Highlights and Analysis of the 2026-27 Enacted Budget

Executive Summary

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Overview

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Budget Rides Artificial Intelligence (AI) Tax Coattails. General Fund revenues in 2026-27 would reach $237 billion, a slight drop of about 1 percent from 2025-26 but a gain of 3.2 percent from two years ago. The revenue forecast updates for the January 2026 Governor's proposal and the enacted 2026 Budget Act both shifted estimates higher by a combined $53 billion compared to expectations in place for the 2025 Budget Act, reflecting continued strength in AI-driven capital gains, at least for now.

General Fund Spending Reaches Record High. The enacted budget authorizes General Fund spending of $251 billion in 2026-27, an increase of $23 billion or 10 percent over the enacted 2025-26 budget. Spending increases in two main areas, TK - 14 Education and Health & Human Services, totaled more than $18 billion, accounting for 80 percent of that total spending increase.

Over Governor Newsom's tenure, General Fund expenditures are set to grow by 79 percent through 2026-27. The table below tracks the revenues and expenditures seen since the year prior to Governor Newsom's tenure through three years into the future. Unfortunately for California taxpayers, the state budget is systemically out of balance, as shown by the annual excess of expenditures over revenues throughout the forecast.

Tax Increases, Borrowing, and Reserves Prop Up Record Spending. The enacted budget reflects nearly $14 billion in budget "solutions" to address deficits through new tax increases, borrowing, and additional use of reserves. These include $5.4 billion from suspending the deposit into the Rainy Day Fund, $3.9 billion in new borrowing known as an education "settle-up obligation," and several tax increases generating $2.0 billion in new revenue.

Insufficient Spending Solutions Leave Long-Term Deficits, Despite Higher Revenue. The Governor's January budget proposal estimated a deficit of $2.9 billion for 2026-27 and a much larger deficit of $22 billion for 2027-28. The enacted budget now reflects budgets that are technically balanced in 2026-27 and 2027-28. The lack of significant ongoing spending reductions means that revenues and expenditures will remain fundamentally out of balance for the duration of the budget forecast. Annual operating deficits, which exclude the funds carried in from prior years or reserves, range from $18 billion in 2026-27 to $8 billion in future years, as illustrated in the chart below. The persistence of these deficits means that the state budget is unsustainable over the long term.

Special Funds and Federal Funds Also Increase. State special funds add another $95 billion in spending, an increase of 4.4 percent, bringing total state spending to $352 billion in 2026-27. Federal funds of $187 billion are also reflected in the budget, an increase of 4.9 percent, despite claims from some Democrats that the federal government has gutted programs. When counting all these fund sources, the budget spends $539 billion in 2026-27, an increase of 2.6 percent.

Budgetary Borrowing Increases Despite Tax Revenue Surge. The budget adds another $2 billion on net to the short-term borrowing approved in the past few budgets, bringing the budgetary "Wall of Debt" to nearly $30 billion, despite the recent surge in General Fund tax revenues.

First Use of Projected Surplus Temporary Holding Account. The budget makes use of the recently established Projected Surplus Temporary Holding Account, a legislatively created account intended to shift resources forward by one year. The budget places $6.4 billion into this account in 2026-27 to provide more resources to cover planned spending in 2027-28, which helps cover the operating deficit for that year.

TK-12 Education

Proposition 98 TK-14 Funding and Settle-Up Debt. The Proposition 98 TK-14 guarantee levels are $125 billion for the 2024-25 fiscal year, $125 billion in 2025-26, and $128 billion in 2026-27. In the 2025-26 fiscal year, the budget underfunds the guarantee by $3.9 billion, for a total guarantee of $121 billion, creating a "settle-up" obligation.

Local Control Funding Formula (LCFF). The budget includes a 4.31 percent cost-of-living adjustment (COLA) for the LCFF. When combined with population growth adjustments, this will result in a $2.2 billion increase in discretionary funds for schools. This is 1.44 percent above the statutorily required 2.87 percent COLA. The "super cola" is included to cover the paid pregnancy leave mandate.

