 schools.

But the state budget is about more than dollars and cents. The budget expresses our values as well as our priorities for Californians and as a state. At its best, the budget should reflect our collective efforts to expand economic opportunities, promote well-being, and improve the lives of Californians who are denied the chance to share in our state’s wealth and who deserve the dignity and support to lead thriving lives.

State budget choices have an impact on all Californians. These decisions affect the quality of our schools and health care, the cost of a college education, families’ access to affordable child care and housing, the availability of services and financial support to help older adults age in place, and so much more.

Because the state budget touches so many services and our everyday lives, it is critical for Californians to understand and participate in the annual budget process to ensure that state leaders are making the strategic choices needed to allow every Californian — from different races, backgrounds, and places — to thrive and share in our state’s economic and social life.

This report sheds light on the state budget and the budget process with the goal of giving Californians the tools they need to effectively engage decision makers and advocate for fair and just policy choices.

Key Takeaways

The Bottom Line

  1. The state spending plan is about more than dollars and cents.
    • Crafting the budget provides an opportunity for Californians to express our values and priorities as a state.
  2. The state Constitution establishes the rules of the budget process.
    • Among other things, these rules allow lawmakers to approve spending with a simple majority vote, but require a two-thirds vote to increase taxes. Voters periodically revise the budget process by approving constitutional amendments.
  3. The governor has the lead role in the budget process.
    • Proposing a state budget for the upcoming fiscal year gives the governor the first word in each year’s budget deliberations.
    • The May Revision gives the governor another opportunity to set the budget and policy agenda for the state.
    • Veto power generally gives the governor the last word.
  4. The Legislature reviews and revises the governor’s proposals.
    • Lawmakers can alter the governor’s proposals and advance their own initiatives as they craft their version of the budget prior to negotiating an agreement with the governor.
  5. Budget decisions are made throughout the year.
    • The public has various opportunities for input during the budget process.
    • This includes writing letters of support or opposition, testifying at legislative hearings, and meeting with officials from the governor’s administration as well as with legislators and members of their staff.
    • In short, Californians have ample opportunity to stay engaged and involved in the budget process year-round.

Key Facts About California’s State Budget

The State Budget = State Funds + Federal Funds

Three Kinds of State Funds

Three kinds of state funds account for almost two-thirds (66.1%) of California’s $450.8 billion budget for 2024-25, the fiscal year that began on July 1, 2024. Specifically:

  1. General Fund — The state General Fund accounts for revenues that are not designated for a specific purpose. Most state support for education, health and human services, and state prisons comes from the General Fund.
  2. Special Funds — Over 500 state special funds account for taxes, fees, and licenses that are designated for a specific purpose.
  3. Bond Funds — State bond funds account for the receipt and disbursement of general obligation (GO) bond proceeds.

Federal funds comprise the rest (33.9%) of the state’s 2024-25 budget.

Most State General Fund and Special Fund Revenue Comes From Three Sources

California's "big three" taxes

Most state revenue comes from California’s “Big Three” taxes. In 2024-25, General Fund and special fund revenue combined is estimated to total $288.2 billion, with almost 74% ($211.7 billion) expected to come from the Big Three. California’s Big Three taxes are the:

  1. Personal income tax — This is a tax on the income of California residents as well as the income of nonresidents derived from California sources. It is California’s largest source of revenue.
  2. Sales & use tax — This is a tax on the purchase of tangible goods in California (the sales tax) or on the use of tangible goods in California that were purchased elsewhere (the use tax). Services are excluded from the sales and use tax, as are other items exempted by law, including groceries and medications. The sales and use tax is California’s second-largest source of revenue.
  3. Corporation tax — This is a tax imposed on corporations that do business in or derive income from California, with the exception of insurance companies, which instead pay the insurance tax. The corporation tax is California’s third-largest source of revenue.

Other state revenue is estimated to make up more than one-quarter (26.5%) of total projected General Fund and special fund revenue in 2024-25. This other revenue comes from a broad range of sources, including taxes, fees, and fines.

The State Budget is a Local Budget

Dollars spent through the state budget go to individuals, communities, and institutions across California. Under the enacted 2024-25 state budget:

  • Almost four fifths of total spending (79.9%) flows as “local assistance” to K-12 public schools, community colleges, families enrolled in the CalWORKs program, and other essential state services and systems that are operated locally.
  • Nearly one-fifth of total spending (18.7%) goes to 23 California State University campuses, 10 University of California campuses, over 30 state prisons, and other recipients of “state operations” dollars.
  • Less than 2% of total spending flows as “capital outlay” dollars, supporting infrastructure projects across California. (Local assistance and state operations dollars also fund infrastructure.)

State Funds Primarily Support Health and Human Services or Education

Under the enacted 2024-25 state budget:

  • 3 in 4 General Fund and special fund dollars support three categories of spending: health and human services (38.9%), K-12 education (27.3%), and higher education (8%).
  • Just over 6% of General Fund and special fund dollars go to corrections, primarily the state prison system.
  • The balance of these dollars supports other essential services (such as transportation and environmental protection) and institutions (such as the state’s court system).

Federal Funds Primarily Support Health and Human Services

Under the enacted 2024-25 state budget:

  • Three-quarters of federal dollars (75.6%) support health and human services programs.
  • The balance of federal dollars supports other essential services, including labor and workforce development, K-12 education, higher education, and transportation.

The State Budget is Part of a Package of Bills

The state budget never stands alone. Instead, it moves as part of a package of legislation that typically includes two to three dozen bills, and sometimes many more — particularly in years when there is a budget shortfall and state leaders need to make multiple changes to balance the budget. In 2024, Governor Newsom signed more than 30 budget-related bills.

four kinds of budget-related bills

The budget package consists of two types of budget bills along with trailer bills and other budget-related legislation.

  1. Budget Act — The state budget is formally known as the Budget Act. The Budget Act is the initial budget bill passed by the Legislature and signed into law by the governor. In general, budget bills:
    • Provide authority to spend money (“appropriations”) across an array of public services and systems for a single year.
    • Move through the Legislature’s budget committees on their own timeline.
  2. Budget Bill Juniors — This is the informal term for any budget bill that amends the Budget Act, such as by increasing or reducing authorized expenditures. There is no limit on the number of Budget Bill Juniors that may be included in a budget package. This means state leaders can revise the Budget Act as many times as they wish by passing additional budget bills.
  3. Trailer bills — The state budget package also includes trailer bills. Trailer bills generally make changes to state law related to the Budget Act and, like budget bills, move through the Legislature’s budget committees. In addition, trailer bills:
    • Must contain at least one appropriation and be listed in the Budget Act — a requirement that directly links trailer bills to the state budget.
    • Are organized by major policy areas in the budget. For example, health-related changes would be included in a “health” trailer bill, housing-related changes would be included in a “housing” trailer bill, etc.
  4. Other budget-related bills — Other bills may be included in the budget package from time to time. These are bills that move independently of the Budget Act (and therefore are not trailer bills) but are still considered part of the state budget framework. This could include, for example, legislation to increase taxes or to place constitutional amendments before the voters as well as bills passed in a special session of the Legislature. This other budget-related legislation can move either through the Legislature’s policy committees or through budget committees.

Terms & Definitions

The Constitutional Framework

The State Constitution Establishes the Rules of the Budget Process

The governor and legislators craft the state’s annual spending plan according to rules outlined in the state Constitution.

California voters periodically revise these rules by approving constitutional amendments that appear on the statewide ballot.

  • Proposals to amend the state Constitution can be placed on the ballot through a citizens’ initiative or by the Legislature.
  • A constitutional amendment takes effect if approved by a simple majority of voters.

Three Key Budget Deadlines

Two in the State Constitution (January 10 and June 15), One in State Law (May 14)

The governor must propose a budget for the upcoming fiscal year on or before January 10. The budget must be balanced: Estimated revenues (as determined by the governor) must meet or exceed the governor’s proposed spending.
The governor must release the May Revision on or before May 14.
The Legislature must pass a budget bill for the upcoming fiscal year by midnight on June 15. The budget bill must be balanced: Estimated General Fund revenues (as set forth in the budget bill passed by the Legislature) must meet or exceed General Fund spending.

Proposition 25: Simple Majority Vote for Budget Bills and Trailer Bills

The budget package generally may be passed by a simple majority vote of each house of the Legislature.

  • Prop. 25 of 2010 allows lawmakers to pass, by a simple majority vote, budget bills as well as trailer bills that may take effect as soon as the governor signs them.
  • Under the rules of Prop. 25, trailer bills must (1) be listed in the Budget Act and (2) contain an appropriation of any amount.
  • Even with Prop. 25, some types of trailer bills that could be included in a budget package will require a supermajority — generally two-thirds — vote of each house. This includes, for example, bills that would raise taxes or amend a state law that was approved by voters via a ballot initiative. However, most trailer bills in the budget package will need only a simple majority vote to pass.

Proposition 25: Penalties for a Late Budget

Lawmakers face penalties if they fail to pass the budget bill on or before June 15.

  • Prop. 25 requires lawmakers to permanently forfeit both their pay and their reimbursement for travel and living expenses for each day after June 15 that the budget bill is not passed and sent to the governor.
  • These penalties do not apply to budget-related bills, which do not have to be passed on or before June 15.

Proposition 26: Supermajority Vote for Tax Increases

Any tax increase requires a two-thirds vote of each house of the Legislature.

  • Under the state Constitution, “any change in state statute which results in any taxpayer paying a higher tax” requires a two-thirds vote of each house.
  • This standard was imposed by Prop. 26 of 2010. This measure expanded the definition of a tax increase and thus the scope of the two-thirds vote requirement, which was originally imposed by Prop. 13 of 1978.
  • Prior to Prop. 26, only bills changing state taxes “for the purpose of increasing revenues” required a two-thirds vote. Bills that increased some taxes but reduced others by an equal or larger amount could be passed by a simple majority vote of each house.

Proposition 26: Supermajority Vote for Tax Increases

Prop. 26 of 2010 also expanded the definition of a tax to include some fees.

  • Prior to Prop. 26, lawmakers could create or increase fees by a simple majority vote. These majority-vote fees included regulatory fees intended to address health, environmental, or other problems caused by various products, such as alcohol, oil, or hazardous materials.
  • Prop. 26 reclassified regulatory and certain other fees as taxes. As a result, a two-thirds vote of each house of the Legislature is now required for many charges that previously were considered fees and could be passed by a simple majority vote.

Additional Supermajority Vote Requirements

The state Constitution requires a two-thirds vote of each house of the Legislature in order to:

  • Appropriate money from the General Fund, except for appropriations that are for public schools or that are included in budget bills or in trailer bills.
  • Pass bills that take effect immediately (urgency statutes), except for budget bills and trailer bills.
  • Place constitutional amendments or general obligation bond measures before the voters.
  • Override the governor’s veto of a bill or an item of appropriation.

Proposition 54: A Bill Must Be Published for At Least 72 Hours Before the Legislature Can Act on It

Proposition 54 of 2016 requires bills to be distributed to legislators and published on the Internet, in their final form, at least 72 hours before being passed by the Legislature.

This rule applies to all bills, including the budget bill and other legislation included in the budget package.

This mandatory review period can be waived for a bill if:

  • The governor declares an emergency in response to a disaster or extreme peril, and
  • Two-thirds of legislators in the house considering the bill vote to waive the review period.

Proposition 98: A Funding Guarantee for K-12 Schools and Community Colleges

Prop. 98 of 1988 guarantees a minimum annual level of funding for K-14 education.

