The legislative process — also known as the policy bill process — provides a key pathway through the state Legislature for Californians who want to change state law.
Each year, members of the state Assembly and Senate collectively introduce thousands of bills that move, partially or all the way, through the legislative process. These bills propose changes to one or more of California’s nearly 30 state codes — changes that take effect only if a bill is passed by both houses and signed by the governor.
Proposals to amend the state Constitution also move through the legislative process. While Assembly and Senate constitutional amendments do not require the governor’s signature, they do need voter approval in order to take effect.
The legislative process operates according to rules outlined in the state Constitution, in state law, and in two-house agreements (“joint rules”) adopted by the Assembly and Senate at the outset of each two-year legislative session.
Written and unwritten rules that are unique to each house as well as to various committees within each house — and that can change from year to year — also shape the legislative process with opportunities for public involvement.
It is important to highlight that the state budget process provides a separate pathway through the Legislature for changing state law (through budget-related “trailer bills”). Compared to the legislative process, the state budget process has distinct rules, deadlines, and — in some cases — decision-makers. Advocates typically use both the state budget process and the legislative process to advance their policy goals. However, the remainder of this guide focuses exclusively on the legislative process.
Opportunities for Public Engagement in the Legislative Process
The public has many opportunities to engage with state policymakers during the legislative process. For example, members of the public can:
Suggest bill ideas to members of the Legislature.
Build/renew relationships with lawmakers and their staff in order to develop familiarity and trust — which is critical to securing bill authors and advancing legislation.
Meet with lawmakers and their staff as well as with members of the governor’s administration to make the case for legislation and address any concerns.
Write letters to committees and individual legislators sharing opinions about bills that have been introduced.
Attend legislative committee hearings to share opinions about bills during public comment periods.
Urge the governor to sign or veto legislation.
Policy Committees
Assembly and Senate policy committees consider the policy implications of a bill. Each house’s leadership assigns bills to policy committees based on subject matter and other factors. Bills may be reviewed by a single policy committee in each house or by multiple policy committees.
The state Senate has more than 20 standing policy committees, and the Assembly has over 30. Examples include the Assembly Education Committee and the Senate Revenue and Taxation Committee. Bills that are approved at this stage — potentially with amendments — go to the appropriations committee for further review.
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Appropriations committees estimate the cost of bills. If the cost meets or exceeds certain thresholds, the bill generally is placed on the committee’s suspense file, which is essentially a “holding pen” for bills that will receive additional scrutiny. The dollar thresholds are relatively low in both houses. In the Senate, the threshold ranges from $50,000 to $150,000, depending on which state fund the money would come from. The threshold in the Assembly is $150,000 regardless of the fund.
Twice per year, appropriations committees convene hearings where they rapidly announce the fate of the hundreds of bills on their suspense files. Bills voted off the suspense file — often with amendments — advance to the Assembly or Senate floor, while bills that are held “on suspense” in the appropriations committee are dead for the year.
Bills can be held on suspense for any number of reasons, including concerns about their cost. However, committee chairs typically do not publicly explain why some bills advance to the floor while others are held.
Floor Votes: Simple Majority or Supermajority
Once a bill clears the final committee in its “house of origin,” it is scheduled for a debate and vote on the house floor. Most bills require only a simple majority vote to advance off the floor — 41 votes in the 80-member Assembly and 21 votes in the 40-member Senate.
However, a two-thirds (supermajority) vote of each house is required if the bill:
Would create a new tax or increase an existing tax.
Contains an “urgency” clause that allows it to take effect immediately rather than on January 1 (the typical date).
Proposes to amend the state Constitution — a change that ultimately must be approved by a majority of voters in a statewide election.
Rinse and Repeat: Process Moves to the Second House
If a bill passes the first house, it moves to the second house, where it repeats the process — policy committee(s), appropriations committee, floor vote. Bills are typically amended again at this stage. If approved with amendments, the bill goes back to the first house for a “concurrence” vote. Bills passed on concurrence go to the governor for final consideration.
Learn the Lingo
Understanding budget-related terms is essential for navigating the state budget and legislative process and effectively engaging with decision-makers to advocate for just policy solutions for Californians.
Thumbs Up or Thumbs Down: Approved Bills Go to the Governor
Once a bill receives final legislative approval it goes to the governor, who can:
Sign the bill into law.
Allow the bill to become law without a signature.
Veto — reject — the bill. The Legislature can override a veto with a two-thirds vote of each house. However, veto overrides are extremely rare.
Bills passed by a simple majority vote typically take effect on January 1 of the next calendar year. Urgency statutes, tax increases, and certain other bills take effect as soon as they become law.
Committee agendas and other publications, floor session and committee schedules, the annual legislative calendar, and live and archived video streaming of legislative proceedings.
Kristina Bas Hamilton, Changemaker: An Insider’s Guide to Getting Sh*t Done at the California Capitol (October 2023).
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.
what is the governor’s proposed budget?
The governor’s proposed budget provides a detailed overview of the governor’s proposed expenditures for the upcoming fiscal year, estimated expenditures for the current fiscal year, and actual expenditures for the prior fiscal year. The proposed budget is released — along with the governor’s budget summary — on or before January 10.
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:
Increasing the state’s film and television tax credit by $420 million.
