Introduction

Governor Gavin Newsom released his proposed 2025-26 California state budget on January 10, projecting a small positive balance of $363 million after two years of state budget deficits. The governor’s proposal projects $16.5 billion in additional revenue compared to estimates from last June and would draw down $7.1 billion in reserves. The $229 billion General Fund spending plan would protect investments made in prior years, but does not propose any significant new investments to address affordability challenges confronting millions of Californians or major tax policy changes to increase state revenues. 

The administration’s revenue projections reflect an economic outlook that expects moderate growth to continue in the near term. However, the administration warns that federal policies on tariffs, international trade, and immigration would increase inflationary pressure on the economy, which would dampen economic growth and reduce state revenues. In addition, federal cuts to domestic programs — particularly health care — threaten the well-being of millions of Californians and would significantly reduce federal support that flows to California. 

While the governor’s proposal draws down reserves to sustain ongoing commitments, it also leaves $17 billion in reserve accounts to buffer against future revenue decline or threats to the state’s fiscal condition. The governor also proposes changes to the state’s reserve policies to exempt rainy day fund deposits from the state’s spending cap, commonly known as the Gann Limit; allowing the rainy day fund to grow to 20% of General Fund revenues (up from the current 10% cap); and allow the state to set aside a larger portion of state revenues in the rainy day fund during periods of strong revenue growth.

The governor’s plan notably does not include any substantial proposals to increase revenues — changes needed to help Californians who have not benefited from the state’s economic growth and to build a more equitable, thriving state in the long run. With federal leaders poised to extend and expand tax cuts that primarily benefit larger corporations and high-income households, offset in part by cuts to vital public supports, state leaders have a responsibility to make our state’s tax system more equitable, protect California, and invest in the economic security and well-being of all Californians.

The governor’s spending plan protects and maintains much of the modest progress made in prior budget years to help improve economic security and opportunities for Californians with low incomes and Californians of color, including policy advances in health care and behavioral health, cash assistance (refundable tax credits and SSI/SSP), food assistance, and universal transitional kindergarten (TK). The proposal also boosts funding for TK-12 schools and community colleges due to automatic adjustments in constitutionally required funding allocations and budget commitments made in recent years.

Notably, however, the governor’s plan does not include any new funding to address homelessness and abandons funding for housing programs for Californians with low incomes and affordable housing production.

Even as the governor’s proposal limits investments to combat the high cost of living, it would commit the state to new spending to expand the film tax credit for film studios at a cost that could grow to more than $400 million annually in future years. 

The plan also calls for committing over $600 million to pay the interest on a $20 billion debt to the federal government to cover the costs of the state’s unemployment insurance system. This debt resulted from increased unemployment due to the COVID-19 pandemic and the fact that historically businesses have underpaid into the system to cover periods of increased unemployment. Today, California’s effective unemployment insurance tax rate is less than half of what it was in 1980. 

The administration projects that the state prison population will increase in the near term due to the passage of Prop. 36 in November 2024, which increased penalties for certain drug and theft offenses, including by reversing some of Prop. 47’s (2014) sentencing reforms. However, the administration does not anticipate substantial ongoing costs from Prop. 36 and projects that the prison population will resume its long-term decline after 2025-26 due to other justice system reforms that remain in effect. These projections suggest that state policymakers should plan for additional state prison closures. 

Overall, while the governor’s proposed spending plan protects much of the progress made in earlier years, failure to advance more equitable tax policies and misguided priorities like expanded tax credits for film studios would weaken the state’s capacity to better help Californians manage our state’s high cost of living. State leaders have an opportunity and a responsibility to champion policies that uplift and protect every Californian during a time of threat. This First Look report outlines key pieces of the 2025-26 California budget proposal, and explores how the governor prioritizes spending amid projected growth in state budget revenues.

Table of Contents

Budget Overview

• Economic Outlook: Administration Expects Economic Growth to Moderate, But Federal Policy Changes Present a Major Risk
• Economic Outlook: Many Californians Continue to Struggle to Make Ends Meet and Federal Policies Will Likely Increase Hardship
• Revenues: Proposed Budget Reflects a $16.5 Billion Improvement in the Revenue Outlook
• Tax Policy: Governor Proposes No Major Revenue Increases, But Expands Film Tax Break
• Reserves: Governor’s Budget Proposal Includes Withdrawal of Reserve Funds, Proposes Changes to Reserves Policies

Health

• Coverage, Affordability, & Access: No Health Care Cuts in Governor’s Budget Proposal
• Proposition 35: State Budget Adapts to MCO Tax Changes Under Proposition 35
• Behavioral Health: State Leaders Launch New Behavioral Health Initiative, Sustain Other Efforts

Housing & Homelessness

• Housing: Governor’s Budget Fails to Address Housing Costs for Low-Income Californians
• Homelessness: Governor Pushes Homelessness Accountability with No New Funding

Economic Security

• Overarching Economic Security: Budget Maintains, but Fails to Increase Investments, Despite Urgent Need and High Cost of Living
• Refundable Tax Credits: Administration Preserves Refundable Tax Credits for Low-Income Californians, Makes No New Investments
• CalWORKs: Proposed Budget Includes Only Modest Required Increase in CalWORKs Grants
• Food Assistance: Governor Upholds Commitments to Food Assistance Programs
• Californians with Disabilities and Older Adults: No Significant Investments in Services for People with Disabilities and Older Adults
• Child Care: Amid Union Negotiations, Governor Maintains Prior Child Care Commitments
• Immigrant Californians: Governor Maintains, Does Not Increase, Support for Immigrant Californians
• Domestic Violence Prevention: Governor Does Not Provide Needed Support to Domestic Violence Survivors

Education

• Early Learning & Pre-K: Transitional Kindergarten and State Preschool Continue Expansion Plans
• Proposition 98: Budget Proposal Shows Significant Growth in the Prop. 98 Guarantee
• PK-12 Education: Budget Proposal Boosts Funding to K-12 Schools Through New Block Grant
• Community Colleges: Proposed Budget Enhances Technology and Data Systems at the Community Colleges
• CSU/UC: Proposed Budget Maintains Deferrals of Investments for the CSU and UC Systems
• Student Financial Aid: Spending Plan Fails to Propose Solutions to Fund Cal Grant Reform

Justice System

• State Corrections + Prop. 36 Impact: Spending Plan Projects a Larger Prison Population in the Near Term Due to Proposition 36
• Proposition 47 Investments: Governor Estimates Proposition 47 Savings of $88 Million for Local Investments in 2025-26

Workforce

• Workforce: Governor Proposes New Investments to Fund Master Plan for Career Education

