By: @Ophelia Szigeti
Last Friday, California Department of Finance Director Joe Stephenshaw presented the Governor’s Budget for 2026-2027. Director Stephenshaw emphasized that Governor Gavin Newsom’s proposal is a “workload” budget and is focused on funding baseline cost increases and program adjustments necessary to ensure the May Revision is fiscally sound.
Director Stephenshaw also noted that the budget continues to build on prior investments made by the Governor and the State Legislature in education, public safety, childcare, housing, homelessness, and climate change, while maintaining a focus on long-term fiscal sustainability. He emphasized that several spending allocations from last year were one-time in nature, rather than “cuts” to ongoing programs.
Also highlighted during Director Stephenshaw’s press conference was the state’s revenue volatility, particularly related to personal income taxes, corporate taxes, sales taxes, and capital gains projections. This longstanding consequence of California’s progressive tax structure must always be accounted for during the budget process.
When asked about potential increases in revenue to offset some of the shortfalls, Director Stephenshaw indicated that there will be no new taxes proposed by Governor Newsom, but that there may be minor fee increases, such as state park-related fee increases.
In response to Governor Newsom’s January State Budget proposal, CSDA Chief Executive Officer released the following statement:
“Projecting the budget months in advance is no easy task, but one thing that is clear is the fundamental cost of critical infrastructure is outpacing funding for the special districts largely responsible for California’s water, sanitation, fire protection, resource conservation, mosquito abatement, and more. As we all strive to make California more affordable, our local service specialists seek the State’s partnership to uphold voter-approved funding and to refrain from legislation and regulations that increase the cost of delivering the essential services our communities rely on for housing, economic development, and quality of life.”
On Monday, January 12, California’s Legislative Analyst’s Office (LAO) released its Overview of the Governor’s Budget highlighting four key observations:
- Governor’s Budget Roughly Balanced on Higher Revenues
- Stock Market Poses Serious Risk to Revenues
- Multiyear Budget Deficits Alarming
- Administration Acknowledges These Challenges, but Governor’s Budget Does Not Materially Address Them
The complete 16-page LAO overview can be found here.
Topline 2026-2027 Budget Numbers
The Governor’s proposed 2026-27 budget is $348.9 billion, with $248.3 billion in General Fund spending, and $23 billion in total reserves:
- Rainy Day Fund: $14.4 billion
- Special Fund for Economic Uncertainties (SFEU): $4.5 billion
- Public School Rainy Day Fund: $4.1 billion
Director Stephenshaw noted that the increase in General Fund expenditures is constitutionally required to meet Proposition 98 (1988), which guarantees a minimum level of annual funding for schools, and Proposition 2 (2014), which requires deposits into the Budget Stabilization Account (the Rainy-Day Fund).
Revenue Forecast Differences
Governor Newsom and the LAO present different outlooks for state revenues. The Governor’s budget assumes modest growth in major tax sources—personal income, corporate, and sales taxes—totaling $28.8 billion higher than what the LAO projects for those same revenue sources. In contrast, the LAO warns of a higher risk of a stock market downturn and potential revenue declines in the 2026–27 fiscal year.
Budget Deficit Outlook
The Governor and the LAO also differ significantly in their deficit projections. The Governor estimates a $2.9 billion budget shortfall, while the LAO projects a $17.6 billion deficit. Director Stephenshaw highlighted that the Governor’s forecast assumes continued economic growth and does not factor in a potential economic or stock market downturn, whereas the LAO anticipates and has incorporated an economic slowdown in their 2026–27 projections.
Director Stephenshaw noted that baseline costs are expected to continue increasing and that the May Revision to the State Budget will address both this growth and longer-term structural deficits, driven in part by reductions in federal funding (H.R. 1) for emergency services and hospital care. Reductions to the General Fund of a total of $1.4 billion are the result of added costs for the implementation of Medi-Cal ($1.1 billion) and the increased administrative costs associated with the state’s CalFresh program ($300 million). He also identified key budget risks discussed during the press conference, including market volatility and potential market declines, uncertainty in federal policy, elevated or resurgent inflation, and restrictive monetary policy.
Budget Adjustments
The Governor’s budget proposes $9.8 billion for the state’s CalPERS contribution for state employees, an increase of $741.9 million over the 2025–26 level. The budget also includes a $4.8 billion General Fund contribution to CalSTRS, which is $144 million above the projected 2025–26 amount, largely driven by increased teacher compensation.