Major Funding Increase for Special Education. The budget includes an increase of $2.4 billion ongoing for special education, an increase of 43 percent, bringing the per-pupil base rate to $1,340. The Legislative Analyst's Office previously noted that local funds are currently covering about 60 percent of special education costs, and the increase in special education funding could reduce that by 12 percent.

Changes the Role of the Superintendent of Public Instruction. The budget reorganizes California's education governance structure by establishing the role of the Education Commissioner, appointed by the Governor and confirmed by the Senate. The budget shifts the management of the California Department of Education (CDE) from the Superintendent of Public Instruction (SPI) to the Education Commissioner, beginning January 1, 2027.

Implements 14 Weeks of Paid Pregnancy Leave. The budget requires a school district, county office of education, charter school, or educational joint powers authority to provide up to 14 weeks of leave of absence with specified pay benefits because of pregnancy, miscarriage, childbirth, abortion, or recovery from those conditions, beginning January 1, 2027.

Significantly Expands Community School Funding. The budget provides $1 billion ongoing Proposition 98 General Fund to continue the expansion of the community schools model. The Community Schools Partnership Act was established in 2021 and describes a community school as a public school with strong and intentional community partnerships to promote pupil learning and whole child and family development.

Shifts All California State Preschool Programs Under Proposition 98. The budget shifts non-LEA state preschool programs into Proposition 98 and "re-benches" Proposition 98 to account for this shift, which involves pulling more General Fund into the Proposition 98 guarantee. The budget also moves $813 million from the General Fund to the Proposition 98 General Fund to avoid any negative impacts to Proposition 98 supported programs.

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Higher Education

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University Compact Increases Partially Restored. Previously agreed-upon "compacts" between the Governor and the University of California (UC) and the California State University (CSU) promised annual increases of 5 percent per year. However, the state delayed or pulled back compact increases in the past two budget cycles. The 2026-27 enacted budget provides the full 5 percent increase for Year 5 of the compacts, amounting to $254 million for UC and $265 million for CSU ($519 million combined). However, the budget provides only a portion of the previously delayed Year 4 increase, amounting to $197 million combined. The budget continues to delay the remainder of the Year 4 increase, totaling $241 million for UC and $252 million for CSU ($493 million combined).

Restoration of Base Budget Cuts Delayed. The 2025 Budget Act cut base funding for UC and CSU by 3 percent, or $274 million, including $130 million for UC and $144 million for CSU. The budget also provided a no-interest loan to the two systems to help mitigate the effects of the cuts. The 2026-27 budget delays restoration of those 3 percent base cuts and rolls over the cash flow loan into another one-year loan that the UC and CSU would have to repay in 2027-28.

Middle Class Scholarship Amounts Cut by One-Third. The enacted budget reduces the program goal to meet only 23 percent of students' unmet college expenses, compared to 35 percent the prior year, though Governor Newsom initially proposed a level of only 17.5 percent. The budget sets program funding at $691 million, a reduction of $268 million. The average MCS award would fall by about one-third from $2,937 to $2,015.

Community Colleges Funding and Enrollment Increases. The community college budget, which is set overall by Proposition 98, would reach just over $10 billion from the General Fund in 2026-27, an increase of $1.3 billion, or 15 percent, over the 2025-26 level. Within that total are a variety of specified funding increases, including a cost-of-living adjustment to the Student Centered Funding Formula of 4.31 percent ($441 million) and funding adjustments of $153 million intended to reflect enrollment growth of 2.5 percent.

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Health

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New Managed Care Organization (MCO) Tax Harms Californians. The budget relies on $575 million in new revenue in 2026-27 (and $2.3 billion annually through 2030) from a new MCO tax on both Medi-Cal managed care plans and commercial health insurance plans. This equates to $1.5 billion in health insurance premium hikes on individuals and businesses in California. A family of four on private insurance is likely to see their health premiums increase by several hundred dollars due to this misguided policy.