Climate Change

• Climate Change: Budget Allocates $2.7 Billion in Climate Bond Spending for 2025-26

Other Key Issues

• California Competes: Proposes Additional Funds for “New, Unproven” California Competes Grants
• Unemployment Insurance: High Interest Payment Due on Unemployment Loans Highlights Need for Reform

---

Budget Overview

Administration Expects Economic Growth to Moderate, But Federal Policy Changes Present a Major Risk 

The administration’s economic outlook is an important aspect of the budget because aggregate changes in economic indicators, such as jobs and wages, affect how much revenue the state will generate. Overall, the governor’s updated outlook expects growth in major indicators to moderate in the near-term. For example, total nonfarm jobs are projected to increase by 0.8% in 2025 and 0.6% in 2026, following a slightly stronger 1% growth rate in 2024. Similarly, average wages are expected to rise by 3.4% and 3.7% in 2025 and 2026, respectively, after much stronger growth (6.4%) in 2024, due to strong gains in the relatively high-paying information, professional and business services sectors. Growth in personal income, which includes wages as well as other sources of income, such as investment income, is projected to follow a similar pattern. The administration’s outlook also expects growth in overall inflation to continue to moderate, falling to more typical annual growth of between 2% to 2.5%.

The governor’s budget notes that policies expected from the incoming federal administration pose the most immediate threat to California’s economic outlook. Proposals to establish broad tariffs and launch massive attacks on immigrant communities, for example, would have a devastating impact on Californians across the state and would harm the state’s economy.

Many Californians Continue to Struggle to Make Ends Meet and Federal Policies Will Likely Increase Hardship

While the administration’s outlook is useful for understanding how economic conditions might impact budget revenues, it’s also important to consider how economic conditions are affecting Californians with low incomes, who count on programs and services funded by the budget. In recent years, persistently high inflation has hit families and individuals with low incomes especially hard as price increases have risen the most for food, housing, and other necessities that make up most of their spending. As a result, millions of people across California continue to struggle to afford basic needs every day. Over 7 million Californians — nearly 1 in 5 state residents — were living in poverty last year, and poverty rates for Black and Latinx Californians were almost twice as high as for white Californians, the direct result of historic and ongoing racism. Additionally, staggering inequities in economic well-being between women and men persist, and are especially pronounced for women of color. Policy decisions expected from the incoming federal administration and leaders in Congress, including deep cuts to vital services that are supported with federal funds, are likely to increase economic hardship and worsen racial and gender inequities.

Proposed Budget Reflects a $16.5 Billion Improvement in the Revenue Outlook

The governor’s budget proposal assumes that state General Fund revenues across the three-year budget window — covering fiscal years 2023-24 through 2025-26 — will be $16.5 billion higher than projected when the 2024-25 budget was enacted, before taking into account the administration’s tax policy proposals. The improved outlook is mainly driven by a $12.6 billion increase in projected personal income tax revenues across the budget window. The increased revenue projections reflect higher-than-expected revenue collections since the 2024-25 budget, an upgrade of the economic forecast, higher wage growth in technology sectors, and the strong stock market. However, the budget summary notes that the forecast is based on current state and federal laws, and the outlook could deteriorate if the federal government enacts policies that negatively impact the economic outlook. The outlook is also subject to other external risks, such as stock market volatility and global events.

The administration’s revenue projections are somewhat higher than the Legislative Analyst’s Office’s (LAO) estimate. In the LAO’s  November Fiscal Outlook, the office estimated General Fund revenues could be about $7 billion higher than the 2024-25 budget estimate. The LAO also noted that revenues have been performing better than the broader economy, likely due to stock market-related increases in income among higher-income Californians. The office cautioned that recent improvements in revenue may not be sustainable without broader economic improvements. 

It’s important to keep in mind that both the governor’s and the LAO’s revenue estimates are projections and are subject to change as additional information becomes available. There is always a high degree of uncertainty in forecasting future revenues, and the picture may very well look better or worse by the time the 2025-26 budget is being finalized, depending on changes in economic conditions and their impact on state tax collections.

Governor Proposes No Major Revenue Increases, But Expands Film Tax Break

Given the many challenges Californians face with the costs of living and the many unmet needs in the state, policymakers will need to substantially raise ongoing revenues to ensure that state residents can make ends meet. However, the governor’s proposal does not contain tax policy changes that would significantly increase state revenues to meet the level of needs existing in the state or to account for potential federal threats to vital public supports that could harm California residents as well as the state’s budget.

During the 2024-25 budget process, facing a large budget shortfall, state leaders enacted a package of budget solutions that included some tax policy changes to increase state revenue, but the majority of that revenue increase was related to temporary corporate tax benefit limitations set to expire by the 2026 tax year at the latest. Overall, permanent revenue increases made up less than 1% of the budget solutions. 

Notably, the state loses tens of billions of dollars on corporate and personal income tax breaks each year. However, these costly tax breaks are not reevaluated in budget deliberations and many continue every year without scrutiny. Some of the largest of these tax breaks largely benefit highly profitable corporations and wealthy individuals and make the state’s tax system less equitable.

The governor’s proposal includes the following tax policy proposals:

The estimated combined impact of these tax policy proposals is a $186 million increase in state revenues for 2025-26. In future years, as the budget impact of the proposed film credit expansion increases, the combined impact of the tax policy changes could be a net revenue loss or the impacts could be roughly offsetting and have little net revenue impact.

To ensure that the state can support the investments needed to create a California where everyone has the resources they need to thrive, policymakers should enact policies to ensure profitable corporations pay their fair share in taxes and end or reform inequitable tax breaks that disproportionately benefit wealthy Californians. Additionally, they should increase transparency by requiring better public data on the impacts of tax breaks and creating a process to regularly evaluate these breaks to determine whether they should be renewed, modified, or eliminated.

Governor’s Budget Proposal Includes Withdrawal of Reserve Funds, Proposes Changes to Reserves Policies

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

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

Prop. 2 also established a new state budget reserve for K-12 schools and community colleges called the Public School System Stabilization Account (PSSSA). The PSSSA requires that when certain conditions are met, the state must deposit a portion of General Fund revenues into this reserve as part of California’s Prop. 98 funding guarantee (see section on Prop. 98).

In order to access the funds in the BSA and PSSSA, the governor must declare a budget emergency — an action that was taken in the enacted current-year (2024-25) budget in response to the state’s projected budget deficit.

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

The governor’s proposal, including updated estimates from the budget enacted in mid-2024, projects 2024-25 reserve levels at $18.0 billion in the BSA; $1.2 billion in the PSSSA; $0 in the Safety Net Reserve; and $8.3 billion in the SFEU for total reserves of $27.5 billion.