Increasing the state’s film and television tax credit by $420 million — more than doubling the current annual allocation cap from $330 million to $750 million. The proposed expansion would be in effect for fiscal years 2025-26 through 2028-29, even though the administration projects the state will face large and growing deficits beginning in 2026-27. In effect, this proposal prioritizes the film industry over investments in education, housing, health care, and other critical programs that help Californians make ends meet. The film credit is intended to encourage productions to remain in or relocate to California, but some of the benefits are reaped by entertainment corporations for productions that would have filmed in California even without the credit. The proposed increase is an attempt to compete with other states and countries that have enacted generous film credits — creating a “race to the bottom” where states are encouraged to adopt ever more generous incentives to attract productions, leaving less resources for states to directly support working families. The administration estimates that the credit expansion will cost $15 million in 2025-26, increasing to $209 million in 2028-29 and higher in years after. The budget impact of the credit is delayed because it generally takes several years after the credit allocation for productions to be filmed and the credits to be claimed on tax returns.
Excluding up to $20,000 in military retirement and survivor benefits from taxable income.
The exclusion would only be available for tax filers with incomes up to $125,000 ($250,000 for joint filers). The administration estimates that this exclusion will cost $130 million in 2025-26 and $85 million annually ongoing.
Excluding wildfire settlement payments from taxable income.
Excluding wildfire settlement payments from taxable income for all settlements paid in tax years 2025 through 2029. There is no assumed budget impact of the exclusion because wildfire settlements have generally been exempted from tax on a case-by-case basis.
Changing the way banks and financial corporations calculate state taxes.
California taxes corporations that operate both inside and outside of the state on the share of their income estimated to be generated in California. For most corporations, this is calculated based on the share of their sales made in California. Banks and other financial institutions are required to use a formula that takes into account the share of sales as well as property and payroll in the state. The governor’s budget proposes to require financial corporations to use the “single sales factor” that most other corporations use. This would decrease state taxes for corporations with significant property and employees in California and increase taxes for corporations with little physical presence in California that make significant sales into the state. The administration estimates that on net, this change would increase state corporate tax revenues by $330 million in 2025-26 and over $250 million annually ongoing.
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.
Watch: Analyzing governor newsom’s 2025-26 state budget proposal
Budget Center policy experts explore what the budget proposal means for California’s communities and economy.
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:
California should secure permanent, streamlined Medi-Cal access by adopting unwinding flexibilities beyond June 2025, implementing continuous coverage for children from birth to age five, and extending continuous coverage to adults. These measures would promote consistent health care access, reduce administrative burdens, and increase economic stability for Californians.
Reforming the Medi-Cal Share of Cost program.
Raising the maintenance need level to 138% of the Federal Poverty Level (FPL) would make Medi-Cal health coverage more accessible for many seniors and people with disabilities who currently face unaffordable monthly Shares of Cost, which work like monthly deductibles. They are forced to make difficult choices between paying for health care, rent, food, or other basic needs. While policymakers passed the Share of Cost reform in the 2022 Budget Act, its implementation depends on future funding.
Expanding outreach and enrollment efforts.
Policymakers should invest in targeted outreach and education initiatives by community-based organizations, particularly in areas with high uninsured rates, to connect eligible individuals with health coverage.
New Health Investments
Although the proposed budget does not introduce bold new investments to strengthen Medi-Cal, it includes these smaller but impactful actions:
$8.5 million in 2025-26 and ongoing for the AIDS Drug Assistance Program (ADAP).
ADAP helps people living with HIV access life-saving medications and health care support by covering costs like prescription drugs and insurance premiums. The Pre-Exposure Prophylaxis (PrEP) Assistance Program provides medication and related services to individuals at high risk of HIV to prevent infection.
Up to $7.4 million General Fund in 2025-26 and $12.5 million General Fund in 2026-27 for a diaper initiative.
This program will provide a three-month supply of diapers at no cost to California families with newborns, distributed through hospital systems. The initiative aims to support maternal and newborn health by reducing financial stress and addressing essential needs during the critical early months of a child’s life.
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:
Remove barriers to Covered California based on immigration status.
Undocumented Californians who are not income-eligible for Medi-Cal are unjustly excluded from accessing and purchasing health care coverage plans through Covered California.
Continue and expand cost-sharing reductions in Covered California.
State policymakers should maintain and enhance investments in cost-sharing reductions to make health coverage through Covered California even more affordable.
Extend premium tax credits.
Congress should act to preserve enhanced premium tax credits, which are essential for maintaining affordability in the health insurance marketplace.
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:
Implementing continuous coverage for children from birth to age five.
This would allow children to keep their Medi-Cal coverage without any administrative renewals or disruptions from birth to age five. While state and federal policymakers have extended this flexibility through June 2025, additional funding is needed for long-term implementation.
Raising rates for community health workers.
These are frontline public health workers who help patients access health and social services. This workforce supports patients in a way that is linguistically and culturally responsive to their communities, including immigrant communities and people of color. While state leaders have taken steps to integrate community health workers into the Medi-Cal workforce, additional ongoing investments are needed to ensure that they are paid fair wages.
Investing in long-term supports for children with complex medical needs, older adults, and people with disabilities.
This includes private duty nursing, community-based adult services, and congregate living health facilities. These services provide medical care and assistance with daily living activities, which is essential for people’s quality of life.
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:
California Advancing and Innovating Medi-Cal (CalAIM)
A multi-year initiative to transform the Medi-Cal program with the goal of improving health outcomes, particularly for individuals experiencing homelessness, foster youth, and justice-involved individuals. It brings together physical health, mental health, and social services to make care simpler and more focused on patients, while improving support through new ways of paying for and delivering care.