Climate Funding
The Governor’s budget allocates $2.1 billion in the second year of a multi-year investment plan, including initiatives for local fire prevention, fire resilience, and risk reduction for power transmission lines. Director Stephenshaw also noted the Governor’s proposal of $200 million in one-time special funds for a ZEV (zero emission vehicle) incentive program that utilizes non-general fund sources such as the Greenhouse Gas Reduction Fund (GGRF) and air pollution control funds.
The budget includes $792 million of ongoing investments for water storage, groundwater replenishment, stream and river restoration, water resilience, and water-related infrastructure. Of this total, $232 million is dedicated to flood control, $173 million to drinking water projects, and $68.8 million to regional conveyance and repairs of existing facilities. The California Natural Resources Agency will prioritize funding for repairs to existing infrastructure.
The Governor proposes $314 million in continued investments for wildfire prevention and forest resilience projects. This includes $58 million for local fire prevention grants to support wildfire prevention and fuel reduction efforts, $19.6 million to help homeowners in wildfire-prone areas create defensible space, and $15.2 million to reduce wildfire risks associated with electricity transmission infrastructure.
The budget also provides $133.2 million in Proposition 4 funding to the Department of Water Resources for Central Valley flood management projects. This includes $24.31 million for the Statewide Flood Risk Reduction Project and $109.1 million for the Urban Flood Risk Reduction Program, supporting efforts to strengthen levees, improve flood infrastructure, and reduce flood risk for vulnerable communities throughout the region.
Cap and Invest
The Cap-and-Invest program (formerly known as “Cap-and-Trade”) includes three tiers of expenditures:
- Tier 1 (appropriations related to the Manufacturing Tax Credit, the State Responsibility Area Backfill, and the Legislative Counsel Climate Bureau) funded first.
- Tier 2 ($1 billion allocated for High-Speed Rail and another $1 billion for purposes specified in SB 840) & Tier 3 (Affordable Housing, Transit and Intercity Rail Program, Community Air Protection, Sustainable Communities and Agricultural Land Conservation, the Low Carbon Transit Operations Program, Health and Resilient Forests, and the Safe & Affordable Drinking Water Program).
- Tier 3 appropriations will transition from percentage-based continuous appropriations to capped dollar amounts, with associated reductions as necessary to ensure that Tiers 1 and 2 are fully funded.
The Governor’s approach will also maintain the 2025 Budget Act agreement to fund CAL FIRE with $1.25 billion in GGRF in 2026-2027, $500 million in 2027-2028, and $500 million in 2028-2029.
Additional Proposed State Funding Highlights
The budget also proposes the following notable funding investments across key policy areas:
- Coastal Resilience: $107 million to protect coastal communities from climate-related impacts.
- Transformative Climate Communities Program: $137.4 million for community-led development and infrastructure projects.
- Community Resilience Centers: $55.3 million for new construction and upgrades to neighborhood emergency shelters.
- Urban Forestry Program: $22.8 million to expand urban greening efforts and deliver long-term environmental and community benefits.
- Parks and Outdoors: $35 million in continued investments to enhance parks and outdoor spaces statewide.
- Clean Air and Energy: $326 million to support the state’s evolving energy needs while reducing air pollution.
- CAL FIRE: $6.2 million for 31 ongoing positions to help meet the state’s goal of conducting 250,000 parcel inspections annually.
- River Forecasting and Snow Survey Resources: $9.5 million for the Department of Water Resources to provide 24-hour river forecasting and snowpack measurements.
- Delta Levee Mitigation: $14 million for the Department of Water Resources to implement levee safety projects in the Sacramento–San Joaquin Delta.
- Federal Rural Health Transformation Program: $233.6 million in federal funds in federal fiscal year 2026 to expand healthcare access and support workforce and infrastructure improvements.
- Apprenticeship Training Grant Program: One-time funding of $18.2 million in 2026–27, $18.1 million in 2027–28, and $17.8 million in 2028–29 for the Department of Industrial Relations for grants to approved apprenticeship programs in construction and related trades.
- California Tahoe Conservancy: $8.4 million for the initial project phases of programs included in the Environmental Improvement Program for the Lake Tahoe Basin, including $3.9 million from General Obligation bond funds and $4.5 million from other funding sources.
Paying Down Long-Term Debt
The Governor’s budget proposes $11.8 billion in debt reduction over four years, including a $3 billion repayment in the 2026–27 fiscal year, of which $2.5 billion would be directed to the California Public Employees’ Retirement System (CalPERS). The funds do not pay down the unemployment funds borrowed from the federal government during the pandemic, which will continue to be paid by employers.
Additional Background and Resources
- More information on the budget from Jason Sisney, Budget Advisor to Assembly Speaker Robert Rivas, can be accessed here.
- A recording of the press conference can be viewed on the Governor’s YouTube channel.
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