The governor’s January proposal projects $17 billion in reserves at the end of 2025-26. Specifically, the proposal:

• Includes a $7.1 billion withdrawal from the BSA and, due to other required adjustments, leaves the remaining BSA balance at $10.9 billion;
• Projects the PSSSA balance at $1.5 billion;
• Leaves the Safety Net Reserve with a zero balance; and
• Projects an SFEU balance of $4.5 billion.

Administration proposes changes to reserve policies

The administration also proposes to revise the state’s reserve policies under Prop. 2 (2014) and Prop. 4 (1979), which created an arbitrary spending cap known as the Gann Limit. The administration contends that these changes are needed in order to ensure the state can adequately build up reserves during periods of strong revenue growth to offset years of revenue decline.

Under Prop. 2, deposits into any reserve, including the BSA, are counted as expenditures under the spending cap. This means that savings for future budget needs are treated as spending in the year the deposit is made. As a result, in years when revenues are strong, the required deposit into the BSA could put the state at risk of exceeding the spending cap since the deposit is counted as part of the state’s overall expenditures. In order to address this situation, the governor proposes to exempt annual BSA deposits from the spending cap so that they no longer count as spending. 

Prop. 2 also set a maximum size of the BSA at 10% of state General Fund revenue. The governor proposes to increase the maximum BSA deposit from 10% to 20% of General Fund revenues to allow state leaders to grow reserves to higher levels during periods when revenues are strong.

Health

No Health Care Cuts in Governor’s Budget Proposal

Access to health care is necessary for everyone to be healthy and thrive. Medi-Cal, California’s Medicaid program, provides free or low-cost health care to over one-third of the state’s population. This program covers a wide range of services to Californians with modest incomes, and many children, seniors, people with disabilities, and pregnant individuals rely on it.

Medi-Cal Budget Highlights

The governor’s proposed budget upholds recent Medi-Cal investments that have expanded access, improved coverage, and increased eligibility, including comprehensive Medi-Cal coverage for eligible adults regardless of immigration status.

The proposed budget reflects the following spending in Medi-Cal:

• $174.6 billion ($37.6 billion General Fund) in 2024-25. This reflects a $2.8 billion increase in General Fund spending compared to the 2024 Budget Act, which is mainly due to higher enrollment and pharmacy costs. The budget accounts for the extension of “unwinding” flexibilities through June 30, 2025, which reduce Medi-Cal disenrollment by streamlining eligibility renewals. 
• $188.1 billion ($42.1 billion General Fund) in 2025-26. This represents a $4.5 billion increase, which is mostly because of escalating program costs and reduced support from the Managed Care Organization Tax (see Proposition 35 section).

State leaders can take additional steps to ensure that all Californians, regardless of race, age, disability, or immigration status, can access and maintain the critical health coverage they need to be healthy and thrive. These policy solutions include:

New Health Investments

Although the proposed budget does not introduce bold new investments to strengthen Medi-Cal, it includes these smaller but impactful actions:

Covered California

For those who earn too much to qualify for Medi-Cal, Covered California — the state’s health insurance marketplace established through the Affordable Care Act (ACA) — serves as a vital resource. About 1.8 million Californians rely on the state’s health insurance marketplace for their health coverage.

The governor’s proposed budget does not include additional funding to enhance affordability or access through Covered California. Policymakers should consider the following steps:

Looming Threats to Health Care Access

California’s health care system faces significant challenges as the incoming Trump administration and a Republican-controlled Congress signal plans to cut health care funding in favor of tax cuts for corporations and the wealthy. Medi-Cal, which accounts for almost two-thirds (64.4%) of all federal funding flowing through California’s state budget, is particularly vulnerable to federal cuts.

Efforts to repeal or undermine the Affordable Care Act (ACA), coupled with plans to significantly reduce federal Medicaid funding, have raised serious concerns about the future of health care access for millions of Californians with low and middle incomes. Despite these looming threats, state leaders have adopted a cautious “wait-and-see” approach, rather than taking proactive measures to bolster or expand access to critical health services.

Rather than waiting for federal decisions to unfold, state leaders should proactively develop contingency plans and explore state-level solutions to safeguard health care coverage. Enacting policies that ensure profitable corporations pay their fair share in taxes and ending tax breaks that disproportionately benefit the wealthiest Californians would provide revenue to help support critical health care programs (see tax policy section). By acting now, California can mitigate potential harm and reaffirm its commitment to equitable and accessible health care for everyone.

State Budget Adapts to MCO Tax Changes Under Proposition 35

Proposition 35, which voters approved in November 2024, significantly changed how state policymakers can use revenue from the Managed Care Organization (MCO) tax. State leaders have historically relied on much of this revenue to reduce or offset General Fund spending on Medi-Cal. While Prop. 35 allows policymakers to continue using a portion of this funding for that purpose, the amount has been reduced and will decrease further starting in 2027.

The budget reflects the following MCO tax revenue to offset General Fund spending to support existing Medi-Cal services:

• $7.9 billion in 2024-25, 
• $4.4 billion in 2025-26, and 
• $3.3 billion in 2026-27.

Compared to the 2024 Budget Act, this reflects an increase of $1 billion in 2024-25 and decreases of $2.2 billion in 2025-26 and $1.8 billion in 2026-27. Notably, recent amendments to increase the MCO tax revenue, which the federal government approved in December 2024, are not subject to the restrictions imposed by Prop. 35.

Prop. 35 overturned several spending initiatives in the 2024 Budget Act that were intended to be funded with MCO tax revenue, including:

Prop. 35 requires policymakers to consult with an advisory committee to finalize the spending plan for MCO tax revenue. However, the measure specifies funding formulas for key health care investments. As such, the budget allocates the following MCO tax dollars for 2025 and 2026:

• $741 million for primary care.
• $575 million for specialty care.
• $355 million for emergency care.
• $300 million for behavioral health facilities.
• $245 million for community and outpatient procedures.
• $150 million for Designated Public Hospitals.
• $90 million for abortion and family planning services.
• $75 million for graduate medical education. 
• $75 million for the Medi-Cal workforce.
• $50 million for ground emergency medical transportation.

A major challenge with Prop. 35 is that the MCO tax may not be a sustainable, long-term funding source. The federal government — which must approve the state’s MCO tax structure to ensure it complies with Medicaid financing rules — had already indicated that it may revise the rules governing state MCO taxes. Changes in the federal administration add another layer of uncertainty for this funding. Any shifts in federal policies or delays in approval could disrupt California’s ability to generate and allocate MCO tax revenue. These potential challenges highlight the need for policymakers to develop contingency plans to protect Medi-Cal funding.