  • The amount of the guarantee is calculated each year based on one of three tests that apply under varying fiscal and economic conditions. Two of these tests include adjustments for changes in statewide K-12 attendance. Prop. 98 funding comes from the state General Fund and local property tax revenues.
  • The Legislature can suspend the guarantee for a single year by a two-thirds vote of each house and provide less funding. Following a suspension, the state must increase Prop. 98 funding over time to the level that it would have reached absent the suspension.
  • While the Legislature can provide more funding than Prop. 98 requires, the guarantee has generally served as a maximum funding level.

Proposition 2: Saving for a Rainy Day, Paying Down Debt

Prop. 2 of 2014 revised the rules that apply to the Budget Stabilization Account (BSA) — the state’s constitutional rainy day fund — and also established a new requirement to pay down state budgetary debt.

  • The state is required to set aside 1.5% of General Fund revenues each year, plus additional dollars in years when tax revenues from capital gains are particularly strong.
  • Until 2029-30, half of the revenues go into the BSA and the other half must be used to pay down state budgetary debt, which includes unfunded pension liabilities. Starting in 2030-31, the entire annual transfer goes into the BSA.
  • State policymakers may suspend or reduce the BSA deposit and withdraw funds from the reserve, but only under limited circumstances that qualify as a “budget emergency.”

Proposition 2: A Budget Reserve for K-12 Education

Prop. 2 of 2014 also created a state budget reserve for K-12 schools and community colleges called the Public School System Stabilization Account (PSSSA).

  • Deposits come from state capital gains tax revenues in years when those revenues are particularly strong.
  • However, various conditions must be met before these dollars could be transferred to the PSSSA. For example, transfers may occur only in so-called “Test 1” years under Prop. 98, which have been relatively rare.

Proposition 55: Potential New Funding for Medi-Cal From a Tax on the Wealthiest Californians

Prop. 55 of 2016 extends, through 2030, personal income tax rate increases on very high-income Californians and establishes a formula to boost funding for Medi-Cal, which provides health care services to Californians with low incomes.

  • Starting in 2018-19, General Fund revenues — including those raised by Prop. 55 — must first be used to fund (1) the annual Prop. 98 guarantee for K-12 schools and community colleges and (2) the cost of other services that were authorized as of January 1, 2016, as adjusted for population changes, federal mandates, and other factors.
  • If any Prop. 55 revenues remain after meeting these required expenditures, MediCal would receive 50% of this excess, up to a maximum of $2 billion in any fiscal year.
  • Prop. 55 has not yet resulted in any additional funding for Medi-Cal.

Proposition 4: State Appropriations Limit (SAL) — A Cap on Spending

Appropriations are subject to a limit established by Prop. 4 of 1979, as modified by later initiatives. This spending cap is known as the Gann Limit.

  • The SAL limits the amount of state tax proceeds that can be appropriated each year. This limit is adjusted annually for changes in population and per capita personal income.
  • Some appropriations from tax proceeds do not count toward the limit, including debt service and spending that is needed to comply with court or federal mandates.
  • Revenues that exceed the SAL over a two-year period are divided equally between Prop. 98 spending and taxpayer rebates. The state last exceeded the SAL in 2020-21 (but did not do so in the prior year).

State Mandates: Pay for Them or Suspend Them

The state must pay for or suspend mandates that it imposes on local governments.

  • Prop. 4 of 1979 requires the state to reimburse local governments for costs related to a new program or a higher level of service that is mandated by the state.
  • Prop. 1A of 2004 expanded the definition of a mandate to include the transfer of
    financial responsibility from the state to local governments.
  • Prop. 1A also requires the state to suspend a mandate in any year in which local
    governments’ costs are not fully reimbursed.

What Do the Governor and the Legislature Do?

The Governor

Approves, modifies, or rejects spending proposals prepared by state departments and agencies through an internal process coordinated by the Department of Finance.

Proposes a spending plan for the state each January, introduced as the budget bill in the Legislature.

Updates and revises the proposed budget each May (the “May Revision”).

Signs or vetoes the bills included in the budget package.

Can veto all or part of individual appropriations (line items), but cannot increase any appropriations above the level approved by the Legislature.

The Legislature

Approves, modifies, or rejects the governor’s proposals.

Can add new spending or make other changes that substantially revise the governor’s proposals.

Needs a simple majority vote of each house to pass budget bills and most trailer bills.

Needs a two-thirds vote to pass certain other bills that may be part of the budget package, such as bills that increase taxes or propose constitutional amendments.

Needs a two-thirds vote of each house to override the governor’s veto of a bill or an appropriation.

What Happens When?

The State Budget Timeline

The state budget process is cyclical. Decisions are made throughout the year.

State Budget Resources

  • Department of Finance: The governor’s budget proposals and related documents.
  • Legislative Analyst’s Office: Budget and policy analyses, budget recommendations, and historical budget data.
  • Legislative Counsel: Bills and bill analyses, a free bill-tracking service, the state codes, and the state Constitution.
  • State Assembly and Senate: Committee agendas and other publications, floor session and committee schedules, the annual legislative calendar, and live and archived video streaming of legislative proceedings.
California Budget

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California’s Budget Reserves

California’s Constitution and state law govern when funds may be withdrawn from the state’s budget reserves, the amount that can be withdrawn, and how funds may be used. 

  • Established in the state Constitution: Budget Stabilization Account, Public School System Stabilization Account
  • Established in state law: Safety Net Reserve, Special Fund for Economic Uncertainties, Projected Surplus Temporary Holding Account
Budget Stabilization Account (BSA)
(aka Rainy Day Fund)		Public School System Stabilization Account (PSSSA)Safety Net ReserveSpecial Fund for Economic Uncertainties (SFEU)Projected Surplus Temporary Holding Account
Is the state required to make an annual deposit?YesNo
However, a deposit is required under a restricted set of circumstances.1For example, these circumstances include requirements that deposits only occur when capital gains tax revenues exceed a specific level of total General Fund proceeds of taxes and when growth in the state’s minimum funding guarantee for K-12 schools and community colleges is relatively strong.		NoNoNo
Can a required deposit be reduced or suspended — and by who?Yes
A required deposit can be reduced or suspended if the governor declares a budget emergency and the Legislature approves the reduction or suspension by a majority vote.		Yes
A required deposit can be reduced or suspended if the governor declares a budget emergency and the Legislature approves the reduction or suspension by a majority vote.		Not applicableNot applicableNot applicable
When can funds be withdrawn?Funds may be withdrawn if the governor declares a budget emergency and the Legislature passes a bill, by majority vote, to withdraw funds.2These withdrawal rules apply to funds that are deposited into the BSA as required by Proposition 2 of 2014. State policymakers may also deposit funds into the BSA on top of Prop. 2 requirements, creating a “discretionary” balance within the reserve. The Legislative Analyst’s Office suggests that the Legislature can withdraw a discretionary balance at any time without a declaration of a budget emergency by the governor. Separate from this issue, funds must be withdrawn from the BSA — without the need for a declaration of a budget emergency — when updated revenue estimates indicate that a prior-year deposit was greater than required.Funds may be withdrawn if the governor declares a budget emergency and the Legislature passes a bill, by majority vote, to withdraw funds.3Funds must be withdrawn from the PSSSA — without the need for a declaration of a budget emergency — when the state’s minimum funding guarantee for K-12 schools and community colleges is less than the prior year’s funding level, adjusted for changes in student attendance and the cost of living, or when updated revenue estimates indicate that a prior-year deposit was greater than required.The Legislature may withdraw the funds at any time by majority vote.The Legislature may withdraw the funds at any time by majority vote.4Additionally, the Department of Finance may withdraw funds from the SFEU without legislative approval to cover the cost of state disaster response efforts upon an emergency proclamation by the governor.The Legislature may withdraw the funds by majority vote at any time up to one year after they are deposited. After one year, any unappropriated funds must be transferred back to the General Fund.
Is there a limit on the amount of funds that can be withdrawn?Yes
The amount that can be
withdrawn is limited to the lower
of 1) the amount needed to
address the budget emergency
or 2) half of the funds in the BSA,
unless funds had been withdrawn
in the previous fiscal year, in
which case all of the funds
remaining in the BSA may be
withdrawn.		No5However, in any year when funds must be withdrawn from the PSSSA because the state’s minimum funding guarantee for K-12 schools and community colleges is less than the prior year’s funding level — adjusted for changes in student attendance and the cost of living — the required withdrawal is limited to the amount of that shortfall.NoNoNo
How can the funds be used by the state?Funds may be used for any purpose.Funds must be used to support K-12 schools and community colleges.Funds are intended to maintain existing CalWORKs and Medi-Cal benefits and services during an economic downturn, but may be used for any purpose if the Legislature so chooses.Funds may be used for any purpose.Funds may be used for any purpose.

Note: A ”budget emergency” that’s declared by the governor is defined as either: 1) the existence of ”conditions of disaster or of extreme peril to the safety of persons and property within the State, or parts thereof” as defined in Article XIII B, Section 3(c)(2) of the state Constitution; or 2) a determination by the governor that there are 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. Article XIII B, Section 3(c)(2), defines “conditions of disaster or of extreme peril” 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.”

Sources: California Constitution, California Government Code, and California Welfare and Institutions Code

California Budget
  • 1
    For example, these circumstances include requirements that deposits only occur when capital gains tax revenues exceed a specific level of total General Fund proceeds of taxes and when growth in the state’s minimum funding guarantee for K-12 schools and community colleges is relatively strong.
  • 2
    These withdrawal rules apply to funds that are deposited into the BSA as required by Proposition 2 of 2014. State policymakers may also deposit funds into the BSA on top of Prop. 2 requirements, creating a “discretionary” balance within the reserve. The Legislative Analyst’s Office suggests that the Legislature can withdraw a discretionary balance at any time without a declaration of a budget emergency by the governor. Separate from this issue, funds must be withdrawn from the BSA — without the need for a declaration of a budget emergency — when updated revenue estimates indicate that a prior-year deposit was greater than required.
  • 3
    Funds must be withdrawn from the PSSSA — without the need for a declaration of a budget emergency — when the state’s minimum funding guarantee for K-12 schools and community colleges is less than the prior year’s funding level, adjusted for changes in student attendance and the cost of living, or when updated revenue estimates indicate that a prior-year deposit was greater than required.
  • 4
    Additionally, the Department of Finance may withdraw funds from the SFEU without legislative approval to cover the cost of state disaster response efforts upon an emergency proclamation by the governor.
  • 5
    However, in any year when funds must be withdrawn from the PSSSA because the state’s minimum funding guarantee for K-12 schools and community colleges is less than the prior year’s funding level — adjusted for changes in student attendance and the cost of living — the required withdrawal is limited to the amount of that shortfall.

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key takeaway

Prop. 1, passed in March 2024, aims to strengthen California’s behavioral health system by funding mental health treatment, substance use disorder services, and supportive housing for veterans and individuals facing homelessness. Ensuring equitable access to these essential services is critical as the state works to address both housing insecurity and behavioral health needs across diverse populations.

Millions of Californians, including many facing housing insecurity, rely on county-provided services to address mental health conditions and substance use disorders. Strengthening the state’s behavioral health system is essential to guaranteeing that every Californian — regardless of race, age, gender identity, sexual orientation, or where they live — can access the care they need.

In March 2024, California voters narrowly passed Proposition 1 on the promise to improve the state’s behavioral health system and provide the housing support needed to successfully maintain mental health and substance use disorder services for all Californians.