No Medi-Cal Managed Care Plans for the Undocumented. The budget reflects $472 million in General Fund savings from the transition of undocumented Medi-Cal beneficiaries from managed care plans to the fee-for-service system. The budget also appropriates $39 million for care coordination resources and navigators to aid in this transition. Undocumented adults will also begin to pay a premium of up to $50 a month in 2027.

Delays Budget Solutions to Reduce Undocumented Care Medi-Cal Costs. The budget reflects costs of $1.3 billion to delay two policies until July 1, 2027: (1) the elimination of prospective payment system reimbursement for community clinics for services to the undocumented, and (2) the elimination of dental benefits for undocumented Medi-Cal beneficiaries.

Legal Immigrants Kicked off Full-Scope Medi-Cal in 2027. The budget includes $303 million in costs to fund legal immigrant populations (refugees, asylees, victims of human trafficking, etc.) in full-scope Medi-Cal for one year until July 1, 2027, when they will then be moved into restricted-scope Medi-Cal benefits (limited to emergency and pregnancy services). This action is a stark and highly objectionable contrast in that the budget will maintain full-scope benefits for illegal immigrants while shifting legal immigrants to restricted-scope benefits. This means that Governor Newsom and the Democrats are penalizing immigrants who follow the laws while rewarding those who do not.

Dialysis Covered as a Restricted Scope Medi-Cal Benefit. The budget elevates outpatient dialysis to the equivalent of emergency care within restricted-scope Medi-Cal in order to prevent costlier kidney failure interventions. While covering outpatient dialysis as a restricted scope Medi-Cal benefit will likely prevent unnecessary ER visits, it could also begin a slippery slope of adding benefits for populations ineligible for Medi-Cal, including some illegal immigrants previously on state-only full-scope Medi-Cal.

Lower Medi-Cal Asset Limit in 2027. The budget includes $278 million to retain the existing $130,000 Medi-Cal asset limit for 2026-27, but then the asset test will decrease to $21,000 for individuals and $31,000 for couples on July 1, 2027. The Governor initially proposed an asset limit of $2,000, so this policy takes a middle option. This will affect numerous seniors and the disabled.

County Administration Costs. The budget allocates $197 million from the General Fund to support the county administration workload for the Medi-Cal program. This was a priority ask from the California State Association of Counties (CSAC).

Proposition 36 Behavioral Health Treatment Funding. The budget includes $20 million in funding over three years, for county behavioral health departments to continue Prop. 36 related mandatory drug treatment, a tiny fraction of the real treatment need.

Insufficient Funding for Distressed Hospitals. The budget includes $90 million to support grants to distressed hospitals and authorizes an additional $50 million at the discretion of the Department of Finance. In addition, the budget allocates $10 million to evaluate hospitals' financial distress across the state. This amount falls short of the $300 million for which both Senate Republicans and the California Hospital Association had advocated.

Questionable Diaper Contract Continued. The budget contains a public contract code exemption for the Diaper Access Initiative to continue exclusive contracts with the non-profit Baby2Baby, run by friends of First Partner Jennifer Newsom. Last year's budget allocated $20 million over two years for the program.

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Human Services and Child Care

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Provides a Temporary Waiver for County CalFresh Match Increases. The budget caps the share of CalFresh administrative costs a county must expend in fiscal years 2026-27 through 2028-29 at its contribution in the 2024-25 fiscal year, or however much the county was required to contribute to receive its full allocation of General Fund.

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Targeting Siskiyou County IHSS on Behalf of Political Allies. The budget includes policy language in a trailer bill, AB 152, that will force Siskiyou County to come to an agreement with an IHSS employee organization or risk a 10 percent fiscal penalty on its IHSS funding from the state.

