Blogs

By: @Ophelia Szigeti

On January 10, California Director of Finance Joe Stephenshaw presented a detailed overview of the Governor’s 2025-26 budget proposal, highlighting significant fiscal developments. According to Stephenshaw, State General Fund revenues are expected to rise by $16.5 billion compared to the 2024 Budget Act, a reflection of favorable economic and fiscal conditions. General Fund revenues for Fiscal Year 2025-26 are projected to total $225.1 billion. This includes: 

• $133.7 billion from personal income tax, 
• $35.1 billion from sales and use tax, 
• $37.7 billion from corporate tax, 
• $4.3 billion from insurance tax, 
• $7.2 billion from other revenue sources, 
• and a $7.1 billion transfer from the Budget Stabilization Account (BSA). 

Expenditures for the fiscal year are estimated at $228.9 billion, allocated as follows: 

• $83.3 billion for K-12 education, 
• $83.6 billion for Health and Human Services, 
• $23.3 billion for Higher Education, 
• $13.6 billion for Corrections and Rehabilitation, 
• and $25.0 billion for other expenditures.  

The Department of Finance (DOF) projects revenues to be $8.2 billion (1.4%) higher than estimates provided by the Legislative Analyst’s Office (LAO), underscoring a more optimistic financial outlook.  

Rainy Day Fund and Reserves 

The Governor’s 2025-26 budget proposal sustains a planned withdrawal of $7.31 billion from the Budget Stabilization Account, commonly referred to as the Rainy-Day Fund, to address anticipated fiscal challenges. Despite this withdrawal, the state’s overall financial reserves are projected to remain robust, totaling $17 billion by the end of the fiscal year. This includes $10.96 billion retained in the Rainy-Day Fund, which serves as a critical safeguard against unexpected economic downturns or emergencies. Additionally, $4.5 billion is allocated to the Special Fund for Economic Uncertainties, providing flexibility to address unforeseen budgetary pressures. Another $1.5 billion is set aside in the Public School System Stabilization Account, ensuring stability and support for California’s education system. 

Proposition 2 Reforms 

The Governor’s budget also introduced two proposed reforms to Proposition 2, aimed at strengthening California’s ability to save during periods of economic growth. The first reform proposes raising the cap on deposits into the Rainy-Day Fund from 10 percent to 20 percent of General Fund revenues, allowing the state to build a larger financial cushion to prepare for future economic downturns. The second reform excludes Rainy Day Fund deposits from the State Allocation Limit (SAL), thereby preserving the state’s flexibility to save without triggering restrictions on spending. In addition to these savings enhancements, Proposition 2 funding is being utilized to address initiatives to test for and mitigate lead contamination in school water systems.  

Limited New Commitments Amid Fiscal Prudence 

Despite the growth in capital gains, the Governor is proposing a cautious approach to managing State finances. The newly proposed budget allocates resources to address critical funding needs in essential programs, with the goal of ensuring that services are sustained without overextending commitments. Ongoing information technology projects are also supported to modernize state operations and improve efficiency. Additionally, the budget allocates funding to implement newly enacted legislation. However, the state has deliberately limited new spending commitments, focusing instead on safeguarding long-term financial stability.  

Climate Resilience Bond and Environmental Investments 

The budget dedicates $2.7 billion from the $10 billion Climate Resilience Bond (Proposition 4) supported by CSDA and passed by voters in 2024. Key allocations include: 

• Water Projects: $183.2 million for water quality and tribal infrastructure; $173.1 million for flood management; $153.4 million for water recycling; and $148.2 million for the Salton Sea Management Program. 
• Wildfire and Forest Health: $82.2 million for forest health initiatives; $59.1 million for local fire prevention grants; and $9.1 million for wildfire mitigation programs. 
• Coastal Resilience: $30.8 million for coastal lands and habitats, plus $20.3 million for sea level rise and wetland restoration. 

Note that some funding is new, and some represents shifts of funding from General Fund to bond funding. Director Stephenshaw noted $2.5 billion in prior authorized climate investments, including $200 million per year through 2028-2029, as specified, which would continue. For an outline of specific funding categories, fund shifts, grant opportunities, and guidance, please visit our guest article from CSDA business affiliate Townsend Public Affairs, "Billions in Funding Opportunities from Prop 4 Climate Bond Begin to Take Shape". 

Development of Port Upgrades to Serve Offshore Wind Generation and Other Purposes 
 

The Governor’s budget proposal includes $228.2 million for port upgrades, including construction and improvements of publicly owned port facilities for manufacturing, assembly, staging, and integration of components and vessels, to support the development of offshore wind generation and other activities 

Parks and Community Resilience 

The proposed budget would allocate $190 million to the Statewide Park Program to support the development and improvement of parks in disadvantaged communities, a critical investment aimed at promoting equitable access to green spaces and recreational opportunities. In addition to the park improvements, the budget dedicates $85.9 million to coastal resilience projects. These initiatives focus on addressing the impacts of climate change, such as rising sea levels and erosion. Further, $46.8 million is allocated to urban greening projects, which aim to expand tree canopies, reduce urban heat islands, and improve air quality in densely populated areas. Finally, $16.1 million is designated for extreme heat mitigation efforts, supporting programs that reduce heat-related risks through innovative solutions like cooling centers, heat-resistant infrastructure, and public awareness campaigns. 