Prop. 1 was a two-part measure that 1) amended California’s Mental Health Services Act and 2) created a $6.38 billion general obligation bond. The bond will fund behavioral health treatment and residential facilities, and supportive housing for veterans and individuals at risk of or experiencing homelessness with behavioral health challenges.

As the transformation of California’s county-based behavioral health system brings both benefits and potential challenges for Californians, this Q&A highlights key developments of Prop. 1 since its passage and addresses important questions and considerations that remain.

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Key Acronyms

  • BHSA: Behavioral Health Services Act (formerly the Mental Health Services Act)
  • BHIBA: Behavioral Health Infrastructure Bond Act 
  • BHCIP: Behavioral Health Continuum Infrastructure Program
  • CalHHS: California Health and Human Services Agency
  • CalVet:  California Department of Veteran Affairs
  • DHCS: California Department of Health Care Services
  • HCD: California Department of Housing and Community Development

Key Terms

What does Prop. 1 do?

Prop. 1 significantly amended the Mental Health Services Act (MHSA), a law that California voters passed in 2004 that created a millionaire’s tax to provide increased funding for mental health services. Revenue from this tax is crucial to California’s behavioral health system as it accounts for nearly one-third of county behavioral health services funding. Prop. 1 renamed the law the Behavioral Health Services Act (BHSA) and made other changes, including:

  • Expanding its scope to encompass treatment for substance use disorders.
  • Modifying how revenue from the millionaire’s tax is allocated for behavioral health services.
  • Changing the requirements for counties’ three-year program and expenditure plan for behavioral health services and outcomes.
  • Revising accountability and transparency requirements for counties.

Prop. 1 additionally established a $6.38 billion behavioral health infrastructure bond. Roughly $4.4 billion is dedicated to the infrastructure development of treatment and residential care facilities. The remaining $2 billion is reserved for permanent supportive housing units specifically for veterans and other Californians with serious mental health conditions or substance use disorders. 

This initiative was designed to create targeted funding for mental health services and housing or treatment units for people with behavioral health conditions who are experiencing or at risk of homelessness. As such, these reforms will only serve a subset of Californians, as they do not cover everyone at risk of homelessness or all individuals with behavioral health conditions.

What do we know about the behavioral health infrastructure bond?

Major developments regarding Prop. 1 have primarily related to the Behavioral Health Infrastructure Bond Act (BHIBA). BHIBA created a $6.38 billion general obligation bond to fund the infrastructure development of treatment and residential sites as well as supportive housing. There are two programs funded by the bond which are overseen by different state departments:

HCD is aggregating two main funding sources for Homekey+ for a total of $2.25 billion for the upcoming November application cycle:

  • $1.98 billion from Prop. 1 bond funding, with $1.065 billion designated for veterans and $922 million for other people experiencing or at risk of homelessness. 
  • $323 million Homeless Housing, Assistance, and Prevention Program (HHAP) Homekey Supplemental funding appropriated in the 2023 and 2024 Budget Acts.

Homekey+ projects are required to demonstrate a funding match of at least 3 years for operating costs. For long-term sustainability, HCD is encouraging counties to pair the restructured BHSA housing intervention dollars and other funding sources for behavioral health treatment to provide long-term service and operating costs for Homekey+ projects. However, Homekey+ projects will be awarded before counties are required to have their new three-year BHSA expenditure plans approved, which may create budgeting challenges.

How are counties allocating Behavioral Health Services Act (BHSA) funds under Prop. 1?

Prop. 1 significantly reforms the allocation of MHSA (now BHSA) dollars to prioritize Californians who are most affected by severe behavioral health conditions (mental illness and substance use disorders) and homelessness.1SB 326 created the legislative language for the BHSA.

Under Prop. 1, counties continue to receive the bulk of BHSA funds (90%). However, the allocation across different spending categories would change. Counties would allocate their BHSA funds as follows:

Prop. 1 shifts a small percentage of dollars from counties to the state (from about 5% of total MHSA funding to about 10%). This would result in about $140 million annually redirected to the state budget. However, this amount could be higher or lower depending on the total amount of revenue collected from the tax.

Prop. 1 also revised the allocation of state-level funds:

  • At least 3% to the Department of Health Care Access and Information to implement a statewide behavioral health workforce initiative.
  • At least 4% to the California Department of Public Health for population-based mental health and substance use disorder prevention programs. A minimum of 51% of these funds must be used for programs serving Californians who are age 25 years or younger.

What are the new county reporting requirements under Prop. 1?

Prop. 1 changes the way counties plan and report behavioral health funding. 

Starting in 2025, counties will need to develop integrated county plans for the 2026-29 fiscal years. The steps for developing plans are similar to how counties developed plans under the MHSA — counties will still gather community input and receive approval from County Boards of Supervisors. However, a key change is that counties will now report on all behavioral health funding, not just BHSA dollars. This includes local, state, and federal funding sources such as opioid settlement funds, SAMHSA and PATH grants, realignment funding, and federal financial participation.

Counties will also be required to report on unspent funds, service utilization data, outcomes with a focus on health equity, workforce metrics, and other information. The Department of Health Care Services (DHCS) has the authority to impose corrective action plans on counties that fail to meet these requirements. Additionally, the State Auditor will release a report on the implementation of the BHSA by December 31, 2029, with follow-up reports every three years thereafter.

What do we know about implementation timelines?

Since the passage of Prop. 1 in March, various developments regarding both the behavioral health infrastructure bond and county guidance for BHSA reforms have surfaced.

Behavioral Health Infrastructure Bond

Treatment and Residential Sites — BHCIP

In July, the Department of Health Care Services (DHCS) released an expedited timeline to roll out $3.3 billion for the construction, renovation, or expansion of treatment and residential care facilities through the existing Behavioral Health Continuum Infrastructure Program (BHCIP). Round 1 applications for “launch ready” projects are currently being accepted through mid-December 2024. DHCS is prioritizing applicants working in regional models or collaborative partnerships focused on expanding residential treatment facilities. Awards for Round 1 are anticipated to be announced in May 2025 and Round 2 “unmet needs” project applications will be opened in the same timeframe for the remaining $1.1 billion bond funds.

Permanent Supportive Housing — Homekey+

The Department of Housing and Community Development (HCD), in conjunction with the Department of Veteran Affairs (CalVet), engaged with stakeholders on the roll out of the Homekey Plus (Homekey+) program. Homekey+ is expanding on the Homekey Program which funded the acquisition and conversion of property for permanent supportive housing during and after the COVID-19 pandemic. It is receiving roughly $2 billion in bond funds to develop supportive housing for people with behavioral health conditions, with $1.065 billion designated for veterans and $922 million for other people experiencing or at risk of homelessness. HCD was collecting stakeholder input through the end of September. Applications will open November 2024 with continuous award announcements beginning in May 2025.

Behavioral Health Services Act Reform

Since the passage of Prop. 1 in March 2024, the California Health and Human Services Agency (CalHHS) and the State Department of Health Care Services (DHCS) have held public listening sessions to share Prop. 1 implementation updates and collect feedback from counties and other interested groups.

DHCS, in coordination with other agencies and departments, is currently in the midst of stakeholder engagement to inform new county expenditure plans and reporting requirements under the BHSA.2Other departments and agencies include: CalHHS, the California Behavioral Health Planning Council, and the Behavioral Health Services Oversight and Accountability Commission. CalHHS plans to share full guidance to counties in early 2025.

In addition, Prop. 1 created a Behavioral Health Services Act Revenue and Stability Workgroup, which has held two meetings. This group is charged with developing and recommending solutions to reduce BHSA revenue volatility and to propose appropriate prudent reserve levels to support the sustainability of county programs and services.

To support Prop. 1 implementation, the Department of Health Care Access and Information (HCAI) is taking steps to improve the behavioral health workforce. HCAI recently presented its strategy on how to grow and diversify the behavioral health workforce to the California Health Workforce Education and Training Council, and will provide additional updates in November 2024. The behavioral health workforce shortage in California is a major obstacle to addressing the growing need for mental health and substance use disorder services.

What don’t we know about Prop. 1 implementation?

There are several critical questions and considerations surrounding the BHSA reforms and behavioral health bond funds that are yet to be addressed. As key Prop. 1 players continue to engage with stakeholders, roll out program details, and prepare to release additional county guidance in early 2025, the following fundamental questions are essential to understanding how these reforms will impact Californians and current behavioral health and housing systems. Key questions include:

Supported by the California Health Care Foundation (CHCF), which works to ensure that people have access to the care they need, when they need it, at a price they can afford. Visit chcf.org to learn more.

California Budget
  • 1
    SB 326 created the legislative language for the BHSA.
  • 2
    Other departments and agencies include: CalHHS, the California Behavioral Health Planning Council, and the Behavioral Health Services Oversight and Accountability Commission.

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This report was co-authored by Amy M. Traub, Senior Researcher and Policy Analyst at the National Employment Law Project.

key takeaway

California’s Unemployment Insurance (UI) system is severely underfunded and outdated, leaving workers with inadequate benefits and excluding millions. To revitalize UI and ensure it supports both workers and the economy, the state must raise the taxable wage base and reform its financing structure to eliminate the $19.8 billion debt and stabilize the system for future economic downturns.

When Californians are out of work, unemployment insurance (UI) should help them make the rent, put food on the table, and cover other basic needs until they can find a new job. During the worst days of the pandemic, millions of jobless workers across the state relied on UI benefits to make ends meet, supporting both their families and California’s economy until it could thrive again. UI is also critical for jobless workers during periods of economic growth: In May 2024, 379,955 California workers — laid off from industries including manufacturing and information — counted on UI as they sought new employment.1Employment Development Department, California Employers Gained 43,700 Nonfarm Payroll Jobs in May 2024, accessed June 21, 2024, https://edd.ca.gov/en/about_edd/news_releases_and_announcements/unemployment-may-2024/.

Yet without the federal supplements that were available during the pandemic downturn, California workers received an average UI benefit of just $368.53 a week in 2023, less than the income needed to afford fair market rent in any county in the state.2Average benefit amount based on US Department of Labor Employment and Training Administration, Unemployment Insurance Data, https://oui.doleta.gov/unemploy/data_summary/DataSum.asp; housing affordability based on National Low Income Housing Coalition, Out of Reach: The High Cost of Housing, 2023, https://nlihc.org/sites/default/files/oor/California_2023_OOR.pdf using an affordability standard of 30% of income for rent. At the same time, millions of California workers, including more than a million immigrant workers, are excluded from accessing unemployment insurance entirely.3Legislative Analyst’s Office, Extending Unemployment Insurance to Cover Excluded Workers, (March 28, 2023), https://lao.ca.gov/handouts/state_admin/2023/Unemployment-Insurance-032823.pdf.

To strengthen and expand UI to adequately support workers and the economy, California must address the severe and chronic underfunding of the UI trust fund, which has created a structural deficit and $19.8 billion in debt for the state’s UI system. The underlying problem is California’s deficient UI financing: For decades policymakers have not required businesses to cover the true cost of the unemployment benefits their workers need. Instead, the state taxes employers on only the first $7,000 of each employee’s pay, a dramatically lower wage base than most other states.

This report details how workers, employers, and the economy as a whole are paying a steep price for California’s inadequate UI financing system. It explores how both raising the taxable wage base and changing the state’s experience rating system will be necessary to strengthen and stabilize UI to better serve workers, employers, and the economy.