Additional Funding for Immigration Legal Services. The budget includes $116 million in one-time General Fund to increase support for immigration legal services. When including previous ongoing baseline funding, this brings the total funding in the budget to $179 million. The budget also expands the eligibility for legal services to include "immigrant youth," who are defined as immigrants younger than 21 in removal proceedings.

Child Care Funding. The enacted budget includes $7.8 billion ($5.3 billion General Fund) for child care and development programs in 2026-27. This is an increase of $293 million General Fund over the revised 2025-26 budget. Included in this is $112 million General Fund for a 2.01 percent COLA.

Adds Child Care Slots. The budget includes $228 million from the General Fund to add 22,770 child care slots in 2026-27 and $41 million General Fund to restore 3,430 slots due to decreases in federal funding and Proposition 64 reductions. Of these new slots, 2,070 would be for General Child Care, and 20,700 would be Alternative Payment Program slots.

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Public Safety and the Judiciary

Proposition 36 Implementation Funding. The enacted budget provides $50 million in new one-time General Fund support to continue implementation of Proposition 36 (2024), including $10 million for court workload, $20 million for pretrial services, and $20 million for behavioral health treatment. This level of funding is well short of the $350 million estimated to be the annual Proposition 36 need.

Prison Closures. This budget reflects General Fund savings of $91 million in 2026-27 and $138 million annually thereafter from the closure of the California Rehabilitation Center, the fourth prison to close since 2021. The passage of Proposition 36 in 2024 signaled that voters demand accountability for repeat criminals. If more tough-on-crime initiatives like this follow, the California Department of Corrections and Rehabilitation (CDCR) could find itself in a position of needing more prison capacity.

Mental Health Receivership. In August 2025, the Coleman court ordered CDCR into receivership, transferring the responsibility for mental health delivery in the prison system from CDCR to a new Mental Health Receiver. The budget includes $46 million to establish the Office of the Mental Health Receiver and fund the first year of the receiver's operations. Actual inmate mental health treatment and services are projected to cost more than $760 million per year.

Federal Lawfare. The budget includes $27 million per year through 2028-29 for the Attorney General to sue the federal administration to slow or stop the President's agenda. As of August 4, 2026, the Attorney General had filed 82 lawsuits against the federal administration since President Trump assumed office in January 2025. This antagonistic posture could bring more harm than good for California.

Judgeships and Courthouses. The budget includes $100 million General Fund in 2026-27 and $44 million annually thereafter to fund 26 new judgeships plus related court facilities costs. In addition, the budget authorizes $1.3 billion in lease-revenue bonds to address the replacement or renovation of courthouses with the most immediate and critical needs. This funding is a major step toward fully funding and supporting the judicial branch.

Victims of Crime Act Backfill. The budget includes $50 million General Fund to continue partially backfilling the ongoing reduction of more than $100 million per year in federal victim services funding through the Victims of Crime Act. This state backfill is a lifeline to victim programs, allowing them to continue serving crime victims to the greatest extent possible given the reduction in federal support.

Next Generation 9-1-1. The budget includes $326 million from the State Emergency Telephone Network Account for the Office of Emergency Services (OES) to continue supporting the legacy 9-1-1 system while transitioning the state to Next Generation 9-1-1 (Next Gen 911). After problems plagued several dispatch centers that had transitioned to Next Gen 911, OES halted rollout, reevaluated its implementation plan, and changed direction dramatically. To hopefully bring clarity to the situation, the 2026-27 budget requires OES to contract with the RAND Corporation for an independent evaluation.

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Natural Resources and Environment

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Lower Auction Revenue Cuts Funding for Lower-Tier Programs by More Than $1 Billion. Estimated funding for Tier 3 programs fell from $1.4 billion at Governor's budget to $372 million by June as auction revenue estimates declined. The final budget also gives state operations and certain administrative costs priority ahead of Tier 2 and Tier 3 programs, leaving actual Tier 3 funding dependent on revenues available after higher-priority allocations.