The Children and Youth Behavioral Health Initiative
A multiyear, multi-department package of investments to improve mental health and wellness supports for children, youth, and families. It focuses on prevention, early intervention, and making services more accessible in schools and community settings.
Community Assistance, Recovery, and Empowerment (CARE) Court
A plan to establish court-ordered treatment for people experiencing both homelessness and serious behavioral health challenges.
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:
State Low Income Housing Tax Credits (LIHTC) which are pivotal in developing and financing affordable housing. The state LIHTC program will only receive what is required by state statute; in 2024 the required allocation was roughly $120 million.
The Multifamily Housing Program
The Multifamily Housing Program is the state’s primary subsidy for affordable housing construction and preservation. It has been heavily oversubscribed and funding will be fully depleted after this year’s award round.
The Portfolio Reinvestment Program
The Portfolio Reinvestment Program preserves California Department of Housing and Community Development-funded affordable housing projects that are at-risk of conversion to market-rate housing. After the funding cuts in the 2024 Budget Act, this program currently has no funding.
Joe Serna, Jr. Farmworker Housing Grant Program
Joe Serna, Jr. Farmworker Housing Grant Program funds housing for agricultural workers with a priority for lower-income households. Although persistently oversubscribed, funding will be entirely exhausted in May.
The Infill Infrastructure Grant Program
The Infill Infrastructure Grant Program supports infill housing development by funding essential Capital Improvement Projects for affordable and mixed-income housing. The program’s funding will be fully exhausted this year.
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:
In December 2024, California received federal approval to cover transitional rent of up to six months or temporary housing for eligible Medi-Cal enrolled individuals experiencing or at risk of homelessness transitioning out of institutions or foster care. These funds are intended to work in conjunction with other Medi-Cal covered housing supports and the housing interventions outlined in Behavioral Health Services Act of 2024.
Behavioral Health Services Act (BHSA) of 2024
The BHSA reallocated Mental Health Services Act funds to prioritize those most impacted by severe behavioral health issues and homelessness. The proposed budget adds $93.5 million ($55 million General Fund) for FY 2025-26 to support BSHA implementation at the county level.
Community Assistance, Recovery, and Empowerment (CARE) Court
Sustained by the administration as various counties have begun implementation, it establishes court-ordered treatment for people experiencing both homelessness and serious behavioral health challenges. The proposed budget includes $90.1 million in 2024-25, $107.6 million in 2025-26, and $111.8 million in 2026-27 General Fund for state and county CARE Act activities.
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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.
Projects a 0.2% increase in CalWORKs grants carrying a cost of $9.1 million.
This slight grant increase is required by AB 85 of 2013, which links CalWORKs grant increases to projected sales tax revenues. However, the proposed grant increase falls short of meeting the minimal needs of CalWORKs families. In recent years state policymakers have raised the maximum CalWORKs grant above the deep poverty threshold (50% of the federal poverty line) for some CalWORKs families, but not for many of those with an excluded family member, unfairly leaving these children and families behind with less assistance to meet basic needs.
Uplifts California’s selection to participate in a federal pilot program but does not allocate any specific funding to carry this out.
California was one of five states selected to participate in a pilot to test alternative well-being metrics for participants of the Temporary Assistance for Needy Families (TANF) program, as CalWORKs is known federally. The pilot will be an opportunity for California to build on recent progress in CalWORKs and move away from the CalWORKs work participation rate penalty for counties, which is a racist and sexist policy that hinders the CalWORKs program from helping parents address barriers.
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.
Includes $7.1 billion to support current child care and development program commitments.
Compared to 2024-25, spending increased by approximately $288 million. This increase is reflected in higher than anticipated caseloads for CalWORKs Stage 2 and Stage 3 child care, an anticipated cost of living adjustment (COLA) of 2.43 percent, and newly authorized 2024-25 general child care slots. Additionally, costs associated with the recent redefinition of full-time care to 25 hours or more is reflected in the proposed spending amount.
Maintains plan to add approximately 200,000 new child care slots.
In 2021-22, the governor committed to adding approximately 200,000 new child care slots by 2026-27. Expansion was delayed and paused in 2023-24 and 2024-25; however, the 2024-25 budget did solidify a plan for rolling out the remaining slots. Per this plan, slot expansion remains paused during 2025-26, and costs to maintain slots are reflected in the aforementioned $7.1 billion. Thus, the 2025-26 budget does not include appropriations for slot expansion. However, the administration remains committed to adding 44,000 slots in 2026-27, 33,000 slots in 2027-28, and any remaining unawarded slots in 2028-29 and ongoing.
Maintains 2024-25 child care provider temporary rate increases.
The 2024-25 budget included trailer bill language requiring the state to set new reimbursement rates under the alternative methodology by no later than July 1, 2025. The state’s report detailing these new rates also must include estimated costs and timelines associated with the implementation components of the alternative methodology. Child Care Providers United (CCPU) is currently in the process of negotiating the new rate structure with the administration as part of the new union contract. This new structure (as well as continuation of the hold harmless policy to pay providers based on enrollment) is not reflected in the budget proposal. However, it is important to note that 2024-25 trailer bill language prohibited the new reimbursement rates or any temporary reimbursement established by the state as part of a transition timeline from being reduced below their current levels. Thus, the 2025-26 proposed budget includes $699 million to maintain the cost of care plus rates for child care providers. This is up from the approximately $669 million estimated for 2024-25. CCPU’s current contract expires June 30, 2025.
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:
Maintains $75 million for immigration level services.