Unemployment Insurance is a Lifeline for California, But Low Benefits and Exclusions Undermine Its Effectiveness

The joint federal-state UI system was established in the wake of the Great Depression to protect workers and their families against the loss of employment income, to bolster the economy during economic downturns by supporting consumer demand, and to ensure jobseekers are not forced into substandard jobs that could broadly depress wages and degrade working conditions.

Today, economists recognize that UI also plays an important role in improving job matches, enhancing the overall functioning of the labor market, and helping employers match with workers who have the right skills, improving their efficiency.4Ammar Farooq, Adriana D. Kugler, and Umberto Muratori, “Do Unemployment Insurance Benefits Improve Match Quality? Evidence From Recent US Recessions,” National Bureau of Economic Research (2020), https://www.nber.org/system/files/working_papers/w27574/revisions/w27574.rev0.pdf. By giving workers time to match with more suitable jobs, UI also contributes to higher wages and greater job satisfaction when they find new work.5Nick Gwyn, State Cuts Continue to Unravel Basic Support for Unemployed Workers (Center on Budget and Policy Priorities, June 27, 2022), https://www.cbpp.org/research/state-budget-and-tax/state-cuts-continue-to-unravel-basic-support-for-unemployed-workers; Adriana D. Kugler, Umberto Muratori, and Ammar Farooq, The Impacts of Unemployment Benefits on Job Match Quality and Labour Market Functioning (Centre for Economic Policy Research, February 7, 2021), https://cepr.org/voxeu/columns/impacts-unemployment-benefits-job-match-quality-and-labour-market-functioning. Yet UI’s ability to fulfill any of these functions is weakened by California policymakers’ failure to raise the state’s low benefit levels or to include the significant numbers of workers who are locked out of the system entirely.

Unemployment benefits remain critical to workers who receive them. In 2022, UI prevented more than 400,000 people nationwide, including 116,000 children, from experiencing poverty.6Amy Traub, Unemployment Insurance Had Less Capacity to Cut Poverty in 2022 (National Employment Law Project, 2023), https://www.nelp.org/insights-research/unemployment-insurance-had-less-capacity-to-cut-poverty-in-2022/. Even for workers not facing poverty, receiving unemployment benefits reduces hardship and broadly improves the well-being of households, including recipients’ financial stability and mental health.7Patrick Carey, et al., “Applying for and Receiving Unemployment Insurance Benefits During the Coronavirus Pandemic,” Monthly Labor Review, US Bureau of Labor Statistics, September 2021, https://doi.org/10.21916/mlr.2021.19.

Yet benefits in California have not been raised in nearly two decades. With an average benefit of just $368.53 a week in 20238US Department of Labor, Employment and Training Administration, Unemployment Insurance Data, https://oui.doleta.gov/unemploy/data_summary/DataSum.asp., UI benefits no longer provide enough money for Californians — particularly those with low incomes — to meet the rising cost of living while seeking employment. As the California Budget & Policy Center pointed out earlier this year, a worker who loses a full-time minimum wage job (at $16.90-per-hour in Los Angeles County) receives just $1,465 in monthly unemployment benefits, which falls $69 short of covering rent for a studio in Los Angeles priced at Fair Market Rent.9Alissa Anderson and Hannah Orbach-Mandel, California Should Increase Unemployment Benefits to Help Workers Meet Basic Needs (California Budget & Policy Center, January 2024), https://calbudgetcenter.org/resources/california-should-increase-unemployment-benefits-to-help-workers-meet-basic-needs/ California’s UI benefits are significantly lower than other Western states, including Washington ($703.79 per week on average), Oregon ($543.81 per week), Nevada ($450.70 per week), and Hawaii ($613.30 per week), as shown in the figure below. California’s low benefits are even more striking considering the state’s higher cost of living.

At just $40 per week, California’s minimum UI benefit — the payment provided to workers who earned the lowest wages before becoming unemployed — is also among the nation’s lowest, falling below the minimum benefits provided by 29 other states. For example, Washington’s minimum benefit is seven times greater than California’s ($295 per week), while Arizona’s minimum benefit is $200 per week, and Oregon’s is $171. In addition, 12 states offer dependent allowances, providing a weekly supplement to UI benefits so that workers with children and other dependents have an additional resource to make ends meet. Despite its low average and minimum benefits, California offers no additional support to unemployed parents and other workers supporting dependents.

Low Unemployment Insurance Benefits Exacerbate Racial and Gender Inequities 

Low UI benefits can be especially harmful for workers of color, including American Indian, Black, Latinx, and Pacific Islander Californians — particularly women — who are overrepresented in low-paying jobs due to structural racism and sexism.10Jasmine Tucker and Julie Vogtman, When Hard Work Is Not Enough: Women in Low-Paid Jobs (National Women’s Law Center, April 2020), https://nwlc.org/wp-content/uploads/2020/04/Women-in-Low-Paid-Jobs-report_pp04-FINAL-4.2.pdf. Since benefit levels are based on prior wages, low-paid workers tend to receive lower UI benefits. Yet workers who lived paycheck-to-paycheck when they were employed face even greater hardship in trying to cover their expenses on benefits that are a small fraction of their paycheck. At the same time, workers of color typically have fewer financial resources other than UI benefits to draw on during unemployment compared to white workers, as a result of systematic exclusion from wealth-building opportunities over generations.11Angela Hanks, Danyelle Solomon, and Christian E. Weller, Systemic Inequality (Center for American Progress, February 21, 2018), https://www.americanprogress.org/article/systematic-inequality/.

California’s low benefit levels also undercut UI’s ability to fight recessions. This is particularly troubling because a strong UI system is among the most effective tools available to promote economic recovery: According to the International Monetary Fund, each dollar paid in UI benefits during the pandemic generated $1.92 of economic growth as workers and their families were able to continue spending on basic necessities.12Klaus-Peter Hellwig, Supply and Demand Effects of Unemployment Insurance Benefit Extensions: Evidence from US Counties (International Monetary Fund, 2021), https://www.imf.org/en/Publications/WP/Issues/2021/03/12/Supply-and-Demand-Effects-of-Unemployment-Insurance-Benefit-Extensions-Evidence-from-U-S-50112. This powerful impact was achieved because the federal government expanded UI benefits during the pandemic: A $600 a week supplement to regular state UI benefits early in the pandemic (later $300 a week) ensured that unemployed workers could keep spending money, supporting local businesses across the state. The expanded federal benefits also ensured that California jobseekers and their families were able to meet expenses far better than they could by relying solely on the state’s regular UI benefits.

Federal pandemic programs also expanded eligibility for UI benefits to self-employed workers, caregivers, misclassified independent contractors, part-time workers, and many underpaid workers who are typically shut out of California’s regular UI system. By expanding the share of unemployed workers who received support, federal pandemic programs further improved the ability of UI to stabilize the economy.

More than 1 million undocumented workers, who represent over 6% of California's workforce, were, notably, not included in the UI benefit expansions.13University of California Merced Community and Labor Center, Worker Relief: Expanding the Safety Net to Excluded Workers, April 2023, https://clc.ucmerced.edu/sites/clc.ucmerced.edu/files/page/documents/worker_relief_2022_2.pdf. California instituted a Disaster Relief Assistance for Immigrants (DRAI) program to provide limited, one-time financial assistance to unemployed immigrants who were not otherwise eligible for UI benefits. However, the amount of support was grossly inadequate to meet immigrant workers’ needs and fell far short of what other Californians received, with researchers finding that unemployed citizen workers in California were eligible for up to 20 times more aid than the state’s undocumented workers in the first year of the pandemic.14University of California Merced Community and Labor Center, Essential Fairness: The Case for Unemployment Benefits for California’s Undocumented Immigrant Workers, March 2022, https://clc.ucmerced.edu/sites/clc.ucmerced.edu/files/page/documents/essential_fairness.pdf.

Workers who are on strike are also excluded from UI benefits, even though they miss paychecks and risk hardship for exercising their right to collective action. California should consider expanding UI benefits to striking workers, as New York and New Jersey already do.

Now both federal and state emergency programs have expired, and Californians are left with a UI system that does not adequately support jobseekers and still excludes many of them. California’s UI system is not prepared for the next unexpected economic shock or crisis. At a moment when policymakers are increasingly worried that the use of artificial intelligence could push large numbers of workers out of a job, a strong UI system is needed more than ever to support Californians who could be displaced.

A Strong and Effective UI System Requires Adequate Financing: California Needs Major Reforms

Unemployment insurance is funded by state and federal payroll taxes. In general terms, the Federal Unemployment Tax Act (FUTA) funds UI administrative costs and certain special programs, while the State Unemployment Tax Act (SUTA) tax, imposed by states, pays for UI benefits and is used to repay any federal loans made to the state’s UI trust fund (more on this below). SUTA tax revenues are deposited into a trust fund held for each state by the US Treasury.

State unemployment insurance benefits are paid out of each state’s trust fund. If states don’t have sufficient money in the trust fund to pay UI benefits, they can take out a federal loan. That’s what California and 21 other states did as they struggled to pay out benefits to tens of millions of laid off workers in the early days of the COVID-19 pandemic.15US Department of Labor, Office of Unemployment Insurance Division of Fiscal and Actuarial Services, State Unemployment Insurance Trust Fund Solvency Report 2021, March 2021,https://oui.doleta.gov/unemploy/docs/trustFundSolvReport2021.pdf. Although the federal government fully paid for expanded UI benefits during the pandemic economic crisis, California still faced a record $35 billion in costs for regular UI benefits. The state is still paying back those costs today, and currently faces a trust fund debt of $19.8 billion.16US Department of Labor, Office of Unemployment Insurance Division of Fiscal and Actuarial Services, State Unemployment Insurance Trust Fund Solvency Report 2024, March 2024, https://oui.doleta.gov/unemploy/docs/trustFundSolvReport2024.pdf.

Yet the extraordinary costs of the pandemic are only the latest and most dramatic manifestation of an ongoing structural deficit in California’s UI financing system. In January 2020, before the pandemic triggered record job loss, California already had the most underfunded UI system of any state.17US Department of Labor, Office of Unemployment Insurance Division of Fiscal and Actuarial Services, State Unemployment Insurance Trust Fund Solvency Report 2020, March 2020, https://oui.doleta.gov/unemploy/docs/trustFundSolvReport2020.pdf. Even today, with a relatively low unemployment rate hovering around 5%, California does not raise enough revenue to pay for current UI benefits, much less pay down its trust fund debt.

In addition to regular SUTA taxes, California employers are paying a 15% tax surcharge to pay back the trust fund loan, but this additional revenue is still not sufficient to reduce the principal. The state Employment Development Department projects that at the current rate of repayment, the outstanding federal UI loan balance will grow to nearly $22 billion in 2025.18Employment Development Department, May 2024 Unemployment Insurance (UI) Fund Forecast, May 2024, https://edd.ca.gov/siteassets/files/unemployment/pdf/edduiforecastmay24.pdf.

California must overhaul its UI revenue system to adequately support unemployed workers and the economy, pay down its debt, and build a reserve for future economic downturns.

Failing to Modernize UI Financing Costs All Californians

California’s underfunded UI system imposes steep costs across the state. As described above, job seekers face hardship as they struggle to get by on low UI benefits, even as many jobless workers are excluded. At the same time, meager benefits may not be enough to power the state’s economic recovery in the next downturn. Yet the costs are even more widespread: Because the interest on the trust fund debt has traditionally been paid out of the state’s general fund, all California residents will ultimately pay a price.