Housing and Infrastructure Reforms 

The Budget also included the Administration’s proposal to create a California Housing and Homelessness Agency to streamline housing efforts, one of two new agencies proposed for creation. Policies will focus on reducing construction costs, eliminating barriers to development, and promoting transit-oriented projects. Additionally, the 2025 Five-Year Infrastructure Plan allocates $55.4 billion for essential state responsibilities, including fire and life safety projects. 

Cap-and-Trade and Decarbonization 

The cap-and-trade program, which is currently authorized to run through 2030, is already the subject of early extension discussions, which CSDA has participated in, as the state seeks to ensure long-term stability and predictability.  

At the same time, the Administration is prioritizing collaboration with the Legislature to develop and implement measures that ease the financial burden of the clean energy transition on residents. A key focus is on reducing electric bill costs for Californians while accelerating progress toward a clean energy economy. This includes exploring policies to enhance energy efficiency, expand renewable energy infrastructure, and ensure equitable access to clean energy benefits. CSDA closely monitors these investments as special districts work to comply with the California Air Resources Board’s Advanced Clean Fleets vehicle electrification mandate. 

Transportation 

The Budget retains the amounts of transportation spending outlined in previous state budgets, including $15.4 billion for various rail and transit projects. The appropriations and projects include $7.7 billion for high-priority transit and rail infrastructure projects to improve rail and transit connectivity between state and regional/local services; $4.2 billion for the High-Speed Rail Authority to continue building the Central Valley Segment; $1.2 billion for projects that improve goods movement on rail and roadways at port terminals; $1.1 billion for Active Transportation projects, the Reconnecting Communities Highways to Boulevards Pilot program, and climate adaptation projects; $1.1 billion for the Zero Emission Transit Capital Program; and $150 million for grade separation projects. 

Cannabis Regulation and Environmental Protection 

Proposition 64 funding places an emphasis on regulatory and enforcement activities, dedicating $93.6 million specifically to address the environmental impacts caused by illegal cannabis cultivation. These illegal activities detrimentally impact the work of special districts, particularly those providing water service in impacted areas. This funding supports critical efforts, including the cleanup and remediation of affected sites, as well as the enforcement of environmental protections to prevent further damage. The allocation represents 20 percent of the total funding, underscoring the importance of mitigating the ecological harm associated with unregulated cannabis operations. 

Master Plan for Career Education 

The recently released January budget allocates more than $100 million to implement the newly developed Master Plan for Career Education, signaling a significant investment in the state’s education and workforce development strategies. This plan is designed to align state education initiatives with anticipated economic demands and further seeks to expand affordable access to educational and career opportunities. Among the key investments is $4 million specifically earmarked to support regional coordination efforts, which will facilitate partnerships between schools, colleges, employers, and community organizations. These initiatives are expected to create a more adaptable and skilled workforce while driving economic growth and innovation across the state. 

Efficiencies in Government Operations 

The proposed budget also includes a plan to eliminate 6,500 state positions, a reduction from the 10,000 initially considered which will save the state over $1.2 billion over a two-year period. Director Stephenshaw noted the need to strategically approach balancing fiscal responsibility with the need to maintain essential public services. This decision ensures that critical areas, such as health, safety, and firefighting, remain adequately staffed to protect California's residents and natural resources. Among the exemptions are positions within CAL FIRE and critical administrative roles that support the effective delivery of public services and emergency response coordination.  

Risks to Economy and Revenue 

Director Stephenshaw also highlighted several risks to the state’s economy that could affect revenue ahead of the May Revise and in future years. These include stock market volatility and potential declines, which would significantly impact state finances. Additional uncertainties stem from potential new federal policies, such as tariffs that could drive inflation, immigration policies that may lead to labor shortages, elevated or re-emerging inflation prompting restrictive monetary measures, and delayed tax deadlines resulting from natural disasters. 

CSDA’s Response 

Regarding the Governor’s proposed Budget, CSDA Chief Executive Officer, Neil McCormick, noted that, "True affordable housing and safe neighborhoods depend on affordable and reliable water, sewer, fire protection, parks, and other essential services provided by special districts. CSDA applauds the prudent work by the Governor and Legislature to well-position California’s 2025-26 Budget and asks for similar prudence on any proposals that could increase costs or reduce revenues for our local agencies that are critical to meeting the needs of millions of Californians." 

Over the following weeks, CSDA’s advocacy team will evaluate the Budget, monitor key committee hearings in the Legislature, and engage with lawmakers where appropriate. 

Access the Full Budget 

For more details on the Governor’s January Budget, visit the Department of Finance website.