This provides funding for a variety of legal service programs, such as $45 million for programs run by the California Department of Social Services (CDSS), $7 million for the California State University Immigration Legal Services program, and $3 million for youth legal services.
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.
Does not provide funding to fill the gap in crime victim services funding.
In 2024, the state stepped in and provided $103 million in one-time funding to backfill federal VOCA funding gaps. However, even with federal cuts anticipated again this year, there is no funding provided in the 2025-26 proposed budget to fill those gaps. Since 2019, funding has fallen far short of levels needed to maintain the services local organizations provide to more than 816,000 victims of crime.At the current funding levels, programs will have experienced a 67% cut in funding since 2019. Although the governor has highlighted how much the state has spent on several public safety purposes, such as targeting organized retail theft and gun violence, that spending is not being extended to programs that provide critical services to the survivors of crime.
Does not provide continued funding for domestic violence prevention.
While the 2023-24 budget extended state funding for domestic and sexual violence prevention grants until the end of 2024, the governor does not propose any additional funding for new grants in the 2025-26 fiscal year, leaving many organizations uncertain as to how they will continue providing crucial services without funding.
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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 initial year one expansion took effect during the 2022-23 school year and covered children whose fifth birthdays fell between September 2 and February 2 (the previous cut-off was December 2). The year two 2023-24 expansion provided eligibility to children who turn 5 between September 2 and April 2. The year three 2024-25 expansion extended eligibility to children who turn 5 from April 2 to June 2. As a final step, the 2025-26 school year will allow all children who turn 4 by September 1 to enroll in TK. The 2025-26 budget proposal includes $2.4 billion ongoing Proposition 98 dollars for this full implementation. This 2025-26 expansion is estimated to provide TK access to 60,000 additional children.
Implements new TK ratio guidelines.
As Universal TK completes expansion in 2025-26, reduced teacher-to-child ratios will take effect. Specifically, TK classroom ratios will reduce from 1:12 to 1:10 in 2025-26. This new ratio was originally planned for 2023-24 but was delayed. The 2025-26 proposed budget includes $1.5 billion ongoing Prop.98 dollars to support this ratio reduction in every TK classroom.
Funds English language proficiency screeners for multilingual learners in TK.
In 2024-25, the governor signed Assembly Bill 2268 to exempt TK students from the English Language Proficiency Assessment for California (ELPAC) to determine whether new students will be designated English learners. The ELPAC was considered inadequate for accurately screening multilingual 4-year-olds. This bill went into effect for the 2024-25 school year, meaning that TK students currently do not have an English language proficiency screener. Thus, the proposed budget includes $10 million Prop. 98 dollars for TK classrooms to use English language proficiency screeners. This proposed appropriation may help address the current lack of an English language proficiency screener in TK.
Maintains CSPP program levels.
The 2024-25 budget authorized (but did not require) both part-day and full-day CSPP to enroll eligible 2-year-old children until July 1, 2027. The 2025-26 budget for CSPP includes this temporary expansion. Proposed spending for CSPP includes approximately $1.9 billion Prop. 98 dollars and $1.0 billion non-Prop. 98 General Fund dollars, which is up from the $1.4 billion Prop. 98 dollars and $865 million non-Prop. 98 General Fund dollars in 2024-25. Moreover, while rate reform is currently being negotiated by Child Care Providers United (CCPU, as discussed in the child care section) – representing home-based providers – the new rate structure will also apply to CSPP providers. Thus, future versions of the 2025-26 budget may include a revised rate structure for CSPP providers.
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:
Allocates $2.7 billion for a COLA for the LCFF and other non-LCFF programs.
The governor’s spending plan includes about $2.5 billion to provide a 2.43% COLA for the LCFF. The proposal also includes $204 million to provide the same COLA for other programs, including the LCFF Equity Multiplier, special education, the State Preschool Program, and Child Nutrition.
Allocates more than $2 billion to continue to expand and strengthen Transitional Kindergarten (TK).
This includes fully expanding TK to all four-year-old children, reducing staff-to-student ratios, and a language proficiency screener to support dual language learners (see early education section).
Provides $1.8 billion for a new discretionary block grant.
The proposal includes a new block grant, the Student Support and Professional Development Discretionary Block Grant, to provide districts, charter schools, and county of offices of education with additional funding to support:
Professional development for teachers, including literacy support for multilingual students and math
Teacher recruitment and retention efforts
Career pathways and dual enrollment expansion efforts
Allocates $435 million to increase access to expanded learning opportunities for students in grades TK-6.
This increase would adjust eligibility criteria and provide funding to more schools to offer the Expanded Learning Opportunities Program. This proposed funding also marks full implementation of this program, totaling $4.4 billion.
Provides $250 million for teacher preparation and professional development.
This includes $150 million one-time Prop. 98 funds for the Teacher Recruitment Incentive Program, which would provide financial support for teacher candidates. The remaining $100 million would extend the timeline for the current National Board Certification Incentive Program (see workforce section).
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:
Allocates $246 million for a 2.43% COLA for apportionments and other programs.
This includes$230 million ongoing Prop. 98 dollars for the Student Centered Funding Formula. The proposal also allocates $16 million ongoing Prop. 98 dollars to provide the same percentage COLA to other CCC categorical programs and the Adult Education Program.
Provides more than $330 million to support technology transformation and developing a common data platform.
$168 million one-time Prop. 98 dollars would support the completion of the Statewide Technology Transformation project, which will streamline data collection across the CCC system. Another $162.5 million would provide funding to develop a common cloud data platform across the CCC system.