Due to rising interest rates, California owed $484 million in interest on UI debt in 2024 at a time when the state was facing a significant, multi-year budget shortfall. Although California was able to use internal borrowing to cover the interest payment due in 2023, there were fewer such options available in 2024 and the state’s final budget agreement covered most of the interest payment ($384 million) with General Fund dollars, taking significant resources away from other priorities. Looking ahead to future years, California will continue to owe interest every year that it maintains trust fund debt, and these payments will significantly reduce funding available to invest in other critical priorities, including health care, child care, affordable housing, and environmental protection.

And while employers may express concern about increased UI taxes in a modernized system, they also face a direct tax penalty if no action is taken: In addition to the surcharge to pay back the loan, California employers will also face a reduction in the Federal Unemployment Tax Act (FUTA) tax credit, effectively hiking their taxes as long as the trust fund debt continues to go unpaid.

Raising and Indexing the Taxable Wage Base Is Critical to Improving UI Financing

Failure to raise revenue is at the heart of California’s UI financing crisis. State policymakers have been reluctant to mandate that employers contribute the funds needed to finance a strong and effective UI system. As a result, California taxes employers on only the first $7,000 of each employee’s pay.

What Is the Taxable Wage Base and Why Is It Important for Understanding How Unemployment Insurance Benefits Are Funded?

State unemployment benefits are financed through state payroll taxes paid by employers. There are two basic factors that determine how much employers pay in those taxes: the tax rate and the taxable wage base. The tax rate is determined for each employer based on tax rate schedules outlined in state law. The rate for a particular employer is then applied to a taxable wage base equal to each of their employee’s first $7,000 in annual earnings to determine how much tax the employer owes. 

For example, new employers are assigned a state payroll tax rate of 3.4%. If a new employer has three employees all earning $40,000 annually, the employer would calculate the payroll tax they owe by multiplying 3.4% by $7,000 for each employee ($238), for a total annual tax of $714 for all three employees. If the taxable wage base were higher, say $21,000, the same amount of revenue could be raised with a much lower tax rate (1.1%) because a greater proportion of each worker’s wages would be subject to taxation. Alternatively, by maintaining a 3.4% tax rate, the higher taxable wage base would raise three times as much revenue ($2,142 for all three employees).

When comparing state payroll taxes across states, it’s important to consider both the tax rate and the taxable wage base to which that rate is applied. A state with relatively high tax rates does not necessarily result in employers in that state paying more in taxes than states with lower tax rates. For example, a 5.7% rate would generate a tax of $400 if applied to a base of $7,000. But a much lower rate of 3.8% would generate twice as much tax ($800) if applied to a base of $21,000.

This low fixed amount, known as the taxable wage base, not only raises inadequate revenue but raises it inequitably. The low taxable wage base means that California  taxes a higher proportion of the wages of low-paid workers and imposes the highest effective tax rates on small businesses while failing to keep up with wage growth and taxing a far smaller share of wages than most other states. Raising the taxable wage base and indexing it to the state’s average wages is essential to strengthen the UI system.

Wages have increased significantly over the last 40 years, yet California’s taxable wage base has remained fixed, lagging further and further behind. While the state’s taxable wage base of $7,000 was equivalent to full-time wages at the federal minimum wage in 1982, it was less than three months of full-time work at the minimum wage in 2022 in California. By 2022, California’s effective UI tax rate was less than half of what it had been in 1980, as the figure below illustrates.

California’s UI financing system disproportionately taxes the employers of low-paid and part-time workers because the state’s taxable wage base is so low. Take, for example, employers subject to a state UI tax rate of 3.1%, which is the average rate paid by employers in 2023. Since most workers earn more than the state’s taxable wage base of $7,000, employers effectively pay $217 in state UI taxes per worker. But this represents a much larger share of employers’ labor costs for low-paid and part-time workers. For instance, $7,000 amounts to 1.3% of the earnings paid to half-time minimum wage workers, compared to 0.7% of the earnings paid to full-time minimum wage workers and just 0.2% of the earnings of workers paid three times the minimum wage, as the figure below shows. Researchers find that this creates disincentives to hire part-time workers in the first place, leading to fewer employment opportunities, which would impact workers who benefit from the flexibility of part-time work or who rely on additional earnings to make ends meet.19Mark Duggan, Audrey Guo, and Andrew C. Johnston, Would Broadening the UI Tax Base Help Low-Income Workers? (IZA Institute for Labor Economics, January 2022), https://docs.iza.org/dp15020.pdf; Po-Chun Huang, “Employment Effects of the Unemployment Insurance Tax Base,” The Journal of Human Resources, 59, no.4 (March 2022) https://doi.org/10.3368/jhr.0719-10316R2. Raising the taxable wage base would help to address these inequalities.

Small businesses also bear a disproportionate tax burden as a result of California’s low taxable wage base for UI.

Raising California’s taxable wage base is not a pie-in-the-sky idea. In fact, 94% of US states already have a higher taxable wage base than California, including Washington State with a taxable wage base of $68,500 in 2024, Oregon ($52,800), Nevada ($40,600) and Hawaii ($59,100).20US Department of Labor, Employment and Training Administration, Significant Provisions of State Unemployment Insurance Laws Effective January 2024, https://oui.doleta.gov/unemploy/content/sigpros/2020-2029/January2024.pdf. These states not only tax a much higher share of payrolls than California, but their wage base is indexed to the state’s average weekly wage so that it adjusts automatically each year as wages rise, providing far more reliable financing than California’s low fixed rate. As the figure below shows, businesses in California actually pay taxes on a smaller share of wages than any other state, with just 8% of average annual earnings taxed. California’s low, fixed taxable wage base leads it to raise far less UI revenue than the state needs.

California Must Shift to Forward Financing of UI Benefits and Reform Experience Rating

Raising and indexing California’s taxable wage base is essential to ensuring adequate UI financing, but that alone will not be sufficient to sustainably fund the system because of the structurally flawed mechanism that determines UI tax rates in California.

California has seven employer contribution rate schedules that operate to increase state UI tax rates when the balance of the state’s UI trust fund is low and to reduce rates when the trust fund has more funding.21Employment Development Department, California System of Experience Rating, DE 231Z Rev. 17, (6-22), https://edd.ca.gov/siteassets/files/pdf_pub_ctr/de231z.pdf. This “pay-as-you-go” mechanism is meant to increase revenues at the moment they are needed, but it produces two perverse outcomes. First, by hiking tax rates during economic downturns (when more workers are claiming UI benefits and the trust fund balance falls), the system compels businesses to pay higher taxes during the most difficult economic times, when their own resources are most depleted. Raising business costs during recessions undermines the ability of UI to promote economic recovery. Second, by lowering tax rates as the trust fund balance begins to recover, this system makes raising additional revenue difficult. If California were to increase its taxable wage base without fixing the “pay-as-you-go” mechanism, employer tax rates would automatically fall as soon as the trust fund balance began to improve, making it more difficult to reach and maintain solvency.

The weakness of pay-as-you-go financing is evident with a look at California’s history: As the figure below indicates, the state failed to raise sufficient revenue to fund UI benefits in every recession since 1980.

The alternative to California’s pay-as-you-go financing mechanism is a forward-funded system designed to take in more revenue than it pays out during periods of low unemployment. Forward funding enables state UI systems to build up sufficient reserves during periods of economic growth to pay benefits during economic downturns, when large numbers of workers are laid off and seeking unemployment benefits. The US Department of Labor’s UI Trust Fund solvency standards are designed to encourage this type of forward funding.22US Department of Labor, Office of Unemployment Insurance Division of Fiscal and Actuarial Services, State Unemployment Insurance Trust Fund Solvency Report 2024, March 2024, https://oui.doleta.gov/unemploy/docs/trustFundSolvReport2024.pdf. Numerous other states, including Oregon, use a forward-funding mechanism to put their UI systems on more stable financial footing.23State of Oregon Employment Department Oregon Employment Department Announces 2024 Rates for Paid Leave Oregon and Unemployment Insurance, November 2023, https://www.oregon.gov/employ/NewsAndMedia/Documents/2023-11-Tax-Contribution-Rate-Notice.pdf.

The mechanism for determining each individual employer’s UI tax rate is also flawed and needs to be reformed. In general, private employers are assigned a tax rate based on their experience with unemployment — that is, their history of laying off workers who then claim unemployment benefits.24New employers are initially assigned a rate of 3.4%, which is then adjusted after 2-3 years based on their experience rating. Additionally, public and nonprofit employers may choose to finance UI benefits on a dollar-for-dollar reimbursement basis instead of being subject to experience rating. Employment Development Department, California System of Experience Rating, DE 231Z Rev. 17 (6-22), https://edd.ca.gov/siteassets/files/pdf_pub_ctr/de231z.pdf; Employment Development Department, 2024 California Employer’s Guide, DE 44 Rev. 50 (1-24), 9, https://edd.ca.gov/siteassets/files/pdf_pub_ctr/de44.pdf. This system, known as “experience rating,” is required by the federal government, but states have considerable flexibility in selecting specific experience rating methods. In California, an employer’s experience rating is determined by a formula that takes into account their contributions into the trust fund and the UI benefits paid to their former workers.

There are two unintended consequences of this approach to experience rating. First, because employers’ contribution rate increases when their former employees claim UI benefits, employers have an incentive to discourage workers from applying for benefits, provide misinformation about eligibility, and dispute UI benefit claims. Second, this approach to experience rating makes raising the taxable wage base, on its own, a less effective strategy for improving UI financing. This is because increasing the taxable wage base would improve employers’ experience rating and automatically decrease their contribution rates (all else being equal), effectively limiting the amount of revenue that could be raised.

One potential alternative to this system is an experience rating system based on quarterly changes in the hours employees work for a given employer, regardless of whether these workers claim UI benefits.25Josh Bivens et al., Reforming Unemployment Insurance (Center for American Progress, Center for Popular Democracy, Economic Policy Institute, Groundwork Collaborative, National Employment Law Project, National Women’s Law Center, and Washington Center for Equitable Growth, June 2021), 36, https://files.epi.org/uploads/Reforming-Unemployment-Insurance.pdf. This would remove the incentive for employers to discourage or dispute benefit claims and would make increasing the taxable wage base more effective at shoring up the trust fund while supporting stronger benefits and broader eligibility.

Additionally, California could explore adopting this alternative experience rating system in combination with a method of assigning employer tax rates based on desired revenue targets, which researchers find is a highly effective strategy for improving UI financing.26A comprehensive analysis of state UI financing systems prepared by the Urban Institute for the US Department of Labor concluded that this approach, called “array allocation,” in combination with indexing the taxable wage base to wage growth were two key factors supporting UI trust fund adequacy. The analysis also suggested that states using array allocation have more stability in tax rates from year to year, leading to more predictability for both employers and the UI trust fund. Wayne Vroman et al., A Comparative Analysis of Unemployment Insurance Financing Methods (Urban Institute, December 2017), xv, 20, 42-43, 46, https://www.dol.gov/sites/dolgov/files/OASP/legacy/files/A-Comparative-Analysis-of-Unemployment-Insurance-Financing-Methods-Final-Report.pdf. Finally, California should consider how app corporations like Uber, Lyft, and DoorDash, which use technology to set and control working conditions, short-change California’s UI system by misclassifying employees as independent contractors, circumventing traditional labor laws and taxes. A study from the UC Berkeley Labor Center finds that If Uber and Lyft had treated workers as employees, these two corporations alone would have paid $413 million into the state’s UI trust fund between 2014 and 2019.27Ken Jacobs and Michael Reich, What Would Uber and Lyft Owe to the State Unemployment Insurance Fund? (Institute of Research on Labor and Employment, University of California, Berkeley, May 2020), https://laborcenter.berkeley.edu/pdf/2020/What-would-Uber-and-Lyft-owe-to-the-State-Unemployment-Insurance-Fund.pdf.

