Wait-and-see budget falls short on Californians’ biggest priorities: housing and homelessness, climate change, and public safety

By Cal Cities Staff

California Director of Finance Joe Stephenshaw unveiled a $348.9 billion budget today that was light on the details and even lighter on new investments in housing, climate change, and public safety. The budget proposal also sustains a significant cut to the historic funding levels of the state's flagship homelessness program.

"Like the state, local governments are facing fiscal headwinds, which is why all levels of government need to work together to ensure California can keep delivering the vital services our residents depend upon. This budget falls short on that vision," said Cal Cities Executive Director and CEO Carolyn Coleman in a statement. "Budgets reflect our values, and this budget misses the mark on several priorities for the millions who call California home."

Stephenshaw stressed two points during his presentation. First, the budget proposal contains little in the way of new spending, apart from constitutionally required increases. Second, the Governor's team is taking a wait-and-see approach. According to the Legislative Analyst's Office - which struck a less optimistic note - stock market volatility, uncertain federal policies, and elevated or re-emerging inflation could force hard decisions later in the year.

Statements from top Democrats in the Senate and Assembly also expressed caution. "Today's roaring tax revenues may not last, so this moment also should be used to strengthen schools and accelerate much-needed housing construction," said Assembly Speaker Robert Rivas and Assembly Budget Chair Jesse Gabriel. "Building more reserves now is key for the future, along with doubling-down on budget oversight to ensure responsible spending.

To that point, Stephenshaw noted that the budget proposal today is a "snapshot," with the true budget proposal coming in May, when Gov. Gavin Newsom will unveil a revised budget proposal based on new tax returns.

-Brian Hendershot, Cal Cities Advocate Managing Editor

Revenue and Taxation

Despite worries of ongoing structural deficits, the Governor's proposed budget came in at nearly $28 billion higher than last year's budget. The Administration painted a rosier picture than most, projecting a $2.9 billion budget deficit, while increasing the state's reserves to $23 billion. Stephenshaw noted that revenues are $42.3 billion more than projected, largely driven by personal income tax gains.

Ultimately, the Governor's budget seeks to address the $2.9 billion deficit by suspending a $2.8 billion "true-up" deposit into the state's Budget Stabilization Account. While this accounting maneuver may ease the fiscal pain this year, the proposed budget projects a $22 billion deficit for Fiscal Year 2027-28 and shortfalls in the preceding two years, guaranteeing difficult decisions for the next Governor.

Stephenshaw was pointed in his comments, noting that the proposed budget does not include any significant new spending. Rather, it focuses on implementing previous programs.

The Administration's proposal stands in stark contrast to the LAO, which late last year projected a $18 billion deficit for 2026-27, with ongoing deficits upwards of $35 billion. The office noted that despite income tax revenues coming in above budget projections - driven by optimism over tech and artificial intelligence stocks - California is facing weak economic conditions. This potentially overheated stock market, coupled with tariffs, lower consumer spending, and slower hiring, caused the LAO to project a much bleaker outlook.

Additionally, constitutional restraints and increased costs over the budget window are preventing revenues from alleviating the projected budget deficit. In fact, the LAO projects California's revenue improvements will be almost entirely offset by constitutional spending requirements for schools, reserve deposits, and debt payments, erasing almost all revenue gains.

The LAO also acknowledged that other costs are expected to increase by nearly $6 billion next budget year, including statewide expenditures like retiree health care and pension payments, as well as impacts from federal cuts.

- Ben Triffo, legislative affairs lobbyist

Community Services

As expected, the Governor's proposed January budget does not include significant new investments to address homelessness. For years, Cal Cities has called on the Legislature and the Governor to provide ongoing funding for the Homeless Housing, Assistance and Prevention (HHAP) grant program, maintaining $1 billion in level funding annually.

Last year's budget did not include any new HHAP funding for 2025-2026 and slashed funding for the next round of the program in half for 2026-2027. The proposed budget maintains the $500 million negotiated in last year's budget process. However, it does not restore that allocation to the full $1 billion or allocate any funding for future rounds of the program.

The budget emphasizes that the funding is contingent on enhanced accountability and performance metrics. However, there is no information about what those metrics will entail. The Administration also committed to monitoring changes at the federal level that could create increased housing instability and to exploring programmatic flexibility to mitigate impacts here in California.

Cal Cities will work with the Legislature to restore HHAP funding to historic levels and continue advocating for ongoing, predictable funding.

• Child Care
  • The budget proposal includes an increase of $89.1 million ongoing General Fund for cost-of-living adjustments to child care programs administered by the Department of Social Services.
  • The budget proposal includes an increase of $11.5 million in one-time Proposition 64 funding for child care infrastructure, specifically targeted toward communities impacted by recent fires.
• Outdoor Access
  • The budget proposes $6.8 million in ongoing General Fund allocations to support the California State Parks Library Pass program, which allows library cardholders to borrow park passes at their local library for free.