State Leaders Launch New Behavioral Health Initiative, Sustain Other Efforts

Millions of Californians rely on county services for mental health and substance use treatment, known as behavioral health care. Many of these individuals face housing insecurity, justice system involvement, or child welfare placement. Strengthening the state’s behavioral health system is essential to guaranteeing that every Californian can access the care they need regardless of race, age, gender identity, sexual orientation, or where they live. In recent years, state policymakers have launched various initiatives to transform California’s behavioral health system with the goal of improving access.

Launch of BH-CONNECT

After years of planning, California is officially launching Behavioral Health Community-Based Organized Networks of Equitable Care and Treatment (BH-CONNECT). This multi-year initiative aims to improve access to behavioral health services for Medi-Cal members with significant needs, focusing on children and youth involved in child welfare, people involved in the justice system, and individuals at risk of or experiencing homelessness. 

Funding for BH-CONNECT includes $8 billion in state and federal resources over four years. A portion of this funding was secured through a recently approved federal Medicaid waiver running from January 1, 2025 to December 31, 2029. Some components of BH-CONNECT will operate under the federal waiver, while others are funded entirely through state resources. Implementation will include both statewide and county opt-in programs.

Major components of BH-CONNECT include:

• Workforce Investments: $1.9 billion to recruit and retain behavioral health professionals through scholarships, loan repayment programs, recruitment incentives, and training initiatives.
• Transitional Rent Assistance: Up to six months of rental or temporary housing support for eligible Medi-Cal members transitioning from institutions, congregate settings, or homelessness (see homelessness section).
• Support for Children and Youth: Enhances care and resources for children and youth in child welfare who need speciality mental health services.
• Incentives for Counties: Financial rewards for behavioral health plans that improve care access and reduce disparities for Medi-Cal members.
• Community Transition Services: Continuous support for individuals reintegrating into communities after long-term institutional care.
• Short-Term Inpatient Psychiatric Care: New flexibility for Medi-Cal funding for short-term mental health care provided in certain residential treatment settings.
• Medi-Cal Coverage for Evidence-Based Practices: Includes Assertive Community Treatment (ACT), Coordinated Specialty Care for First Episode Psychosis, Supported Employment, and Community Health Worker Services, available at county option.
• Clarified Existing Services: Guidelines for therapies like Functional Family Therapy and Parent-Child Interaction Therapy to ensure broader access for children and youth, available at county option.

The federal Medicaid waiver is an essential source of funding for BH-CONNECT. While the incoming federal administration has the authority to rescind or modify the waiver or withhold funding, doing so would require navigating complex legal and administrative processes. In addition, such actions could provoke legal challenges from state officials and advocacy organizations.

Proposition 1 Updates

Proposition 1, which voters approved in March 2024, is a two-part measure that amended California’s Mental Health Services Act and created a $6.38 billion general obligation bond to fund behavioral health treatment, residential facilities, and supportive housing for veterans and Californians with behavioral health needs.

Last year, state leaders allocated funding to begin Prop. 1 implementation, including $85 million($50 million General Fund) for FY 2024-25 for county behavioral health departments, which provide mental health and substance use disorder services to Californians through Medi-Cal and other programs. The administration proposes an additional $93.5 million total funds ($55 million General Fund) for FY 2025-26 for Prop. 1 implementation at the county-level.

Other Behavioral Health Initiatives

The governor’s proposed budget also continues other behavioral health initiatives that were launched in previous budget agreements, including:

Investing in the state’s behavioral health system is crucial for supporting Californians who are coping with mental health conditions or substance use disorders. State leaders should continue to invest in the behavioral health system and address the behavioral health workforce shortage. Policymakers can also invest in efforts to make sure that the behavioral health workforce better reflects the diversity of all Californians, including their gender identity and sexual orientation. These investments are vital to creating a robust, inclusive system that meets the needs of California’s diverse population.

Housing & Homelessness

Governor’s Budget Fails to Address Housing Costs for Low-Income Californians

Every Californian deserves a safe, affordable home, regardless of their background—an attainable reality in a state as resourceful as California. State policymakers have made notable progress in streamlining housing development and invested modestly in affordable housing over the last six years. Despite this, and the growing housing pressures California renters are facing, state General Fund dollars comprised less than 20% of funding that supported affordable housing and homeownership attainment between 2019 and 2023. Housing programs already experienced deep cuts totaling over $1 billion in the 2024 budget and this year the administration proposes completely abandoning any new state investments for housing.

Unlike the previous six years, the administration does not provide additional state funds for affordable housing development or homeownership attainment. Select key programs that are proposed to NOT receive additional state funding include:

Proposition 1 (2024) is providing roughly $2 billion in bond funds for permanent supportive housing projects for veterans and Californians with behavioral health conditions through the new Homekey+ program, but these are not state General Fund dollars which are crucially needed to meet the housing needs of all struggling Californians.

Prioritizing Housing Accountability and Administrative Reform

The administration states their intent to work with the Legislature to focus on policies that lower housing costs and hold jurisdictions accountable for meeting state housing requirements. This year’s focus is on promoting policies that support efficient land use, reduce costs through streamlining, enhancing accountability, and prioritize housing near transit. 

The governor is also proposing to establish the California Housing and Homelessness Agency which is intended to improve administrative integration and create alignment among housing initiatives to enhance housing planning, production, and preservation while strengthening the homelessness response system. Reorganization details for this agency — and the parallel proposed new Consumer Protection Agency — will be released in the spring. 

Accountability, coordination, and streamlining are important to increase the overall housing supply, but these alone are not adequate enough to address the current housing hardships many low-income Californians and renters are facing. These interventions must be paired with continuous investments to support affordable housing for the lowest income levels, alongside policies that help keep people in their homes such as strong tenant protections, anti-price gouging laws, and rental assistance.

Governor Pushes Homelessness Accountability with No New Funding

All Californians deserve access to a home that ensures dignity and health. Yet, California’s 2024 point-in-time count showed over 187,000 Californians experiencing homelessness on a single night — with over 65% living in unsheltered spaces, including on the streets of the communities they had homes, and in vehicles and other places not meant for habitation. While California has made notable progress in investing in solutions to end homelessness since 2019, it has been overwhelmingly one-time allocations that are facing critical funding cliffs. Now, the proposed budget provides no new meaningful or ongoing state funding to solve homelessness across the state in fiscal year 2025-26 or beyond. The primary additional investment is $100 million in 2025-26 for Encampment Resolution Grants which was allocated in the 2024 Budget Act. Other primarily administrative highlights include:

HHAP and Funding Accountability

The governor maintains previous budget allocations for the Homeless Housing, Assistance and Prevention (HHAP) Grant program which awards local flexible funds to address homelessness dependent on various coordination and accountability measures. However, they propose to ramp up accountability efforts around HHAP implementation through increasing scrutiny on existing funds and metrics, reviewing local government programs, holding regional convenings, and enforcing regional coordination. The administration additionally states their intent to work with the Legislature to create stricter requirements for any new homelessness investments, including requiring compliant Housing Element plans and state-aligned local encampment policies, giving funding priority to Pro-Housing Designated local governments, and reverting funds from localities that fail to meet requirements or metrics.

