California Senate Republicans: Highlights and Analysis of the 2026-27 Governor’s Budget

Executive Summary

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Overview: Stumbling Forward for Now on an AI High. Governor Newsom is counting on a recent surge of Artificial Intelligence (AI)-fueled revenue to paint an optimistic picture of state taxes and to continue recent reckless spending patterns. However, a lack of any ongoing spending restraint in the Governor's new budget proposal means that massive deficits will continue for the foreseeable future, even under the Governor's rose-tinted projections. Meanwhile, the budget largely fails to address key issues that Senate Republicans recently outlinedin a budget priority letter, includingpublic safety, fire prevention, and affordability.

Governor's Revenue Forecast Dramatically Higher than Nonpartisan Estimate. The Governor's budget estimates that General Fund revenues will be $42 billion higher over the three years ending in 2026-27 compared to levels assumed in last summer's enacted budget. This includes total General Fund revenues of $228 billion in the current 2025-26 fiscal year, which are higher than the enacted budget level by $19 billion. General Fund revenues then would grow by a meager 1.0 percent to reach $230 billion in 2026-27, which is $17 billion higher than forecast in last year's budget package.

In November 2025, the nonpartisan Legislative Analyst's Office (LAO) projected that General Fund revenues would exceed budgeted levels over the three-year window by $11 billion, roughly one-fourth of the Governor's estimate. Both estimates attribute the increases to strong technology stock market and capital gains performance, particularly associated with California's AI sector, but while the LAO cautions that the AI-driven gains are not likely to last, the Governor appears to be going all-in on a sustained AI boom to prop up his spending plans.

Massive Deficits Projected for Years to Come. The Governor claimed the General Fund deficit for 2026-27 would be $2.9 billion, while the LAO's estimate is roughly six times higher at $18 billion. Both sources project long-term unsustainable budgets for years to come, as illustrated in the chart below.

As seen in the chart, the Governor's budget projects annual operating deficits ranging from $22 billion to $26 billion each year through 2029-30. The LAO forecasts even higher deficits each year. Notably, these repeated deficits are occurring during a period of tax revenue growth, not during a recession, a remarkable result that reflects reckless budgeting choices made by Governor Newsom and supermajority Democrats in the Legislature in recent years.

No Plan for A Sustainable Budget as Deficit Solutions Rely on Borrowing and Reserves. The Governor's budget includes several proposals totaling $9.5 billion to help paper over the 2026-27 budget deficit, but $8.4 billion of these consist of one-time actions like borrowing ($5.6 billion for a school funding "settle-up" obligation) and further use of reserves ($2.8 billion). The Governor's Director of Finance indicated there would be additional proposals in the May Revision to address the 2027-28 deficit, but there is no indication at this time of any plan to return California's budget to a sustainable path beyond Governor Newsom's tenure.

Rapid Expenditure Growth Continues. General Fund expenditures under the Governor's proposal would reach a revised total of nearly $238 billion in the current fiscal year, which is $9.3 billion above the level enacted seven months ago for the 2025-26 budget. Proposed General Fund expenditures would reach $248 billion in 2026-27, which is $20 billion above the enacted2025-26 level. This increase is driven largely by the growth in Proposition 98 school spending ($9.1 billion) and in Health and Human Services programs ($6.4 billion). When counting all state funds, such as gas taxes and Cap-and-Invest funds, the 2026-27 budget would reach $349 billion, an increase of about $6.5 billion from the revised current year.

As illustrated in the chart below, spending has risen by 77 percent during Governor Newsom's tenure and would continue to outpace revenues every year for the foreseeable future.

Reserve Use Expanded in Current Year; Small Deposit for 2026-27. The proposed budget would suspend a deposit of $2.9 billion to the Rainy Day Fund that would otherwise be required by the constitution in 2025-26, while maintaining last year's action to withdraw $7.1 billion. The budget would then deposit $3 billion to the Rainy Day Fund in 2026-27 in accordance with constitutional requirements. These actions would raise the Rainy Day Fund balance to $14 billion by the end of 2026-27, which is a relatively low 6.2 percent of General Fund revenues. Total reserve balances would amount to nearly $23 billion by the end of 2026-27.

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Housing and Homelessness

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No New Funding for Local Homelessness Programs. The Governor's budget does not include any new funding for local homelessness programs above what was included in the 2025-26 budget agreement ($500 million General Fund). The January budget continues to seek enhanced accountability and performance requirements but fails to include specific details, passing the buck to the Legislature to determine what those priorities should include.

No New Funding for Housing Programs. The Governor's budget fails to include additional General Fund for the state's numerous housing programs. Last month Senate Republicans issued a letter setting out budget priorities for the upcoming year, including lowering costs for renters and helping more Californians buy homes. Unfortunately, the Governor's budget fails to provide any funding for the expanded renter's tax credit (AB 130, a 2025 budget trailer bill, expanded the tax credit subject to funding), which could provide some much-needed relief to Californians experiencing some of the highest rental costs in the nation.

TK-12 Education

Proposition 98 Education. Proposition 98 funding for TK-12 schools and community colleges in 2026-27 is $126 billion. The revised 2025-26 Proposition 98 guarantee is calculated at $121.4 billion, but the budget proposes to fund the guarantee at only $115.9 billion, creating a settle-up obligation of $5.6 billion. Proposition 98 spending per pupil would be $20,512 in 2026-27 and $27,418 per pupil from all funding sources. According to the Department of Finance, this is a Proposition 98 increase of 75 percent compared to 2018-19 and a 61 percent increase when accounting for all funds.

Local Control Funding Formula. The Governor's budget proposes a $2 billion increase in the Local Control Funding Formula (LCFF). This reflects a 2.41 percent cost of living adjustment (COLA) and population growth adjustments.