Allocates $100 million to expand credit for prior learning policies.
The goal of this proposed funding is to develop and test an outcomes-based model and a “Career Passport,” which the administration describes as “a resource that will provide students with formalized documentation of their skills and experiences as they enter the workforce.” (See workforce section).
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 454,000students at 23 campuses, and the UC provides undergraduate, graduate, and professional education to more than 294,000students 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
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:
Provides $13.5 billion General Fund for the California Department of Corrections and Rehabilitation (CDCR) in 2025-26, similar to estimated state support in 2024-25 ($13.6 billion).
Under the governor’s proposal, CDCR’s share of overall state General Fund spending would drop below 6% in 2025-26. By comparison, CDCR’s budget comprised more than 9% of General Fund spending in 2013-14, the fiscal year before voters passed Prop. 47.
Projects the state will spend $124,137 per incarcerated adult in 2025-26, down slightly from $127,236 in 2024-25.
The per capita cost of operating state prisons largely reflects security (e.g., correctional officers), health care (e.g., medical, mental health, and dental care), facility operations, and administration. Basic support services (e.g., food and clothing) and rehabilitation programs comprise a relatively small share of per capita spending in the state prison system.
Fails to advance a plan to close state prisons.
In recent years, California has ended the use of private prisons and shut down three state prisons. State leaders can — and should — go further. In a report released last year (before voters approved Prop. 36), state experts estimated that California could safely close up to five additional prisons due to the large number of empty beds, saving the state around $1 billion per year ongoing. While Prop. 36 is expected to increase the state prison population in the near term, the administration’s estimates suggest that population declines are likely to resume within a couple of years. Ongoing declines would create opportunities for additional prison closures, which state leaders can start planning for now.
Proposes to continue various reentry programs that are intended to help people successfully transition back to their communities after leaving prison.
For example, the governor proposes to:
Maintain the Returning Home Well program for an additional two years($12.9 million General Fund in 2025-26 and 2026-27). These funds would support transitional housing and wraparound services for people who would otherwise be at risk of homelessness after exiting prison.
Increase funding for other reentry programs by $32 million General Fund in 2025-26, with this additional support growing to $43 million by 2029-30. These additional funds would allow the state to “increase contract rates and provide annual adjustments for 14 parole reentry contracts.” These reentry programs include Day Reporting Centers, the Long-Term Offender Reentry Recovery Reentry Program, and Specialized Treatment for Optimized Programming (STOP). Notably, a 2023 media investigation into STOP highlighted lax state oversight, inadequate or nonexistent data collection, and an inability to justify the program’s effectiveness.
Outlines over $270 million in “efficiency” reductions to CDCR’s budget for 2024-25 and 2025-26 combined.
These CDCR reductions are part of a broader effort to scale back “state operations” spending across the executive branch, which the governor and lawmakers agreed last June to help close the budget deficit. The efficiency-related savings in CDCR’s budget include:
$194 million in savings from “operational reductions” in 2024-25 and 2025-26, with annual savings continuing in subsequent years. These reductions include $33.1 million in 2024-25 and $65.5 million in 2025-26 from deactivating selected housing units at four state prisons: Calipatria, High Desert, North Kern, and Wasco.
$53 million in savings due to “refining employee training and eliminating non-essential activities and contracts” in 2024-25 and 2025-26, with annual savings continuing in subsequent years. This includes the elimination of the Council on Criminal Justice and Behavioral Health (CCJBH), for an annual reduction of $1.8 million. The administration argues that CCJBH — which was established in 2001 — is no longer necessary because other state programs and efforts have since been launched that focus on improving outcomes for incarcerated adults who have mental health and/or substance use treatment needs.
$14 million in savingsfrom eliminating more than 440 vacant positions starting in 2024-25, with annual savings continuing in subsequent years.
$13 million in savings from “various other efficiency measures, reversions, and General Fund reductions” in 2024-25 and 2025-26, with annual savings continuing in subsequent years.
Identifies an additional $164 million in one-time savings in CDCR’s 2024-25 budget.
The single-largest savings in this category is the governor’s plan to revert $114 million that was appropriated for roof projects that have not yet begun. CDCR would retain these funds for “urgent and critical needs,” potentially including roof replacement projects.
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 lowerthan 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.
Learn the Lingo
Understanding budget-related terms is essential for navigating the state budget and legislative process and effectively engaging with decision-makers to advocate for just policy solutions for Californians.
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.
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In 2021, state leaders passed the California Community School Partnership Act, establishing the California Community Schools Partnership Program (CCSPP). The program aims to address barriers to learning and development exacerbated by poverty and the COVID-19 pandemic. Through trauma-informed and integrated educational, health, and mental health services, community schools are designed to meet the diverse needs of students. By fostering partnerships and expanding learning opportunities, they promote whole-child education, equitable outcomes, academic success, well-being, and positive school climates.
To support this strategy, legislation allocated over $3 billion in funding, later increased by $1.1 billion, for a total of more than $4.1 billion. These funds primarily support grants for establishing or expanding community schools, among other uses. Administered by the California Department of Education (CDE), the program has provided two rounds of planning grants, and three rounds of implementation grants to Local Educational Agencies (LEAs), which include school districts, charter schools, and county offices of education. Eligibility requirements focus on LEAs and schools with higher proportions of low-income students (based on Free or Reduced-Price Meal eligibility), foster youth, or English Learners.
what is a community school?