- Caroline Grinder, legislative advocate

Housing, Community, and Economic Development

The most notable takeaway from the Department of Finance's budget proposal today is that there is no new funding for some of the most effective programs local governments have historically used to help promote affordable housing, including the Infill Infrastructure Grant Program, the Multifamily Housing Program, and the Low-Income Housing Tax Credits.

Although today's budget release from the Department of Finance includes some funding for affordable housing, it is not remotely enough. Local governments were anticipating up to $800 million in Cap-and-Invest funding to support affordable housing and sustainable communities. The proposed budget would provide up to $560 million through the program.

In a recent poll, two in three Californians said that housing affordability is a big problem, with nearly half citing personal financial strain as a result. This budget continues the disheartening trend of the state cutting funding for necessary affordable housing programs. As budget negotiations continue, Cal Cities will push the Legislature to include more affordable housing funding to address this decades-in-the-making crisis.

The Governor also announced five housing policy proposals in the budget:

• Coordinated Financing: Align affordable housing programs under the Housing Development and Finance Committee to better coordinate state housing resources with complementary financing tools.
• Prioritizing Efficiency: Create a single, coordinated application and award process for any future housing appropriations. The Administration also proposed codifying a long-term allocation of private activity bonds for affordable housing.
• Modernizing the Affordable Housing and Sustainable Communities Program: The Governor is proposing changes to modernize this critical program, which local governments have relied on to promote affordable housing development.
• Preservation and Sustainability: The Governor is hoping to use Low-Income Housing Tax Credits to help keep existing housing affordable and stable long-term.
• Rebuilding after the Los Angeles Fires: The Governor stated that the May Revision will include a proposal to assist in efforts to continue rebuilding after the Los Angeles Fires.

- Brady Guertin, legislative affairs lobbyist

Environmental Quality

The Governor's proposed budget includes two important sources of climate funding: $3.77 billion from the Greenhouse Gas Reduction Fund (GGRF) and $2.1 billion from the 2024 climate bond.

The GGRF's new framework provides a tiered-structure approach to allocating Cap-and-Invest funding, including $1 billion as discretionary funding for the Legislature to appropriate. The Governor's proposed budget earmarks the entire $1 billion in discretionary funding, mostly for Cal Fire's operational costs - which is usually and more aptly funded through the General Fund. Funding Cal Fire's operational costs this way would leave no wiggle room for key climate programs for cities, like organic waste diversion grants and other climate-safe infrastructure investments. Cal Cities will work with the Legislature to ensure there is funding available for continued local climate change preparedness efforts.

The GGRF tiers are funded in sequential order based on available funding:

• GGRF Tier 1 ($370 million): Funding for the manufacturing tax credit and other state operations costs.
• GGRF Tier 2 ($2 billion): $1 billion for the high-speed rail project and $1 billion discretionary, including the $750 million for Cal Fire operations costs, with the remaining mostly focused on supporting transit passes and climate-based research.
• GGRF Tier 3 ($1.4 billion): Funding for programs, including up to $560 million in affordable housing and sustainable communities (see the Housing, Community, and Economic Development section for details), transit and intercity rail capital ($283 million), community air protection ($177 million), healthy and resilient forests ($141 million), and safe and affordable drinking water ($92 million).

The Governor's budget proposes $2.1 billion for the second year of the $10 billion climate bond, a Cal Cities-supported proposition that city leaders rallied for in 2024. The proposed budget would infuse Proposition 4 funding into the following climate and environmental program areas:

• Safe drinking water, drought, flood, and water resilience ($792 million): The budget proposes funding for flood management and control ($232 million), water systems and private wells at risk of failing and connecting unsewered homes in disadvantaged communities to a centralized wastewater system ($173 million), and repairs to existing water conveyance projects to improve water supply reliability ($68.8 million).
• Wildfire resilience ($314 million): The budget proposes continued investments in various wildfire and forest resilience projects and programs (as described in the Public Safety section), as well as funding for wildfire risk reduction related to electricity transmission ($15.2 million).
• Coastal resilience ($107 million): The budget proposes investments to protect coastal communities against coastal erosion and sea level rise impacts, conserve and restore biodiversity and natural areas, and improve public access to the coast.
• Extreme heat ($241 million): This includes grant funding for transformative climate communities ($137.4 million), community resilience centers ($55.3 million), and urban forestry ($22.8 million).
• Clean air and energy ($322 million): The budget proposes investments for public financing of clean energy transmission projects to the California Infrastructure Economic Development Bank.

- Melissa Sparks-Kranz, legislative affairs lobbyist

Public Safety

The Governor's proposed budget does not provide any new funding for implementing Proposition 36. However, the budget does note that Proposition 36 has had a significantly lower impact on the California Department of Corrections and Rehabilitation than expected, with only 562 inmates projected, down from 1,878 in the 2025-26 Budget. The only major new investment for reducing crime is $30 million to expand drug interdiction efforts.