More Than 60 Percent of Proposition 4 Allocated in First Two Years. The final budget provides $2.7 billion in specific Proposition 4 appropriations for 2026-27. Together with $3.5 billion appropriated in 2025-26, more than 60 percent of the $10 billion authorized by voters has now been appropriated. As implementation continues, the results of these early funding decisions will provide a clearer picture of how effectively these funding choices reflect the state's highest priority needs.

Wildfire Prevention Increasingly Relies on Finite and Volatile Funding. The budget provides $330 million from Proposition 4 for wildfire and forest prevention. While the budget maintains substantial funding for fire response, prevention increasingly relies on finite Proposition 4 bond funds and revenue dependent Greenhouse Gas Reduction Funds, rather than the large, one-time General Fund packages provided in prior years.

Final Budget Increases Proposition 4 Funding for Water. The final budget provides $1.05 billion from Proposition 4 for water related programs, more than $250 million above the Governor's January proposal. Major allocations include $263 million for drinking water grants and loans, $257 million for flood protection, and $100 million for water recycling and reuse, along with funding for groundwater recharge, drought and watershed resilience, conveyance repairs, and multibenefit land repurposing.

Tax Policy

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Expansion of Sales and Use Tax. The budget expands the state's sales and use tax to include sales of digital prewritten software, regardless of how the product is delivered to the purchaser. and Software-as-a-Service products. While many businesses across California are impacted, the tax expansion will hit the state's hospitals particularly hard. This change taxes the core tools hospitals use to provide patient care.

Limitation on Business Tax Credits, Including Research and Development. The budget extends the business tax credit cap at $5 million for three years. For each of the 2027, 2028, and 2029 taxable years, the budget allows a taxpayer to make an irrevocable annual election to receive a refundable tax credit in the amount of the credit over the $5 million cap. After the three-year extension noted above, beginning with tax year 2030, the budget establishes a permanent business tax credit limitation that is the greater of $5 million per corporation per year or 70 percent of a corporation's pre-credit tax liability.

CalCompetes Tax Credit Extension. The budget extends the $180 million per year CalCompetes Tax Credit program within the Governor's Office of Business and Economic Development through 2035.

Income Tax Exclusion for Wildfire Mitigation Grants. The budget expands and extends an income tax exclusion for wildfire mitigation assistance. The budget extends the current income tax exemption for wildfire loss mitigation grants through 2030, expands the exclusion of payments to include new Proposition 4 grant programs, and would expressly cover assistance for a variety of activities.

Film and TV Tax Credit Expansion. The budget makes numerous changes to the Film and TV Tax Credit program, including, but not limited to, increasing and expediting refundable tax credits.

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Housing

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Multifamily Housing Program. The budget provides $200 million from the General Fund for the Multifamily Housing Program, which provides low-interest loans for new construction, rehabilitation, and preservation of rental housing for lower-income households.

Federal Budget Bill Offers New Resources for Affordable Development. H.R. 1, the federal legislation enacted last summer, offers new resources for affordable housing. Prior to the enactment of H.R. 1, affordable housing developers needed to finance at least 50 percent of their projects with private activity bonds in order to gain access to 4 percent tax credits. H.R. 1 reduced this threshold to 25 percent, effectively doubling how many 4 percent tax credits California projects can draw down each year using the same amount of private activity bonds.

Restructures State's Affordable Housing Financing Programs. The 2026 budget significantly restructures how the state awards its affordable housing funding. In California, state funding for the construction of affordable housing can come from several different departments and multiple different programs.

Waiving Local Impact Fees Creates Pros and Cons. A new housing development will generally increase effects like wear and tear on local roads, the amount of effluent that will flow through local sewers, local demand for utilities, and the number of children attending local schools. To offset the associated costs, local jurisdictions frequently charge the project builder "impact fees." The budget includes changes in the imposition of these local development impact fees on state-funded affordable housing projects.