A community school is a public school (serving preschool through 12th grade) that forms strong, intentional partnerships with the community to promote pupil learning and holistic child and family development. It integrates services like trauma-informed health care, mental health, and social support, and emphasizes family and community engagement, collaborative leadership, and extended learning opportunities.
Implementation Grants
This report focuses on key trends for the first three cohorts of schools that have received implementation grants so far. These multi-year grants represent the majority of the CCSPP funding. Between 2021-22 and 2023-24, nearly 500 LEAs were awarded grants, directing funding to more than 2,000 schools. Priority was given to districts with schools where 80% or more of the enrollment consists of “unduplicated students,” which includes English learners, foster youth, or low-income students.
As expected, the chart below shows that, across all three cohorts, most grantee schools serve 80% to 100% of unduplicated students, with 933 schools enrolling 90% to 100% of such students receiving the bulk of funding. This demonstrates an equitable distribution of resources, aligning with the program’s intent to prioritize directing resources to schools with the highest concentrations of underserved students.
School-level data show that implementation grants are supporting schools with higher proportions of students of color, overlapping with priority groups such as low-income students, English Learners, and foster youth. Latinx, Black, and Indigenous students are overrepresented in grantee schools compared to non-grantee schools, with Latinx students — the largest student population — benefiting the most, as shown in the chart below. For other race and ethnicity categories, enrollment shares are similar or lower at grantee schools. These trends suggest that implementation grants align with the program’s focus on priority student groups, though some populations may benefit less than others.
Overall, these trends demonstrate that the allocation methodology aligns with the program’s intent. However, not all priority schools have received funding. The chart below highlights approximately 2,700 schools with high proportions (80 percent or more) of English Learners, foster youth, and low-income students that have not been funded. 924 of these schools are in LEAs that have received planning grants but would benefit from additional resources to implement their community schools strategy, while 1,767 are in LEAs that did not receive planning grants. Funding just those 924 schools in LEAs that have received planning grants would cost about $1.3 billion, far exceeding the $680 million left for these grants.
CDE is currently accepting applications for the fourth and final round of implementation grants under the program. For this round, CDE should maintain its focus on high-needs schools, as in previous rounds. Initial research from the first cohort indicates that schools have utilized the funding to integrate a range of supports, foster positive school climates, and enrich their curriculum. Additionally, case-studies highlight the potential of community schools to address both school-based and external barriers, including improving attendance. State leaders should consider renewing or expanding this block grant to ensure schools receive sustainable support to meet student needs and create lasting change. Without continued funding, many high-needs schools risk losing critical services and programs established under CCSPP.
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
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.
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.
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.
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.
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 Counties Are Legal Subdivisions of the State
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
Counties operate health and human services programs as agents of the state.
These include foster care; child welfare services; Medi-Cal (health care for low-income residents); public health; behavioral health (mental health services and substance use disorder treatment); the CalWORKs welfare-to-work program; and others.
Counties carry out a broad range of countywide functions.
These include overseeing elections and operating — along with cities and the courts — the local justice system.
Counties provide some municipal-type services in unincorporated areas.
These include policing, fire protection, libraries, planning, and road repair.
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.
Must be placed on the local ballot and approved by a simple majority of voters.
Special taxes
Include both parcel taxes and taxes dedicated to specific purposes.
Must be placed on the local ballot and approved by at least two-thirds of voters.
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.
Two-Step Model (Step 1): Board Approves the Recommended Budget By June 30
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.
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
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.
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.
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.
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.
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:
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.
Special Funds — Over 500 state special funds account for taxes, fees, and licenses that are designated for a specific purpose.
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:
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.
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.
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.
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.
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.
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.
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.
Assembly Budget Committee and Senate Budget & Fiscal Review Committee
Review the governor’s budget proposals and develop each house’s version of the state budget. Most budget committee work is done through subcommittees that focus on specific policy areas.
Budget Act
The initial budget bill passed by the Legislature and signed into law by the governor, after any line-item vetoes. The Budget Act can be referred to by the year in which it becomes law (“Budget Act of 2024”) or by the fiscal year to which it applies (“2024-25 Budget Act”).
Budget Bill Jr.
The informal term to describe any budget bill that amends the Budget Act. Budget Bill Jrs. may be numbered sequentially using Roman numerals (e.g., Budget Bill Jr. I, Budget Bill Jr. II, etc.).
Budget-Related Bills (“Trailer Bills”)
Generally make changes to state law related to the Budget Act. These bills are formally known as “bills … related to the budget bill,” but are more commonly called “trailer bills.” Trailer bills are listed in the Budget Act and move through the Assembly and Senate budget committees. Trailer bills are organized by issue area, such as “health,” “housing,” “higher education,” and “public safety.”
From time to time, bills that move independently of the Budget Act — and therefore are not trailer bills — may be considered part of the overall state budget framework. This could include, for example, legislation to increase taxes or to place constitutional amendments before the voters.
Department of Finance (DOF)
Leads the development of the governor’s budget proposals, prepares the governor’s budget documents, testifies on behalf of the governor at legislative budget hearings, develops the governor’s economic forecasts, and performs several other functions. The DOF’s director is the governor’s chief fiscal adviser.
Governor’s Budget Summary
Provides the governor’s economic and revenue outlook, highlights major policy initiatives in the governor’s proposed budget, and summarizes proposed state expenditures. The budget summary is released on or before January 10.