The budget does include significant investments to wildfire resiliency and mitigation, with approximately $314 million proposed for various wildfire resiliency and fire prevention efforts from the 2024 climate bond (for additional Prop. 4 details, see the Environmental Quality section). The proposal also includes $150 million in General Fund for several disaster preparedness and response programs at the Office of Emergency Services (CalOES).

Below is a breakdown of major allocations, reductions, and policies announced in the Governor's January budget:

• Local Fire Prevention Grants: $58 million from Proposition 4 to fund wildfire prevention and hazardous fuels reduction projects and activities in and near wildfire-threatened communities, with a focus on increasing the protection of people, structures, and communities.
• Defensible Space (Zone Zero): $19.6 million from Proposition 4 for technical and financial assistance to help homeowners in wildfire-vulnerable areas implement defensible space mitigations, including Zone Zero.
• Defensible Space Inspections: $6.2 million General Fund and 31 positions ongoing for Cal Fire to continue to meet the state's goal of 250,000 annual parcel inspections within the State Responsibility Areas.
• Cal OES Funding: $5.1 million General Fund to strengthen the state's regional response capacity and key partnerships with local governments to increase disaster resilience capacity.
• Drug Interdiction Funding: $30 million General Fund to further expand the Military Department's existing efforts to prevent drug trafficking by transnational criminal organizations throughout the state, with a focus on fentanyl.

- Jolena Voorhis, legislative affairs lobbyist

Transportation, Communications, and Public Works

At first glance, the Governor's spending plan for transportation, broadband, and public works appears to be in line with most of last year's enacted budget. However, several programs seem to utilize rosy assumptions and higher estimates that may not be realized.

While one-time transportation investments mirror last year's budget, the January budget proposes a total decrease from last year's budget - from $19.8 billion to $18.5 billion. Below is a breakdown of the major allocations, programs, and policies proposed in the Governor's budget proposal.

• SB 1. The state estimates a decrease in gasoline consumption, with consistent declines each year thereafter. The proposed budget allocates a continuation of funds to further study sustainable revenue source frameworks (such as the road use charge) to replace taxes collected from gasoline.
  • In response to legislation signed last year, the budget includes $2.3 million for the California Air Resources Board to evaluate, develop, and implement the appropriate regulatory changes necessary to authorize a higher blend of ethanol fuel (E15), which can create cost savings up to 20 cents per gallon and emissions benefits compared to standard E10 fuel.
• 2028 Olympic Games. The spending plan includes $17.6 million one-time from the State Highway Account (SHA) to support transportation project planning associated with the 2028 Olympic and Paralympic Games. It also includes provisional language to allow Caltrans to spend up to $20 million from the SHA for Games Route Network capital work.
• High-Speed Rail Authority. The Budget incorporates no less than $1 billion annually (through 2045) from the Cap-and-Invest auction proceeds, along with carryover funds for a total of $1.4 billion.
• Broadband. Extends the encumbrance period to the end of 2028 for the Department of Technology to allocate $550 million in staff salaries to complete the Middle-Mile Broadband Network.
• Dam Safety. The proposal includes a reversion of $47 million General Fund for the Department of Water Resources' Dam Safety program, which provides state funding for repairs, rehabilitation, and enhancement.
• Infrastructure. The state's Five-Year Infrastructure Plan includes approximately $58.5 billion in state infrastructure investments over the next five years. In consideration of the current fiscal outlook, the plan addresses only the most critical investments that support core state functions, such as fire and life safety and/or court-ordered projects.

- Damon Conklin, legislative affairs lobbyist

Governance, Transparency, and Labor Relations

The Governor's budget includes $9.8 billion for the state's contribution to CalPERS, an increase of $741.9 million from the last fiscal year.

The budget would implement cost containment measures included in the last budget by eliminating 6,002 vacant positions and the associated expenditure authority, totaling roughly half a billion for the past fiscal year and ongoing. It would also reduce state operations expenditures by up to 7.95% across all state funds, totaling approximately $1.5 billion in 2025-26 and ongoing.

Subsequent Injuries Benefits Trust Fund

The budget includes $12.7 million Workers' Compensation Administration Revolving Fund and 57 positions in 2026-27, growing to $36.5 million and 177 positions in 2030-31 and ongoing, for the Department of Industrial Relations to address the backlog of cases resulting from years of substantial growth in the Subsequent Injuries Benefits Trust Fund (SIBTF) program.

The Governor's budget states that the SIBTF program has expanded significantly beyond its original purpose, and without changes, the anticipated increase in claims in future years will lead to severe staffing challenges and long delays for workers. It also states that comprehensive reform is needed to make this program viable and available for injured workers.

- Johnnie Pina, legislative advocate

Next steps

With the Newsom Administration's priorities in hand, the Legislature will convene its budget subcommittees to review the Governor's proposed budget. While the three parties will ultimately pass a balanced budget - lawmakers must do so by June 15 to get paid - there will surely be many twists and turns along the way.

The next big budget announcement will arrive in mid-May, when Gov. Gavin Newsom will unveil a new proposal based on the latest economic forecasts.