Conclusion

California’s UI system is a critical piece of social infrastructure and could become an engine of economic dynamism for the state, enabling workers, employers, and the economy to thrive. To achieve this vision, policymakers must stabilize the state’s UI finances by raising the taxable wage base and shifting to a forward-financing mechanism, providing the revenue needed to support California jobseekers with adequate benefits and expand assistance to workers who are currently shut out of the system.

California Budget

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key takeaway

California’s poverty rate has increased significantly, with disproportionate impacts on Black and Latinx residents. This alarming trend highlights the urgent need for federal and state policymakers to implement robust anti-poverty measures, such as strengthening the Child Tax Credit, Earned Income Tax Credit, and SNAP program.

California’s poverty rate increased to 18.9% in 2023, up from 16.4% in 2022 and 11.0% in 2021, according to new Census data.  The state’s poverty rate was particularly high among Black and Latinx Californians and California continued to have the highest poverty rate of the 50 states.

California’s high poverty rate means that 7.3 million state residents lacked the resources to meet basic needs last year — more than the populations of California’s four largest cities: Los Angeles, San Diego, San Jose, and San Francisco. In sharp contrast, the incomes of the richest 1% of state residents continued to substantially exceed the incomes of most Californians. The average income of the top 1% of California households was $1.2 million  in 2023 — 67 times the average income of households in the bottom 20% and 14 times the median household income.

These figures point to the need for federal and state leaders to take urgent action to ensure that all Californians have the resources to thrive, and recent experience proves that policymakers can achieve this vision. Bold investments in the federal Child Tax Credit (CTC) and other economic security-promoting policies during the pandemic brought about a historic drop in poverty in 2021. When Congress allowed these effective policies to expire, that progress was reversed the following year, causing the largest increase in the national poverty rate in 50 years.

With Congress poised to pass a substantial tax package in 2025, federal policymakers should prioritize strengthening and expanding two of the most effective anti-poverty policies: the federal CTC and Earned Income Tax Credit (EITC). Additionally, federal leaders should strengthen SNAP nutrition assistance (CalFresh in California), which plays a critical role in reducing poverty and poverty-related hunger. California policymakers can also cut poverty by strengthening state tax credits and the safety net, and ensuring that all Californians — regardless of immigration status — have access to affordable housing, nutrition assistance, health coverage, and good jobs.

Poverty Rates in California Are at the Highest in Years

California’s poverty rate, as measured by the Census Bureau’s Supplemental Poverty Measure — a more comprehensive reflection of economic well-being than the Census’ Official Poverty Measure —  increased two and one-half percentage points to 18.9% between 2022 and 2023.1SPM thresholds rose 8.6 percent in 2023 for renters, which is notably higher than the 4.1 percent inflation rate from 2023. This difference reflects that prices rose faster for some household items (mainly rent) than average inflation for the full range of household items. Some researchers prefer to use “anchored SPM thresholds” given that SPM thresholds are higher than inflation. Given California’s high cost of housing (among other costly household needs), the Budget Center maintains the SPM thresholds provided by the Census Bureau. The 2023 poverty rate is also higher than the pre-pandemic rate of 16.6% in 2019.

This is the second year the poverty rate has significantly increased, after the expiration of many pandemic-era policies put in place to reduce economic hardships many Americans experienced as a result of COVID-19. These include federal supports such as the expanded Child Tax Credit, the expanded Earned Income Tax Credit for childless workers, and enhanced unemployment benefits — all of which ended in 2021. Additionally, Supplemental Nutrition Assistance Program (CalFresh in California) emergency allotments, which temporarily increased nutrition benefits, ended in early 2023.

California’s labor market also fared worse in 2023 than nationally, with the state’s unemployment rate increasing and inflation-adjusted hourly wages for low-wage workers decreasing in California.

Poverty Rose Across Children, Adults, and Older Adults

While poverty rose across all age groups, rates vary among children, adults, and older adults, notably:

Poverty Increased for All, Californians of Color Face Greater Hardship

Poverty increased for all racial and ethnic groups in California in 2023. However, poverty rates are more pronounced among Californians of color, highlighting deep-rooted inequities that are a direct consequence of historic and ongoing racism.

Most notably, the rise in poverty was sharpest for American Indian, Alaska Native, Native Hawaiian, Pacific Islander, and multiracial Californians (noted as “Other Californians of Color” in the chart above). Specifically, the poverty rate for this group collectively surged from 8.4% in 2022 to 13.6% in 2023. This significant and alarming increase underscores the unique challenges that these communities face, such as historic marginalization, systematic displacement, and limited access to targeted resources.

Poverty also remains disproportionately high for Latinx and Black Californians at 25% and 22.3%, respectively. Both groups saw an increase of about 4 percentage points from 2022 to 2023. These higher poverty rates reflect how centuries of discriminatory policies and systemic racism — such as redlining, wage discrimination, and chronic underinvestment in communities of color — continue to prevent Black and brown Californians from accessing the same economic opportunities as white people.

The persistence of higher poverty rates for Californians of color is not accidental.  Structural racism is the result of policymakers and other individuals with power successfully implementing policies and actions that block people of color from opportunity, many of which are rooted in racism.

Income Inequality Remains Stark in California

In addition to information on poverty, the Census data also sheds light on the incredible magnitude of income inequality in California. In 2023, the richest 5% of California households had an average income of $662,792 and the richest 1% had $1,208,478 on average.3The variable used to estimate household income is the sum of individual top-coded income variables, therefore the total may be underestimated for households at the top of the income distribution. Income reported to the Census Bureau may differ from income reported to the Franchise Tax Board due to underreporting, differences in the composition of households versus tax units, and the exclusion of capital gains income from the Census data. The average income of the top 1% of Californians is 14 times the $89,300 median California household income and 67 times the average income for the bottom 20% of Californians, which stood at a woefully inadequate level of $18,170.  For reference, a single adult needs an annual income of more than $56,000 to afford typical expenses in California, and a single parent with one child needs an income of nearly $100,000.

Notably, the Census income data does not include capital gains — income from the sale of assets like stock shares and real estate — which make up a significant portion of income for wealthy households. Therefore, the Census figures for the top 5% and top 1% of Californians understate their total income. Tax data, which do take into account capital gains income, demonstrate the high level of income concentration in the state, with the top 1% of Californians generally receiving around one-fifth to one-quarter of total income over the past several decades.

Policymakers Can Cut Poverty and Create a California for All

High poverty following the end of major pandemic-era investments proved that policymakers play a significant role in determining the economic well-being of all people. This means they can reverse the spike in poverty by investing in policies that help families and individuals meet basic needs and thrive in their communities.

At the federal level, these include:

California policymakers can also do more to cut poverty across the state, including by:

California Budget
  • 1
    SPM thresholds rose 8.6 percent in 2023 for renters, which is notably higher than the 4.1 percent inflation rate from 2023. This difference reflects that prices rose faster for some household items (mainly rent) than average inflation for the full range of household items. Some researchers prefer to use “anchored SPM thresholds” given that SPM thresholds are higher than inflation. Given California’s high cost of housing (among other costly household needs), the Budget Center maintains the SPM thresholds provided by the Census Bureau.
  • 2
    The increase is not statistically significant at the 95% confidence level.
  • 3
    The variable used to estimate household income is the sum of individual top-coded income variables, therefore the total may be underestimated for households at the top of the income distribution. Income reported to the Census Bureau may differ from income reported to the Franchise Tax Board due to underreporting, differences in the composition of households versus tax units, and the exclusion of capital gains income from the Census data.

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California voters will decide on November 5th, 2024 whether to pass Proposition 35, which would 1) require the state to request federal approval for the Managed Care Organization tax on an ongoing basis and 2) allocate those dollars for certain health care investments.

Access to health care is essential for everyone to be healthy and thrive. In California, Medi-Cal, the state’s Medicaid program, provides free or low-cost health care to over one-third of the state’s population. Medi-Cal covers a wide range of services to Californians with modest incomes, and many children, seniors, people with disabilities, and pregnant individuals rely on it. About half of Medi-Cal beneficiaries are Latinx, highlighting Medi-Cal’s role in promoting health equity.

California’s shortage of health care workers undermines the availability and quality of care for communities across the state. When people can’t find a provider in their area or experience long wait times for appointments, they don’t have meaningful access to health care. Enrolling in Medi-Cal and navigating the health care system can also be difficult, underscoring the need to invest in outreach and enrollment supports. While state policymakers have made considerable investments in recent years to bolster the health care workforce, more progress is needed.

what is health equity?

When everyone has the opportunity to be as healthy as possible and no one is disadvantaged from achieving this because of their race, gender identity, sexual orientation, the neighborhood they live in, or any other socially defined circumstance.

This year, policymakers had to make challenging decisions about health care investments due to the state’s recent budget shortfall and resistance from some state leaders to raise ongoing revenues. This has led to debates over the allocation of revenue from the state’s recently approved Managed Care Organization (MCO) tax. In response, many representatives of the health care industry have proposed Proposition 35, which would: 

  1. Require the state to request federal approval for the MCO tax on an ongoing basis.
  2. Allocate MCO tax revenue for certain health care investments.

There are merits to having dedicated funding to invest in the state’s health care system. However, this approach would reduce flexibility in the state budget and could negatively affect available funding for other key services that improve the lives of Californians. This Q&A provides a high-level overview of Prop. 35, including how Californians with low incomes might be impacted by its passage as well as implications for the state budget.

table of contents

What is the Managed Care Organization (MCO) tax?

Managed Care Organizations (MCOs), also known as health insurance plans, are responsible for managing health care services as a way to control costs, utilization, and quality of care. Anthem Blue Shield and Kaiser Permanente are two examples of MCOs in California. These health insurance plans oversee the health care benefits that people receive, often requiring prior authorization or referrals to ensure that people receive appropriate and cost-effective care.

MCOs manage health care services for people with private health insurance as well as Medi-Cal enrollees. They contract with Medi-Cal to receive payments based on the number of Medi-Cal recipients they serve. Medi-Cal is a joint federal-state program, with the federal government covering part of the cost and the state covering the rest.

Federal law allows states to impose a tax on MCOs and other health-related services to help cover the state share of Medicaid health care costs, but states must comply with federal regulations and receive federal approval for these taxes. Eighteen states reported having an MCO tax in place during the 2023 state fiscal year.

California’s MCO tax is a charge based on enrollment in Medi-Cal managed care plans and private health insurance plans. The MCO tax is distinct from other types of state taxes in that the primary state fiscal benefit comes from the additional federal dollars drawn down as a result of the tax. MCOs bear very little of the cost, as they receive Medi-Cal payments from state and federal funds that offset the portion of the tax levied on Medi-Cal enrollment. By drawing down additional federal funding, the MCO tax frees up state General Fund dollars that would otherwise have been used to support existing Medi-Cal services.

California’s MCO tax was most recently approved in December 2023, and it will expire at the end of 2026 unless it is renewed again. However, state leaders are seeking additional changes to the MCO tax structure to draw down more federal funding. These changes are still pending federal approval.