California Housing and Homelessness Agency

A new major proposal from administration is to establish the California Housing and Homelessness Agency which is intended to improve administrative integration and create alignment among housing initiatives to enhance housing development and preservation while strengthening the homelessness response system. Reorganization details for this agency — and the parallel proposed new Consumer Protection Agency — will be released in the spring.

Homelessness and Behavioral Health

Multiple behavioral health reforms are also underway that will serve people at risk of or experiencing homelessness with a behavioral condition (see behavioral health section). For example:

Economic Security

Budget Maintains, but Fails to Increase Investments, Despite Urgent Need and High Cost of Living

Despite a sizable budget shortfall last year, California was able to avoid many deep and harmful cuts to core anti-poverty programs in the FY 2024-25 budget, and the governor’s 2025-26 budget proposes to maintain core funding for these programs. However, the budget proposal fails to increase investments in economic security programs to meet the pressing needs of Californians struggling to make ends meet amid our state’s high cost of living. 

California continues to lead the nation with the highest poverty rate, amounting to 7.3 million Californians living in poverty in 2023, reflecting the fact that living costs continue to outpace incomes and programs that help Californians meet basic needs fall short (see economic outlook section).  And yet, hardship is likely to worsen for millions of Californians across the state. The incoming federal Administration and leaders in Congress are expected to make deep cuts to programs that provide vital supports to families and individuals with low incomes (which are largely supported with federal funds) to fund trillions of dollars in tax cuts for the extremely wealthy and corporations. 

Despite this threat and existing challenges facing Californians, the governor’s proposed budget:

• Makes no new investments to increase or expand refundable income tax credits like the CalEITC even though the need for additional cash support among Californians with low incomes remains high.  
• Proposes no meaningful increases to CalWORKs grants even though current grant levels put recipients at around 50% of the federal poverty line. 
• Includes no further plans to end restrictions on food assistance programs for excluded Californians. 
• Make no commitments to restore the cost of living adjustment for the SSP program despite the inadequacy of the current grant that many older adults and people with disabilities rely on. 
• Does not fund any new additional child care slots even though the demand for subsidized child care spaces outpaces availability.

Preserving current program levels, while critical, is not sufficient to bring down the poverty rate and help millions of Californians make ends meet. Aggressive investments that will require the state to raise new and sustainable revenues must be made in order to catch up from years of underfunding and ensure that all Californians can thrive.

Administration Preserves Refundable Tax Credits for Low-Income Californians, Makes No New Investments

California’s Earned Income Tax Credit (CalEITC), Young Child Tax Credit, and Foster Youth Tax Credit are refundable income tax credits that collectively help millions of families and individuals with low incomes pay for basic needs like food. These credits also help to promote racial and gender equity by boosting the incomes of Californians of color, immigrants, and women who are frequently blocked from economic opportunities and forced into low-paying jobs that fail to provide economic security.

The administration preserves the credits at current levels, but does not propose to make any new investments to increase or expand these tax credits. Yet the need for additional cash support among Californians with low incomes remains high.  Sustained inflation has hit families and individuals with low incomes especially hard and the share of Californians living in poverty rose last year so that nearly 1 in 5 state residents now lack the resources to afford basic needs. 

The administration also proposes just $10 million for refundable tax credit outreach, education, and free tax preparation assistance grants, which help community based organizations (CBOs) provide on-the-ground and online linguistically and culturally competent services to tax filers, including support applying for and renewing Individual Taxpayer Identification Numbers (ITINs), at no cost to eligible Californians. This funding is down by half from $20 million provided in 2023-24 and $12 million in 2024-25. Severely reduced funding will diminish the capacity of CBOs to provide essential outreach, ITIN, and tax-filing services in communities throughout the state and could increase the likelihood that tax filers turn to predatory and costly for-profit tax preparers.

Proposed Budget Includes Only Modest Required Increase in CalWORKs Grants

The California Work Opportunity and Responsibility to Kids (CalWORKs) program is a core component of California’s safety net for families with low incomes. The program helps over 650,000 children and their families, who are predominantly people of color, with modest cash grants, employment assistance, and critical supportive services. 

The governor’s budget:

Governor Upholds Commitments to Food Assistance Programs

California has great wealth and resources, and no individual should experience hunger. As of 2023, California had lower food insecurity rates than the national average, a testament to the progress achieved by recent policy expansions that combat hunger. Building on these, the budget proposal:

• Includes $106.3 million in additional ongoing Proposition 98 General Fund to fund the universal school meals program;
• Maintains commitment to expand the California Food Assistance Program (CFAP) to include undocumented adults age 55 and older beginning in October 2027;
• Maintains commitment to roll out the CalFresh Minimum Benefit Pilot, which would increase the CalFresh minimum assistance amount from $23 to $50 for pilot participants. The program is projected to begin in October 2025.

However, the governor does not propose any additional support for other nutrition assistance programs, nor does he propose fully ending the exclusion of undocumented Californians of all ages from CFAP. While food insecurity rates may be improving, many Californians still struggle to put food on the table. The new Trump administration and Congressional leadership have also signaled that they intend to cut and restrict access to federal food assistance. California state leaders need to invest in higher benefits and reduce eligibility barriers to help ensure no Californian goes hungry.

No Significant Investments in Services for People with Disabilities and Older Adults

All Californians should be included, supported, and treated with dignity in their communities regardless of their age, ability, race, gender, or economic status. However, Californians with disabilities and older adults face significant barriers, with increasing risks of not meeting their basic needs and becoming homeless. While California provides access to several essential programs and services to help these communities manage their needs, additional support is needed to ensure the unique challenges of our aging population and people with disabilities are not exacerbated. 

The governor’s budget:

• Maintains the current investment in the SSI/SSP programs, the largest cash assistance program serving low-income older adults and Californians with disabilities, but does not allocate any additional funding or make commitments to closing the gap between grants and the federal poverty level. 
• Does not include funding for the Home Safe Program, which serves individuals under Adult Protective Services to prevent and address homelessness. Lack of funding will cause the near-term elimination of program resources (see homelessness section).