Governor’s Proposed Budget
Provides a detailed overview of the governor’s proposed expenditures for the upcoming fiscal year, estimated expenditures for the current fiscal year, and actual expenditures for the prior fiscal year. The proposed budget is released on or before January 10.
Legislative Analyst’s Office (LAO)
An independent, nonpartisan office that conducts research and analysis on state budget issues, analyzes statewide ballot measures, and provides fiscal and policy advice to the Legislature. The LAO is overseen by the Legislature’s bipartisan Joint Legislative Budget Committee.
Line-Item Veto
The governor’s power to reduce or eliminate specific items of appropriation while approving other portions of a bill. This power applies to any bill that contains an appropriation, including budget bills and budget-related bills. The Legislature may override a line-item veto with a two-thirds vote of each house.
May Revision
Released on or before May 14, the May Revision updates the governor’s economic and revenue outlook; adjusts the governor’s proposed expenditures to reflect revised estimates and assumptions; revises, supplements, or withdraws policy initiatives that were included in the governor’s proposed budget in January; and outlines adjustments to the Proposition 98 minimum funding guarantee for K-14 education.
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 departments and agencies develop baseline budgets to maintain existing service levels in the upcoming fiscal year and may prepare “budget change proposals” intended to alter service levels. The Department of Finance (DOF) reviews these documents.
Following a series of meetings within the governor’s administration, the governor makes final decisions and the DOF prepares the proposed budget for release in January.
Independent of the governor, legislative leaders develop their budget priorities for the upcoming fiscal year.
In November, the Legislative Analyst’s Office (LAO) releases their Fiscal Outlook, which provides the LAO’s assessment of revenues, spending, and the state’s overall budget condition across several fiscal years.
By January 10
The governor releases the proposed budget for the upcoming fiscal year that begins on July 1.
January to Mid-May
A few days after the proposed budget is released: The Legislative Analyst’s Office (LAO) releases their overview and assessment of the governor’s proposals, and later publishes an updated revenue forecast.
Late January: The Assembly Budget Committee and the Senate Budget and Fiscal Review Committee convene overview hearings on the governor’s proposed budget.
Late February to early May: Budget subcommittees in each house hold dozens of hearings to review the governor’s proposals in depth.
By May 14
The governor releases a revised budget (the May Revision) for the upcoming fiscal year that begins on July 1.
Mid-May to Early June
A few days after the May Revision: The Legislative Analyst’s Office (LAO) releases their overview and assessment of the May Revision, and later publishes an updated revenue forecast and multiyear budget outlook.
The week after the May Revision: Assembly and Senate budget subcommittees convene to review the governor’s May Revision proposals.
Roughly 10 days after the May Revision: The Assembly and Senate publish summaries — “subcommittee reports” — of their versions of the budget package.
Roughly two weeks after the May Revision:
Assembly and Senate leaders reach a deal on a unified legislative version of the budget package and publish summaries of the agreement. For many years, legislative leaders convened a conference committee composed of Democrats and Republicans to resolve differences between the two houses’ spending plans. However, a conference committee has not been convened since 2019.
A full deal with the governor at this stage is possible, but rare. Nonetheless, the Legislature’s budget package will reflect many points of agreement with the governor based on ongoing, behind-the-scenes negotiations between the governor and legislative leaders.
Somewhat more than two weeks after the May Revision:
The Legislature begins drafting the initial budget bill, also known as the Budget Act. Finalizing the Budget Act for floor votes can take roughly a dozen days.
By June 15
The Legislature passes the Budget Act by June 15 — the constitutional deadline — and sends it to the governor.
If the two houses have scheduled floor votes for June 15, the Budget Act must be published on the California Legislative Information website by June 12 to meet the 72-hour bill-in-print requirement.
If the Legislature schedules floor votes before June 15, the Budget Act must be in print prior to June 12 to comply with the 72-hour rule — for example, by June 10 for floor votes on June 13.
Trailer bills, which are also part of the state budget package, are not required to be — and rarely are — passed by June 15.
Trailer bills generally make statutory changes needed to implement the policies assumed in the Budget Act.
Second Half of June
The governor and legislative leaders continue negotiating in order to reach a three-party deal on the budget package for the upcoming fiscal year.
Once a deal is reached, the rest of the bills in the budget package are unveiled, consisting of multiple trailer bills along with a “Budget Bill Jr.” The Budget Bill Jr. amends the Budget Act as passed by the Legislature in order to reflect the changes required by the deal with the governor.
The Assembly and Senate publish summaries of the budget package as agreed to with the governor.
The Legislature passes the Budget Bill Jr. and trailer bills.
The governor signs the Budget Act, the Budget Bill Jr., and the trailer bills (some trailer bills might not be signed until early July).
All bills must be signed within 12 days of being presented to the governor. However, if the 12th day is a Saturday, a Sunday, or a holiday, the period is extended to the next day that is not a Saturday, a Sunday, or a holiday.
The governor may reduce or eliminate any item of appropriation in any bill (the “line-item veto”).
State departments and agencies focus on the next state budget by beginning to prepare the governor’s proposed budget for release by January 10. This months-long process may begin earlier in June and continues through the summer and into the fall.
July and Beyond
The new state fiscal year begins on July 1.
The governor signs any remaining trailer bills that weren’t signed in June.
The Department of Finance publishes a summary of the June budget package as signed into law by the governor. This summary may be published before the end of June.
The Legislature breaks for a one-month summer recess starting around July 4 in election years and around mid-July in non-election years.