The state is expected to receive net revenues of $7 billion to $8 billion annually while the tax is in effect, assuming the federal government approves recent changes. Essentially, the net revenues are the additional federal funds the state is able to draw down minus the cost of the state’s portion of payments to MCOs to offset the cost of the tax. Under the enacted 2024-25 budget, most of that revenue will be used to offset state General Fund spending on existing Medi-Cal services, with a smaller portion going to increased provider rates and augmentations.

How do policymakers currently plan to use MCO tax dollars?

Policymakers outlined a plan — which Prop. 35 would overturn — to use revenue from the MCO tax in the 2024-25 budget package, with the majority of dollars allocated to offset General Fund spending on Medi-Cal and maintain existing services in the program. Assuming that the federal government approves the changes to the MCO tax that state leaders are seeking, the budget includes the following MCO tax dollars to sustain existing services in Medi-Cal:

  • $6.9 billion in 2024-25
  • $6.6 billion in 2025-26
  • $5.0 billion in 2026-27

Policymakers also allocated funding from the MCO tax for new targeted Medi-Cal provider rate increases as well as other investments. These budget allocations include:

  • $133 million in 2024-25
  • $728 million in 2025-26
  • $1.2 billion in 2026-27

The rate increases from the current MCO tax spending plan are intended to build on investments that policymakers made in previous years. As shown below, the majority of funds for rate increases that will go into effect on January 1, 2025 will support emergency department physician services, abortion care and family planning, and ground emergency medical transportation.

The current MCO tax spending plan also includes additional rate increases and investments that would take effect on January 1, 2026, with the vast majority of dollars allocated to physician and non-physician professionals (e.g., physician assistants, nurse practitioners and certified nurse midwives). 

Policymakers also allocated $40 million one-time MCO tax dollars in 2026-27 to strengthen and support the development and retention of the Medi-Cal workforce. This amount reflects a decrease in health care workforce investments that state leaders made in the past. More substantial and sustained investments are necessary to build a health care workforce that can better meet the needs of Californians.

This MCO tax spending plan would be overturned if voters approve Prop. 35.

How does Prop. 35 differ from the current MCO tax plan?

Prop. 35 proposes a major shift to how state policymakers have used MCO tax revenue to essentially reduce, or offset, General Fund spending on Medi-Cal. If passed, Prop. 35 would overturn the current MCO tax spending plan that policymakers agreed upon in the 2024-25 budget. 

Prop. 35 would require the California Department of Health Care Services to request federal approval for the MCO tax on an ongoing basis in an attempt to make this funding stream more permanent. Federal approval is required for the state to levy health care taxes that draw down additional federal dollars. 

While Prop. 35 provides some flexibility for the state to structure future versions of MCO tax proposals to comply with federal regulations and ensure federal approval, it does set limits to the tax on commercial enrollment. This limitation could affect the state's ability to secure future approval for a tax that generates the same level of revenue as the current tax. The measure also specifies that the MCO tax would not go into effect if the state does not receive federal approval and federal funding in the future.

Additionally, Prop. 35 would establish rules for how MCO tax revenue would be spent in the short term (2025 and 2026) and long term (2027 and beyond). The key difference is that policymakers would no longer be able to use the bulk of the dollars to offset General Fund spending in Medi-Cal. Another notable difference is that Prop. 35 would require funds to be spent by the end of each calendar year or fiscal year, beginning 2027. Currently, policymakers have the flexibility to save funds for future years to help cover costs if the MCO tax is not approved in the future. 

If passed, funds would first cover a portion of MCOs’ cost of the tax as well as administrative costs. 

For calendar years 2025 and 2026, $2 billion would be used to offset General Fund spending in Medi-Cal. Specifically, this amount would cover a portion of the non-federal share of Medi-Cal managed care rates for health care services for children, adults, seniors, and people with disabilities. This represents the majority of funds (about 43%), as shown below. MCO tax revenue would also support health workforce initiatives, including primary care, specialty care, and emergency care.

For calendar year 2027 and beyond, Prop. 35 would allocate revenue from the MCO tax differently. After covering a portion of MCOs’ cost of the tax as well as administrative costs, the next $4.3 billion collected from the tax would be allocated for specific purposes. The majority of funds (44%) would support access to primary care and specialty care. Specifically, it would increase reimbursement rates for primary care services and increase the number of specialty care service providers. A smaller portion of funds would support other rate increases, such as emergency department services and family planning. Prop. 35 would allow the Department of Health Care Services to allocate 8% of funds — $344 million — to provide overall support to the Medi-Cal program.

If there are remaining MCO tax revenues after these funding allocations are made, the measure contains parameters to allocate the excess revenue. Examples of these other allocations include:

  • Additional General Fund offset to support existing services in Medi-Cal.
  • A grant program to expand the number of community health workers. 
  • Supporting the state’s ongoing efforts to reduce the cost of prescription drugs.
  • Providing additional funding to health workforce initiatives.

In addition, Prop. 35 would establish oversight and accountability measures, requiring the state controller to perform independent financial audits. It would also create an advisory committee that would provide input to the Department of Health Care Services on future MCO tax proposals. This advisory committee would be made up of mostly health care provider representatives.

Would Prop. 35 actually make the MCO tax permanent?

No, the MCO tax funding structure under Prop. 35 is entirely dependent on federal approval and ongoing renewals. Prop. 35 would require the California Department of Health Care Services to request federal approval for the MCO tax on an ongoing basis in an attempt to make this funding stream more permanent. Federal approval is required for the state to levy health care taxes that draw down additional federal dollars.

One issue with Prop. 35 is that the MCO tax may not be a sustainable, long-term funding source. While the federal government has historically approved California’s MCO tax, it has indicated that it may revise the rules governing state MCO taxes in the future, which would have implications for the amount of net revenue that future versions of the tax may bring into the state. 

Without federal approval and federal funding, the MCO tax and spending plan under Prop. 35 would not be implemented.

How would Prop. 35 impact the state budget?

While Prop. 35 would ensure more funding is dedicated for health care, its requirement to spend MCO tax revenues on specific services would also limit policymakers’ flexibility in making budget decisions. This is particularly concerning in years when the state is facing a budget shortfall because the reduced flexibility could lead policymakers to make cuts to other critical public services to balance the budget.

State leaders are required to balance the budget each year, and there are already several strict requirements on how some state funds are spent that make budgeting complex. By creating additional mandates on state spending, Prop. 35 would result in policymakers having even less flexibility in making budget decisions. While the measure gives policymakers some ability to modify the structure and uses of the MCO tax, changes would require a three-fourths vote in the Legislature — which can be difficult to obtain — and would need to further the purpose of Prop. 35. 

In years when the state is facing a budget shortfall, this limited flexibility could result in cuts to other critical public services that help Californians make ends meet and address vital needs, such as income supports, subsidized child care, food assistance, and investments in reducing homelessness and increasing affordable housing.  

Of course, cuts could be limited or avoided during budget deficits if state leaders are able to raise new revenues to address a shortfall. However, the state Constitution requires a two-thirds vote in the Legislature to raise taxes, while spending cuts can be approved with a simple majority, and state leaders have generally been more inclined to make cuts than to increase taxes.

In the near term, Prop. 35 would result in the recently enacted 2024-25 budget being out of balance. This is because a solution to the budget shortfall involves using some MCO tax dollars that were previously intended to support provider rate increases and other augmentations to instead offset General Fund spending on existing Medi-Cal services. Since Prop. 35 would require MCO tax revenues to be used for health program augmentations instead of offsetting existing spending, state leaders would have to identify other solutions — potentially spending cuts or delays, revenue increases, or additional budget reserve withdrawals — in next year’s budget to cover the difference. The Legislative Analyst’s Office estimates that the General Fund impact would be between $1 billion and $2 billion in 2025 and 2026, but in a legislative hearing on August 13, 2024, the Department of Finance noted that it estimates the impact could range from $2.6 billion and $4.9 billion in fiscal years 2024-25 through 2026-27.

In the long term, raising state General Fund revenues — through sources aside from the MCO tax — would help to increase the state’s capacity to cover the costs of existing Medi-Cal services and improve state health services and increase access to care, without jeopardizing other state services. This is especially important given that there is no guarantee the federal government will continue to approve an MCO tax that yields the amount of revenue anticipated from the currently authorized tax.

How would Prop. 35 impact Californians?

If passed, millions of Californians who receive health care services through Medi-Cal — about half of whom are Latinx — could have better access to care, especially for primary care and specialty health care services. Increasing provider participation in Medi-Cal is critical to improving access to a wide range of health care services, especially in historically underserved areas where there is often a shortage of providers. By increasing the number of providers in the Medi-Cal network, patients can receive more timely care, which can help improve health and well-being for all Californians, but especially Latinx communities. 

However, there are some critical health equity investments that are included in the current MCO tax spending plan that are either not included or not prioritized in Prop. 35. Examples include:

These potential cuts raise health equity concerns, as they would disproportionately impact people of color, children, older adults, and people with disabilities. Policymakers should explore alternative revenue-raising measures to sustain and advance these crucial health equity initiatives, if Prop. 35 passes.

Additionally, Prop. 35’s limitations on using MCO tax proceeds to offset General Fund spending on current Medi-Cal services could make policymakers more likely to make cuts to other state services when facing budget shortfalls. Such cuts would likely harm Californians with low incomes most. For example, in the difficult budget years during and following the Great Recession, deep cuts were made to safety net programs such as subsidized child care, income supports for families under the California Work Opportunity and Responsibility to Kids (CalWORKs) program, and income support for older adults and people with disabilities under the Supplemental Security Income/State Supplementary Payment (SSI/SSP) program.

Lastly, the passage of Prop. 35 would lock in spending decisions in the future, which would impact how Californians engage with the state budget process. Advocates and community members would have less opportunity to weigh in on how state resources should be allocated because the MCO tax spending decisions would be constrained by the ballot measure. Currently, Californians can contribute to conversations about how MCO tax revenue should be spent during the budget process via public hearings and interactions with policymakers.

What are arguments for and against Prop. 35?

Supporters of Prop. 35 believe the measure will protect and enhance access to care for Medi-Cal patients by ensuring that MCO tax dollars are directed toward patient care. They argue that it would prevent lawmakers from redirecting funds intended for health care to other purposes. Key supporters include the California Medical Association, Planned Parenthood Affiliates of California, the California Hospital Association, the California Primary Care Association, and the California Dental Association.

Opponents of Prop. 35 argue that the measure would reduce flexibility in how Medi-Cal dollars are allocated and overturn the commitments made in the 2024-25 budget to fund important services with MCO tax dollars, including continuous Medi-Cal coverage for young children and the rate increase for community health workers. Opposition groups include The Children’s Partnership, the California Pan-Ethnic Health Network, the California Alliance for Retired Americans, Courage California, and the League of Women Voters of California.

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key takeaway

California voters will decide on November 5th, 2024, whether to pass Proposition 36, which would increase penalties for several drug and theft crimes. This would significantly drive up state prison costs, cut funding for behavioral health treatment and other critical services, and potentially push more Californians into homelessness.

Introduction

Over many years, California lawmakers and voters adopted harsh, one-size-fits-all sentencing laws that prioritized punishment over rehabilitation, led to severe overcrowding in state prisons, and disproportionately impacted Californians of color.

California began reconsidering its “tough on crime” approach in the late 2000s. Multiple reforms were adopted as prison overcrowding reached crisis proportions and the state faced lawsuits filed on behalf of incarcerated adults. These reforms worked as intended: The number of adults serving sentences at the state level fell from a peak of 173,600 in 2007 to around 90,000 today. Meanwhile, violent and property crime rates in California remain well below historical peaks. 