Additionally, the governor’s budget does not include MCO tax revenue for long-term supports for children with complex medical needs, older adults, and people with disabilities that were deprioritized with the passing of Proposition 35 (see MCO tax section). The proposal does elevate the upcoming release of the Master Plan for Developmental Services, which may provide an opportunity to close service gaps and better support Californians with developmental disabilities.

Amid Union Negotiations, Governor Maintains Prior Child Care Commitments

Thousands of families in California rely on subsidized child care and development programs administered by the California Department of Social Services (CDSS) as a critical resource for supporting their families to grow and thrive. The 2025-26 budget sustained the administration’s commitment to recent improvements to California’s child care system such as reforming family fees and advancing an alternative methodology for child care provider reimbursements. However, the system is still falling short for many families and child care providers. Without access to a child care subsidy, a single mother of an infant and a school-age child in California will spend, on average, 61% of her income on child care. Meanwhile, the number of subsidized child care spaces does not meet demand, meaning that thousands of families face prohibitively high child care costs. Moreover, California child care provider wages continue to fall below the living wage, pointing to the urgent need for child care provider rate reform. The administration therefore has an opportunity to advance progress toward creating an equitable child care system that meets the needs of all families and reflects the vital role of child care providers.

The governor’s proposed budget:

Governor Maintains, Does Not Increase, Support for Immigrant Californians

Immigrants and their families are deeply ingrained in the state’s social fabric. They are members of the state’s workforce, pay taxes, attend schools, own businesses, and raise families who invest in local communities. California has the largest share of immigrant residents of any state. Over half of all California workers are immigrants or children of immigrants, and more than 2 million Californians are undocumented, according to estimates. Undocumented immigrants in California make significant contributions to state and federal revenues, contributing $8.5 billion in state and local taxes in 2022, despite their exclusion from most public benefits.

State leaders have made notable progress in recent years working towards a California for all where all people have access to economic opportunity and essential services, regardless of immigration status. The governor’s budget proposal maintains key recent commitments to immigrant Californians. Specifically, the 2025-26 proposed budget:

However, with the incoming federal administration, it is more critical than ever that California ensures the safety and well-being of all people, especially undocumented immigrants. The 2025-26 proposed budget does not include any additional funding to protect and support the state’s immigrant communities, such as funding to:

• Bolster legal services programs that protect children, students, workers, and families.
• Strengthen the safety net for California workers who lose their jobs and are undocumented, such as ensuring these workers can access unemployment insurance benefits.

In a special session called for by the governor, legislators have reportedly agreed to — but not yet approved — $25 million in funding for legal resources for potential fights with the incoming federal administration plus an additional $25 million advocates and the state Senate called for to defend immigrants against deportation, detention, and wage theft. Given the likelihood of federal threats to immigrant communities in California, state leaders will need to take bold action and make investments that ensure all Californians, regardless of immigration status, feel safe and have the resources they need to thrive.

Governor Does Not Provide Needed Support to Domestic Violence Survivors

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

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

However, anticipated cuts to VOCA at the federal level would result in a roughly 45% cut to state grants for organizations that support survivors of crime, decimating the funding of many of these organizations who rely entirely on VOCA funding to provide these critical services.

Additionally, the last round of prevention grants ran out at the end of 2024. Prevention efforts take time, and organizations doing this critical work cannot commit to long term programming without permanent, ongoing funding.

In the January budget proposal, the governor:

Education

Transitional Kindergarten and State Preschool Continue Expansion Plans

The California Department of Education (CDE) hosts two early learning and care programs: Transitional Kindergarten (TK) and the California State Preschool Program (CSPP). CSPP provides preschool to children ages 3 and 4 for families with low to moderate incomes. TK serves 4-year-olds, and eligibility is based on age alone in public schools and is not dependent on family income. Together, CSPP and TK are cornerstones of CDE’s Universal Preschool plan intended to bring more early learning and care options to 3-and 4-year-olds in California. However, as California strives to create a mixed delivery system that centers the needs of families, the administration has the opportunity to spend resources and implement policies in a way that integrates CSPP and TK with the broader early learning system to best support families with young children. 

The governor’s proposed budget:

Budget Proposal Shows Significant Growth in the Prop. 98 Guarantee

Approved by voters in 1988, Prop. 98 constitutionally guarantees a minimum level of annual funding for K-12 schools, community colleges, and the state preschool program. The Prop. 98 guarantee tends to reflect changes in state General Fund revenues, and revenue estimates consequently update the minimum guarantee funding levels. The 2025-26 proposed budget reflects upward adjustments in the minimum guarantee estimates and updates required deposits into the Prop. 98 reserve — the state budget reserve for K-12 schools and community colleges. Prop. 98 updated estimates and proposed adjustments include the following:

• Under the governor’s proposal, the 2025-26 Prop. 98 guarantee is $118.9 billion. This reflects a $3.6 billion growth from the prior year relative to the 2024-25 enacted budget levels.
• Updated Prop. 98 levels also include an upward revision of the guarantee in 2024-25, growing to $119.2 billion. Compared to the 2024-25 enacted budget from June of last year, this update shows a growth of $3.9 billion. However, the governor is proposing to fund the guarantee at a lower level: $117.6 billion in 2024-25. 
• For the 2023-24 fiscal year, the guarantee’s level is maintained at $98.5 billion. Since the guarantee was suspended with the 2024-25 budget, the 2022-23 level does not change.

The governor’s budget also includes deposits into the Public School System Stabilization Account (PSSSA). In 2024-25, there’s a required deposit of $1.2 billion that replaces a discretionary deposit of $1.1 billion included in the 2024-25 budget. Moreover, an additional mandatory deposit of $376 million is included in the proposal. After all of these adjustments, the revised balance in the reserve is $1.5 billion at the end of 2025-26 (see reserves section).

Budget Proposal Boosts Funding to K-12 Schools Through New Block Grant

The largest share of Proposition 98 funding goes to California’s school districts, charter schools, and county offices of education (COEs), which provide instruction to 5.9 million students in grades kindergarten through 12. Funding flows primarily through the Local Control Funding Formula (LCFF), which provides school districts, charter schools, and COEs a base grant per student, adjusted to reflect the number of students at various grade levels, as well as additional grants for the costs of educating English learners, students from low-income families, and foster youth. Other funds flow through a number of categorical programs such as the Expanded Learning Opportunities Program, and special education, among others. 