The Legislature reconvenes in August for the final few weeks of session, which ends in August in election years and in September in non-election years.
In August, state leaders typically advance changes to the state budget package adopted in June, including at least one Budget Bill Jr. along with additional trailer bills. The changes include budget “clean-up,” such as correcting errors in the Budget Act, as well as substantive — often major — revisions to spending and policy.
The Assembly and Senate publish summaries of the budget revisions as agreed to with the governor.
The full budget committee in each house holds a single hearing on the budget revisions before sending the package to the Assembly and Senate floors for final votes.
The governor signs the budget revisions into law in September — or sometimes October in non-election years — possibly with line-item vetoes.
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.
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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 Reserve
Special Fund for Economic Uncertainties (SFEU)
Projected Surplus Temporary Holding Account
Is the state required to make an annual deposit?
Yes
No 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.
No
No
No
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 applicable
Not applicable
Not 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.
No
No
No
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
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.
A treatable mental disorder that affects a person’s brain and behavior, leading to their inability to control their use of substances like drugs, alcohol, or medications. Symptoms can be moderate to severe, with addiction being the most severe form.
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:
Behavioral Health Continuum Infrastructure Program (BHCIP) administered by the Department of Health Care Services.
BHCIP is an existing program that previously received state investments. Under this funding, projects are only eligible if they expand or create new behavioral health infrastructure. It encompasses the construction, renovation, or expansion of treatment and residential care facilities and other facility types. BHCIP is receiving $4.4 billion from the BHIBA, with $3.3 billion available for the first round of applications DHCS is accepting through the end of the year. Counties, cities, tribal entities, nonprofit organizations, and for-profit organizations are eligible to apply. Applications close in December, with the first round of funding awards anticipated in May 2025.
Homekey Plus (Homekey+) administered by the Department of Housing and Community Development in partnership with the Department of Veteran Affairs.
Homekey+ builds on the existing Homekey Program which supported the acquisition and rehabilitation of property for permanent supportive housing. These funds also support the new construction of multifamily rentals, master leasing, and shared housing. It will not award interim housing projects. The units will target Californians who are at risk or experiencing homelessness with behavioral health challenges and extremely low incomes. Applications are set to open November 2024 with continuous award announcements beginning in May 2025.
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:
These dollars would support individuals with behavioral health conditions (i.e., serious mental illness and/or a substance use disorder). Counties can use these funds to cover rental subsidies, operating subsidies, family housing, and shared housing. Half of this funding is dedicated to housing interventions for those experiencing chronic homelessness and up to 25% may be used for capital development.
35% for Full Service Partnership programs.
This is a “Whatever It Takes” approach to supporting individuals with complex needs. It encompasses recovery-oriented, comprehensive services for individuals who are or at risk of experiencing homelessness and have a serious mental illness, and who often have a history of criminal justice involvement and repeat hospitalizations. These services are designed to serve people in the community rather than in locked state hospitals.
35% for behavioral health services and supports.
This allocation would support workforce education and training, innovation, early intervention, and capital facilities. A minimum of 51% of these dollars must be directed towards early intervention supports for Californians who are 25 years and younger.
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:
How will Prop. 1 BHSA spending and infrastructure projects interact or complement other behavioral health and housing initiatives California is spearheading?
How will these reforms ensure the longevity and health of California’s behavioral health and supportive housing systems? For instance, how will they align with programs such as:
Behavioral Health Community-Based Organized Networks of Equitable Care and Treatment (BH-CONNECT) Demonstration: An initiative to expand the continuum of community-based behavioral health care services for Medi-Cal members living with significant behavioral health needs.
California Advancing and Innovating Medi-Cal (CalAIM): A multi-year initiative led by DHCS to transform Medi-Cal. The primary goal is to enhance care coordination, improve health outcomes, and address social determinants of health for Medi-Cal enrollees, particularly for those facing complex challenges such as homelessness, chronic medical conditions, and involvement in the justice system.
Children and Youth Behavioral Health Initiative (CYBHI): A multiyear, multi-department package of investments that seeks to reimagine the systems, regardless of payer, that support behavioral health for all of California’s children, youth, and their families.
Community Assistance, Recovery, and Empowerment (CARE) Court: A plan to establish court-ordered treatment for people experiencing both homelessness and serious behavioral health challenges.
Homeless Housing Assistance and Prevention Program (HHAP): Local flexible funding to address homelessness that has solely received one-time state funding allocations.
How will the new Prop. 1 funding requirements impact funding for prevention and early intervention services?
What are the various efforts to mitigate the impact of decreasing BHSA funds for early identification and prevention of mental health conditions?
Will DHCS allow additional BHSA flexibilities and exemptions to counties?
DHCS has stated that counties will have the flexibility to move up to 7% from one BHSA funding category into another, which would allow counties to address local needs and priorities. However, changes are subject to DHCS approval, and it’s unclear what justifications may be used to move funding between categories.
What steps will be taken to standardize and streamline the integration of health and homelessness systems to ensure continuous services?
Are local homeless service providers, Continuums of Care, nonprofit housing providers, people with lived experience, and other housing parties involved to provide alignment in creating cohesive systems?
Will Prop. 1 reforms meet the scale of the need to serve Californians experiencing homelessness with behavioral health conditions?
Beyond the steps taken by Prop. 1, policymakers need further investments to ensure housing stability for Californians with behavioral health conditions.
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.
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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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 thatIf 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.
Patrick 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.
Mark 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.
State 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.
24
New 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.
25
Josh 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.
26
A 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.
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