A key justice system reform was Proposition 47, which passed with nearly 60% support in 2014. Prop. 47 reduced penalties for six nonviolent drug and property crimes from felonies to misdemeanors. As a result, state prison generally is no longer a sentencing option for these crimes. Instead, people convicted of a Prop. 47 offense serve their sentence in county jail and/or receive probation.

Prop. 47 also requires the state to calculate prison savings due to reduced incarceration and use those dollars to reduce recidivism and support crime victims. Since 2016, over $800 million in Prop. 47 savings has been allocated across the state for behavioral health treatment and other critical services that promote community safety.

However, interest groups opposed to justice system reforms qualified Prop. 36 for the November ballot. Their goal is to increase punishment for drug and theft crimes in California, including by reversing key provisions of Prop. 47. Major donors to Prop. 36 include Walmart ($2.5 million), Home Depot ($1 million), Target ($1 million), In-N-Out Burger ($500,000), the California Correctional Peace Officers Association ($300,000), and Macy’s ($215,000).

Prop. 36 Would Increase Penalties for Several Drug and Theft Crimes

Prop. 36 would amend state law to increase penalties for several drug and theft crimes. These changes would disproportionately impact Californians of color given racist practices in the justice system as well as social and economic disadvantages that communities of color continue to face due to historical and ongoing discrimination and exclusion.

Prop. 36 would increase penalties for drug crimes in multiple ways. Key drug-related provisions of the measure include the following:

Prop. 36 also would increase penalties for theft crimes in multiple ways. Key theft-related provisions of the measure include the following:

Prop. 36 Would Drive Up State Prison Spending and Create Unfunded Costs at the State and Local Levels

By increasing punishment for several drug and theft crimes, Prop. 36 would create substantial new costs — including for incarceration and the court system — at the state and local levels. However, the measure would provide no new revenue to pay for these expenses.1Prop. 36 states that a person charged with a “treatment-mandated felony” may receive, if eligible, relevant Medi-Cal or Medicare services that are delivered through a court-ordered treatment program. (Medi-Cal is supported with state and federal funding; Medicare is funded solely by the federal government.) Therefore, some federal funding could be available to support services for people who are charged with a treatment-mandated felony and are eligible for Medi-Cal or Medicare. However, the state would have to pay a portion of any Medi-Cal services delivered, and Prop. 36 would not provide any revenue to offset those new state costs. In addition, the costs associated with treatment-mandated felonies represent only part of the substantial state and local criminal justice costs that Prop. 36 would create — costs for which the measure provides no new funding. State and local leaders would face the prospect of curtailing funding for existing public services in order to make room in their budgets for the unfunded costs imposed by Prop. 36.

While Prop. 36 would clearly burden public budgets, the magnitude of the impact is uncertain. Cost estimates have been developed by the nonpartisan Legislative Analyst’s Office (LAO) as well as by Californians for Safety and Justice (CSJ), a leading statewide public safety advocacy group. Both organizations suggest that the cost of Prop. 36 could be substantial, although the LAO’s estimates are significantly lower than CSJ’s.2The substantial gap between these two sets of estimates is likely the result of different assumptions, methodologies, and/or data sources adopted by each organization.

Specifically:

  • The LAO estimates that the ongoing increase in state criminal justice costs would likely range from several tens of millions of dollars to the low hundreds of millions of dollars. This estimate reflects a larger prison population — which could grow by “around a few thousand people” — as well as an increase in state court workload.
  • In addition, the LAO estimates that ongoing local criminal justice costs would likely increase by tens of millions of dollars due to Prop. 36. This estimate reflects larger county jail and community supervision populations — which, combined, could rise by “around a few thousand people” — as well as higher costs for courts, prosecutors, public defenders, and county agencies like probation and behavioral health departments.
  • In contrast, CSJ projects that Prop. 36 would lead to much higher costs. CSJ estimates that combined state and local costs would rise by around $4.5 billion ongoing. For example, CSJ suggests that more than 32,000 additional people would be sentenced to state prison within seven years. CSJ also assumes that over 31,000 additional people would serve one-year sentences in jail each year. These projected increases in incarceration are much higher than what the LAO’s analysis suggests.

Regardless of the magnitude of the costs created by Prop. 36, the result would be the same: elected officials would face difficult choices about how to accommodate these new unfunded costs in their budgets. Such choices could disproportionately harm Californians with low incomes and communities of color depending on which current state and local services were affected by funding reductions.

These tough decisions would come at a time when state and local leaders are already struggling to keep their budgets balanced and ensure ongoing support for core services. For example, the 2024-25 state budget package relies heavily on borrowing from future budgets and only temporarily increases revenues — decisions that could compromise the state’s ability to sustain core programs as well as stall much-needed investments in the coming years. The new unfunded costs imposed by Prop. 36 would make it even more challenging for state leaders to sustain support for core services and maintain a balanced budget.

In addition, Prop. 36 would reverse the modest progress that California has made in controlling state prison spending. Justice system reforms, including Prop. 47, have reduced the prison population and allowed state leaders to end private-prison contracts, begin closing state-owned prisons, and bend the prison cost curve. In fact, prison spending is billions of dollars lower today than it would be absent these reforms. These freed-up dollars have been redirected to critical state services that rely on the state’s General Fund for support.

Moreover, the prison system’s “footprint” on the state budget has been shrinking as reforms have taken effect. The budget of the California Department of Corrections and Rehabilitation (CDCR) comprised over 9% of total General Fund spending in 2013-14 — the fiscal year before Prop. 47 was approved in November 2014. Since then, CDCR’s share of the state budget has dropped to less than 7% as prison spending has grown more slowly than overall state expenditures.

Still, state correctional spending remains too high, and more work is needed to further downsize California’s costly and sprawling prison system. However, the trend has been moving in the right direction, and the significant gains that have been made over the last decade would be eroded if Prop. 36 is approved by voters.

Prop. 36 Would Reduce State Funding for Behavioral Health Treatment and Other Critical Services

By passing Prop. 47 in 2014, voters not only reduced penalties for several low-level crimes and lowered the prison population — they also required state prison savings from Prop. 47 be used for services that reduce crime, support youth, and help crime victims heal. To date, Prop. 47 savings — as calculated by the Department of Finance — exceed $800 million, or around $90 million per year, on average.

Prop. 47 savings are annually 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.

Prop. 47 savings are invested in a broad range of programs that support healing and keep communities safe. For example, a recent evaluation shows that people who received Prop. 47-funded behavioral health services and/or participated in diversion programs were much less likely to be convicted of a new crime. People who enrolled in these programs had a recidivism rate of just 15.3% — two to three times lower than is typical for people who have served prison sentences (recidivism rates range from 35% to 45% for these individuals). These programs are also successful in reducing homelessness and promoting housing stability, with a 60% decrease in the number of participants experiencing homelessness by the end of the program compared to when they enrolled.

Because Prop. 36 would undo key provisions of Prop. 47, the annual state savings from Prop. 47 would decline. The LAO estimates that this reduction would likely be in the low tens of millions of dollars per year, whereas CSJ projects that the state savings would be entirely eliminated.

The most recent estimate of Prop. 47 savings is $95 million, as reflected in the 2024-25 state budget. If Prop. 36 had been in effect this year, these savings would have been tens of millions of dollars lower (based on the LAO’s analysis) or entirely eliminated (based on CSJ’s assessment). Either way, there would be substantially less funding for services that reduce crime, support youth, and help crime victims heal. In other words, Prop. 36 would shift tens of millions of dollars or more each year from behavioral health treatment and other critical services back to the state prison system.

Prop. 36 Could Push More Californians Into Homelessness

Prop. 36 could worsen homelessness in California by pushing more residents into the carceral system, further exacerbating the deep link between homelessness and incarceration. While the lack of affordable housing is the primary cause of homelessness, this detrimental outcome is intensified by incarceration as formerly incarcerated people are nearly 10 times more likely  to experience homelessness than the general population. 

Californians leaving incarceration often face significant obstacles to securing long-term, stable housing, which is essential for reconnecting with support networks, finding employment, and maintaining health. Without proper housing, which Prop. 36 does not account for or ensure, formerly incarcerated individuals are more likely to recidivate and resort to survival crimes, perpetuating the harmful cycle.

A recent statewide homelessness study found that nearly 1 in 5 unhoused Californians (19%) entered homelessness directly from an institutional setting, primarily a jail or prison. Additionally, fewer than 20% of people leaving jail or prison had support finding housing upon their release. Prop. 36 does nothing to address this need and instead reverts funding from existing programs that help unhoused individuals with conviction histories connect with housing, behavioral health treatment, and other necessary services needed to reintegrate.

Further, Prop. 36 fails to follow effective, evidence-based interventions that successfully help individuals obtain and sustain mental health and substance use treatment, with housing as a foundational component. The initiative allows certain people arrested for drug possession to admit guilt (or plead no contest) and have their charges dismissed if they complete court-ordered treatment.

However, completing a treatment program is especially challenging for individuals experiencing housing instability or homelessness. Not having a home causes severe stress and trauma and harms physical and mental well-being, which can trigger or worsen mental health issues and lead to complex coping mechanisms like substance use. Yet there is no guarantee that those who are referred to treatment and who may need housing will receive it in a timely manner, essentially curtailing their chances of completing the program and increasing their likelihood of facing incarceration for up to three years.

Moreover, coerced treatment is antithetical to successful “Housing First” principles, which prioritize permanent housing before addressing treatment and other comprehensive needs. Policy experts also recommend against legally compelling people to comply with treatment for opioid use disorders as an alternative to other sanctions like incarceration. While coerced treatment may help engage people with substance use challenges, it likely has minimal to no effect on treatment retention, remission, and overdose mortality. This approach effectively places individuals in vulnerable positions that can lead to long-term incarceration and an increased likelihood of homelessness under Prop. 36.

Creating Safe and Equitable Communities Requires Smart Investments, Not Harsh Penalties and Mass Incarceration

Creating safe, vibrant communities for all Californians is achievable through intentional investments that uplift opportunities and economic security. Rather than promoting this positive vision for California, Prop. 36 advances an incarceration-focused approach that:

Instead of increasing incarceration, state leaders should prioritize policies and interventions proven to reduce crime, enhance public safety, and expand behavioral health treatment options. Effective measures include increasing affordable and supportive housing, expanding economic security programs, broadening access to health care and behavioral health services, supporting education and youth intervention programs, improving recidivism reduction strategies, and implementing equity-centered policies that target vulnerable residents. By focusing on these proven strategies, we can create safer, more equitable communities for all Californians.

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  • 1
    Prop. 36 states that a person charged with a “treatment-mandated felony” may receive, if eligible, relevant Medi-Cal or Medicare services that are delivered through a court-ordered treatment program. (Medi-Cal is supported with state and federal funding; Medicare is funded solely by the federal government.) Therefore, some federal funding could be available to support services for people who are charged with a treatment-mandated felony and are eligible for Medi-Cal or Medicare. However, the state would have to pay a portion of any Medi-Cal services delivered, and Prop. 36 would not provide any revenue to offset those new state costs. In addition, the costs associated with treatment-mandated felonies represent only part of the substantial state and local criminal justice costs that Prop. 36 would create — costs for which the measure provides no new funding.
  • 2
    The substantial gap between these two sets of estimates is likely the result of different assumptions, methodologies, and/or data sources adopted by each organization.

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