The governor’s budget proposal would boost funding to schools through a new discretionary block grant, in addition to a cost-of-living adjustments (COLA), and increase funding for several other programs enacted in prior budgets. Specifically, the governor’s proposed budget:

Proposed Budget Enhances Technology and Data Systems at the Community Colleges

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

The 2025-26 spending plan proposes to support technology and data upgrades, fund a 2.43% cost-of-living adjustment (COLA), and offers support to expand credit for prior learning policies. Specifically, the proposed spending plan:

Proposed Budget Maintains Deferrals of Investments for the CSU and UC Systems

California supports two public four-year higher education institutions: the California State University (CSU) and the University of California (UC). The CSU provides undergraduate and graduate education to nearly 454,000 students at 23 campuses, and the UC provides undergraduate, graduate, and professional education to more than 294,000 students across 10 campuses.

The 2025-26 budget proposal maintains the planned deferral of funding increases to the UC and CSU system. This funding was part of multi-year investments established through agreements between the administration and the CSU and UC systems in 2022. These agreements (also known as compacts) outline major goals, including increasing access, improving student success and advancing equity, increasing affordability, improving collaboration among systems of higher education, and supporting workforce preparedness.

For the CSU, the governor’s budget:

• Maintains planned deferral of $252 million General Fund dollars from 2025-26 to  2027-28.

For the UC, the budget proposal:

• Maintains planned deferral of $240 million General Fund dollars from 2025-26 to 2027-28 as part of the multi-year compacts.
• Maintains planned deferral of $31 million General Fund dollars from 2025-26 to 2027-28 that would support the UC in increasing the number of resident undergraduate students.

Other higher education proposals in the spending plan include:

• 7.95% reduction — $375 million for CSU and $396 million for UC — in ongoing General Fund support for UC & CSU systems beginning in the 2025-26 fiscal year that were planned as part of the current year’s budget agreement.

Spending Plan Fails to Propose Solutions to Fund Cal Grant Reform

Students pursuing postsecondary education confront significant hardship to afford basic necessities, and are often forced to make difficult decisions that impact their college experience and degree completion. Students may also be forced to abandon their postsecondary education plans due to financial strain. These outcomes underscore the importance of providing state support to ensure students have the resources to complete their education.

The governor’s budget does not propose any budgetary actions to ensure Cal Grant reform is funded in 2025 even amidst a projected moderate surplus. The Cal Grant is California’s financial aid program for low-income students pursuing postsecondary education in the state. Grants made available through this program do not need to be paid back. These grants support students by providing financial assistance so they can afford the costs of college attendance, including meeting their basic needs such as housing, food, transportation, and child care. 

The 2022-23 budget included a plan to reform the Cal Grant program. This reform would reach thousands of new students who were previously not eligible and would also allow more students to qualify for CalFresh, freeing up resources for institutions to support students with other non-tuition costs. However, the plan will only be implemented if sufficient General Fund dollars are available in spring of 2025. The proposed spending plan does not include any actions to fulfill this commitment. Meeting this commitment can ensure more students have the financial means to meet their basic needs and be able to complete their chosen educational programs.

Other financial aid proposals in the budget:

• Maintains an agreement from the 2024 Budget Act to reduce funding for the Middle Class Scholarship (MCS) program, providing $572 million General Fund dollars. The MCS provides awards to students to help them cover the total cost of attendance at the University of California and California State University systems. 
• Includes a $50 million one-time General Fund to support the Golden State Teacher Grant Program. This program provides awards to students in professional preparation programs and those who are working toward a teaching credential.

Justice System

Spending Plan Projects a Larger Prison Population in the Near Term Due to Proposition 36

Roughly 91,000 adults convicted of a felony offense are serving their sentences at the state level, down from a peak of 173,600 in 2007. This sizable drop in incarceration is largely due to a series of justice system reforms adopted by state policymakers and the voters since the late 2000s, including Proposition 47, which California voters passed in 2014 (see Prop. 47 investments section).

Despite this substantial progress in reducing incarceration, American Indian, Black, and Latinx Californians are disproportionately represented in state prisons — a disparity that reflects racist practices in the justice system as well as the social and economic disadvantages that communities of color continue to face due to historical and ongoing discrimination and exclusion.

Voters’ decision to pass Prop. 36 last November is likely to further impact communities of color given longstanding patterns and practices in the justice system and the structural disadvantages that these communities continue to encounter. Prop. 36 increased penalties for certain drug and theft offenses, including by reversing some of Prop. 47’s sentencing reforms. For example, under Prop. 47, drug possession, petty theft, and shoplifting were generally misdemeanors. Under Prop. 36, these offenses can now be charged as felonies under certain circumstances.

However, even with the passage of Prop. 36, most of the justice system reforms adopted by state policymakers and voters over the past two decades remain in effect.

The governor’s administration projects that the state prison population will temporarily rise through 2025-26 due to Prop. 36. The number of adults incarcerated in state prison is projected to exceed earlier estimates by several hundred in 2024-25 and by 1,600 in 2025-26 due to the tougher sentencing laws put in place by Prop. 36. However, the administration also projects that the prison population will resume its long-term decline in subsequent years due to the offsetting impact of other justice system reforms that remain in effect.

In addition, the governor’s proposed spending plan:

Governor Estimates Proposition 47 Savings of $88 Million for Local Investments in 2025-26

Passed by voters in 2014, Prop. 47 reduced penalties for six nonviolent drug and property crimes from felonies to misdemeanors. As a result, state prison generally has not been a sentencing option for these crimes. Instead, people convicted of a Prop. 47 offense have served their sentence in county jail and/or received probation. However, with the passage of Prop. 36 last November, some of Prop. 47’s sentencing reforms have been reversed. Key changes enacted by Prop. 36 as well as their potential impact are described at the end of this section.

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

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

California has allocated $816 million in savings attributable to Prop. 47 since 2016. These funds have been invested in local programs that support healing and keep communities safe. For example, research 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. Individuals enrolled in these programs had a recidivism rate of just 15.3% — two to three times lower than is typical for people who have served prison sentences (recidivism rates range from 35% to 45% for these individuals).

The governor’s proposed spending plan estimates that Prop. 47 will generate an additional $88.3 million in savings due to reduced state-level incarceration — dollars that will be invested in local communities starting in the 2025-26 fiscal year. With these additional funds, Prop. 47’s total investment in California’s communities will exceed $900 million, up from the current $816 million.

With the recent passage of Prop. 36, voters increased penalties for certain drug and theft offenses, including by reversing some of Prop. 47’s sentencing reforms. For example, Prop. 36 allows simple drug possession, petty theft, and shoplifting to be charged as felonies in certain circumstances. Under Prop. 47’s rules, these crimes were generally misdemeanors.