Low-Income Housing Tax Credit Program. The budget provides $630 million in 2026-27 for the Low-Income Housing Tax Credit (LIHTC) program, which provides supplemental tax credits within the State Housing Tax Credit program.

Disaster Relief Program. The budget provides $100 million ($56 million General Fund, $44 million National Mortgage Settlement Fund) for the new Disaster Relief Program within the California Housing Finance Agency to assist homeowners seeking to rebuild in the wake of natural disasters.

Homelessness

Budget Includes Homelessness Funding but Also New Match Requirements. The budget provides $890 million for Round 7 of the Homeless Housing Assistance and Prevention Program ($500 million included in the 2025 Budget Act and an additional $390 million included in the 2026 Budget Act). The distribution of the funding would be subject to several layers of performance metrics and outcome data.

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Business Support and Employment

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California's Unemployment Debt Continues to Challenge Employers. Despite increased federal employer taxes intended to pay down the principal, California continues to carry a balance of $19 billion for federal unemployment insurance (UI) loans and must pay $668 million in interest in 2026-27.

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No Principal Payment for UI Debt, but Ballot Measure Might Help. As part of the budget package, ACA 20 placed a measure on the November ballot that, if approved by voters, would authorize-but not require-the state to make additional payments on the UI debt from required budget set-asides.

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Subsequent Injuries Benefits Trust Fund. Provides an increase of $13 million from an employer-funded account to handle claims backlog and support growth within the Subsequent Injuries Benefits Trust Fund. Program reforms included in a trailer bill are expected to limit rising program costs.

Employment Development Department (EDD) Modernization. Includes $146 million in funding for EDD IT systems, improved service for claimants, and fraud prevention, continuing a five-year modernization plan initially funded in 2022-23.

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Transportation

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Gasoline Taxes Increase Again. The automatic annual gas tax increase raised the price of gas by 2.2 cents per gallon and diesel fuel by 1.6 cents per gallon, effective July 1, 2026. These tax increases are estimated to generate an additional $334 million in state tax revenues.

High-Speed Rail Budget. Includes $1.5 billion in 2026-27 for continued construction and reflects increased 2025-26 spending of $4.6 billion, mostly using carryover funds from the prior year.

High-Speed Rail 83 Percent Unfunded. Despite the commitment of $1 billion annually from the state's Cap-and-Invest program, the project has a $192 billion funding gap and could run out of cash in December 2027. Financing options remain uncertain and associated interest costs would significantly increase the overall cost of the project.

Transit Funding and Loans. Provides more than $2 billion in state funds for transit in 2026-27 to subsidize operations, maintenance, and capital expenses. The state is required to issue up to $590 million in loans to Bay Area transit entities as temporary financial assistance while voters consider a local tax measure on the November ballot that would increase local transit funding.

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General Government

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Member Requests and Local Projects. The budget includes just over $1 billion in funding for a long list of over 500 different member requests, local projects, and last-minute awards. Most of the $1 billion in awards never received any public discussion in a budget hearing. Out of this total, about $360 million went to local governments for equipment such as fire or police vehicles or infrastructure projects. Another $600 million was awarded directly or indirectly to private nonprofits across a wide range of activities.

Journalism Bail-Out Continues. The budget includes over $30 million for various journalism bail-out efforts. This includes $10 million General Fund for a second year, though the initial funding authorized in 2025-26 has not been allocated. The budget also provides the University of California with $15 million for vague journalism "fellowships." Additionally, last-minute budget giveaways include $6 million General Fund for ethnic media outreach and public media stabilization grants. There are numerous struggling industries in California, and it is not clear why the budget picks journalism for assistance. Providing state funds for journalism also raises significant concerns about the partisanship of the reporting that will be produced.

Voter Outreach and Election Activities. The budget provides several last-minute budget additions for various voter and election activities that provide nearly $40 million to the Secretary of State and counties. While strengthening elections is laudable, the devil is in the details, which are largely absent so far.

Related Topics

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