If, as anticipated, the state prison population increases due to the longer sentences allowed by Prop. 36, the annual savings attributable to Prop. 47 would likely decline. As a result, funding for behavioral health treatment and other critical services — potentially totaling tens of millions of dollars each year — would be shifted back to the state prison system.

Workforce

Governor Proposes New Investments to Fund Master Plan for Career Education

In December 2024, the governor released a framework for the Master Plan for Career Education, which he called for through executive order in 2023 and will be published in early 2025. The purpose of this plan is to increase access to well-paid jobs by creating and strengthening education and training pathways to careers, including those that do not require college degrees. Additionally, the plan will aim to better align state education and workforce development programs with the emerging needs of businesses and the economy.

The governor’s proposed budget includes new spending to implement some provisions of the plan. Specifically, the governor:

• Proposes $100 million in one-time Proposition 98 General Fund for the California Community Colleges to expand Credit for Prior Learning and begin laying the foundation for the state’s first “Career Passport” (see community colleges section).
• Includes $5 million General Fund in 2025-26 and ongoing for California’s Government Operations Agency to establish an entity to coordinate resources and initiatives across TK-12 education, higher education, and state economic and labor agencies that align with the Master Plan.
• Proposes $4 million in one-time General Fund spending for the Labor and Workforce Development agency to support and analyze regional coordination for career education and training.

Outside of the Master Plan, the governor also includes:

• One-time funding of $17 million for the Regional Initiative for Social Enterprises (CalRISE) program. Originally created in 2022, this program provides financial and technical assistance to employment social enterprises. These enterprises provide jobs, training, and support to employees who face barriers to work, such as homelessness or previous incarceration.

Climate Change

Budget Allocates $2.7 Billion in Climate Bond Spending for 2025-26

As demonstrated by the devastating wildfires currently impacting Los Angeles County and other disasters in recent years, Californians are deeply impacted by the effects of climate change. While the climate crisis impacts all Californians, communities of color and low-income communities are often hit hardest due to historical and ongoing displacement and underinvestment.

The enacted 2024-25 budget included $12.8 billion (over a multi-year period) in climate-related budget “solutions” to help address the recent year’s estimated budget shortfall — including $6.6 billion in reductions, $1 billion in delays, and $5.2 billion in shifts to the Greenhouse Gas Reduction Fund (GGRF) and other special funds.

In November, California voters approved a $10 billion climate bond (Proposition 4) that the Legislature put on the ballot to support various projects including safe drinking water, wildfire, flood, and drought resilience, conservation, clean energy, and other climate-related activities. The bond includes funding for state-run projects as well as grants and loans to local governments, tribes, nonprofit organizations, and water and utility companies.

Prop. 4 specified that at least 40% of the total bond funds be allocated for projects that benefit vulnerable populations or disadvantaged communities, and at least 10% of the funds go to projects that benefit severely disadvantaged communities. The measure defines a disadvantaged community as one with a median household income less than 80% of the area average or statewide median household income. A “severely disadvantaged community” is defined as one with a median household income less than 60% of the area average or statewide median household income. The measure also defines a “vulnerable population” as a subgroup that “faces a disproportionately heightened risk or increased sensitivity to impacts of climate change and that lacks adequate resources to cope with, adapt to, or recover from such impacts.”

The governor’s budget proposes a $2.7 billion allocation plan of Prop. 4 funds for 2025-26 in the eight categories of projects authorized by the bond. This includes:

• $1.1 billion for safe drinking water and drought and flood resilience, with $11.1 million of the safe drinking water allocation dedicated to tribal water infrastructure;
• $325 million for wildfire prevention and mitigation;
• $286 million for biodiversity and nature-based solutions, including land and habitat conservation activities, and $9.4 million for tribal nature-based solutions grants — which may include ancestral land return, habitat restoration, ocean protection, and wildfire resilience;
• $286 million for outdoor access, including $190 million for new parks and park improvements in disadvantaged communities, as well as other park maintenance and outdoor recreation projects;
• $275 million for clean air and energy, including infrastructure to support offshore wind generation and backup energy generation during extreme weather events;
• $173 million for coastal resilience, including coastal land protection, sea-level rise mitigation and adaptation, and dam removal;
• $134 million for climate smart agriculture, including water efficiency, healthy soils, and invasive species projects; 
• $102 million for extreme heat mitigation, “with a focus on those most vulnerable to its impacts.”

Additionally, the governor proposes fund shifts of previously authorized climate spending from the General Fund ($273 million) and the Greenhouse Gas Reduction Fund ($32 million) to the climate bond. These shifts free up some General Fund and GGRF dollars for other investments while continuing to provide support for the previously approved programs.

Other Key Issues

Proposes Additional Funds for “New, Unproven” California Competes Grants

The governor’s budget proposes $60 million in one-time General Fund to award new California Competes grants in 2025-26. This grant program was created in the 2021-22 budget to benefit businesses that cannot fully benefit from the California Competes Tax Credit, which reduces the taxes owed by businesses that meet certain hiring and investment targets. Last year, the Legislative Analyst’s Office recommended against providing additional funding for the grant program in part because the program is a new, unproven model lacking rigorous research on the effectiveness of the grants.

High Interest Payment Due on Unemployment Loans Highlights Need for Reform

The governor’s proposed budget includes $634.3 million General Fund to pay the interest due on over $20 billion in outstanding unemployment insurance loans from the federal government. The 2024-25 budget had included $50 million from the Employment Training Fund to pay a portion of this interest due in 2025-26. However, the governor is now proposing not to draw on that fund because it would require cuts to existing programs supported by the fund.

The total amount in California’s outstanding unemployment insurance loans is expected to grow in coming years, as the taxes paid by businesses fall significantly short of what is needed to cover the cost of the unemployment benefits their workers need. Consequently, the state will likely see interest payments on these loans rise to about $1 billion annually in coming years. This significant, ongoing cost — which the state traditionally pays for out of the state’s General Fund — will take crucial resources away from addressing Californians’ need for affordable housing, child care, and other essentials, and points to the need for state leaders to overhaul California’s broken unemployment insurance system. 

The fundamental problem with the current unemployment insurance system is that for decades state policymakers haven’t required businesses to pay the true cost of the unemployment benefits their workers need. As a result, California has had to borrow money from the federal government to pay for those benefits in every recession since 1980. Under federal law, businesses are required to gradually pay back the principle on those loans, while the state has paid the interest. However, the unemployment insurance system is so fundamentally broken, experts expect California to be stuck in a perpetual cycle of debt unless state leaders modernize how the system is funded. Dramatically reforming the financing of these benefits is necessary to not only prevent significant future debt, but also to make it possible to strengthen unemployment benefits so they better support all Californians who lose their jobs as they seek new employment.