Proposition 98 Reserve. The budget reflects a revised balance in the Public School System Stabilization Account of $4.1 billion at the end of 2026-27. This reflects mandatory revised deposits of $3.8 billion and $424 million in 2024-25 and 2025-26 respectively, and a mandatory withdrawal of $407 million in 2026-27. The budget also proposes to include a discretionary deposit in 2025-26 of $240 million. The balance over the three-year budget window triggers the previously authorized (but ill-advised) 10 percent cap on local school district reserves in 2025-26 and 2026-27.

Special Education Base Rate Increase. The budget includes a proposal to provide $509 million ongoing Proposition 98 General Fund to increase the special education base rates. The Department of Finance highlights that this increase is in response to the growing number of students in special education over the years.

Student Support and Professional Development Discretionary Block Grant. The Governor's budget proposes $2.8 billion one-time Proposition 98 General Fund for the Student Support and Professional Development Discretionary Block Grant. This is in addition to $1.7 billion provided in the 2025-26 budget. Providing a one-time discretionary block grant provides schools with more flexibility to cover costs that are specific to their individual priorities without creating ongoing funding pressure.

Community Schools Expansion. The Governor's budget proposes $1 billion ongoing Proposition 98 General Fund to expand the community schools model. Community schools are public schools that seek to provide community partnerships that integrate education with whole family and child development. This includes, but is not limited to, integrated supportive services like mental health, social services, home visits, professional development, and extended learning time and opportunities.

Charter School Accountability. The Governor's budget notes that new requirements for charter schools will be proposed. Additional details on these requirements were not available at the time this summary was written and will likely be provided in trailer bill language at a later time.

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Higher Education

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University Compact Increases Partially Restored.The Governor's budget would provide the previously promised 5 percent increase representing Year 5 of the current compacts between the Governor and the University of California (UC) and California State University (CSU) systems. This increase amounts to $254 million for the UC and $265 million for the CSU. Additionally, the budget would provide a portion of the previously delayed Year 4 increase, amounting to $96 million for UC and $101 million for CSU. However, the budget would continue to delay the remainder of the Year 4 increase, totaling $241 million for UC and $252 million for CSU, as well as $31 million for UC intended to replace nonresident undergraduate tuition.

Restoration of Base Budget Cuts Delayed. The 2025 Budget Act cut base funding for UC and CSU by 3 percent, or $274 million combined. The budget also provided a no-interest loan to the two systems to help mitigate the effects of the cuts. The Governor's budget now proposes to delay restoration of those 3 percent base cuts and to roll over the cash flow loan into another one-year loan that the UC and CSU would have to repay in 2027-28.

Middle Class Scholarships Cut in Half. The 2025-26 budget package sought to stabilize the Middle Class Scholarship (MCS) program by shifting its budget to a cash loan that would be funded in the budget one year in arrears. The budget package also established the goal that MCS would pay 35 percent of students' unmet expenses, after considering other resources. The Governor's budget now proposes to reduce the program funding by about half ($541 million) and to lower its goal to meet only 17.5 percent of students' unmet expenses. Since the MCS program is now budgeted one year in arrears, the proposed savings of $541 million would appear in the 2027-28 budget.

Community Colleges Funding and Enrollment Increases. The community college budget would increase by $1.3 billion (9 percent) in 2026-27 to $15.4 billion in accordance with Proposition 98. The Governor's budget notably includes various adjustments totaling more than $700 million for the Student-Centered Funding Formula with the intent to support overall enrollment growth of 1.5 percent.

Health

Governor Favors Helping Planned Parenthood Over Saving Hospitals from Closure. Despite many at-risk hospitals in need of funding to stave off closures, the Governor's top healthcare priority is quickly providing $60 million in new General Fund to prop up abortion providers like Planned Parenthood. This funding is on top of $146 million in special funds currently in the budget for abortion provider grants. Shockingly, the Governor requests that the Legislature expedite this new $60 million through an early 2026 budget bill. Last month, Senate Republicans issued a letter setting out budget priorities for the upcoming year, including a $300 million request for hospitals at-risk of closure. The Governor proposed no funding to save these hospitals.

Despite Drop in Caseload, Medi-Cal Budget Still Grows Due to Undocumented Care. The Governor's budget estimates that Medi-Cal enrollment will decrease by roughly 500,000 individuals in 2026-27, yet the General Fund spending will grow by $4.4 billion over the June 2025 Budget Act to a record-high $49 billion in 2026-27. This includes more than $12 billion General Fund to cover the annual costs of the estimated 1.7 million undocumented individuals currently enrolled in Medi-Cal, meaning that roughly one out of every four General Fund dollars in Medi-Cal pays for free care to the undocumented.

Some Legal Non-Citizens Moved Off Full-Scope Medi-Cal. While the budget includes $1.9 billion in General Fund savings from previously enacted budget solutions to freeze new enrollment and decrease benefits to undocumented individuals, the Governor's budget includes $786 million in additional General Fund savings by moving an estimated 200,000 temporarily legal non-citizens (such as individuals seeking asylum) away from full-scope Medi-Cal benefit eligibility and towards emergency and pregnancy only restricted-scope benefits. This creates an odd scenario whereby those non-citizens who are here legally aren't covered, but those who are here illegally are covered.

Governor Doesn't Prioritize Care for Vulnerable Populations. The Governor's budget fails to include any new or ongoing funding for court-ordered substance use treatment as required by Proposition 36, nor does it provide additional funding for critical air ambulance services and necessary care for medically fragile children. Californians deserve these items to be funded as was outlined in the Senate Republican Caucus budget priorities letter.

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Human Services and Child Care

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Department of Social Services Total Budget. The Governor's proposed budget for the Department of Social Services is $59 billion ($26 billion General Fund) for 2026-27, a General Fund increase of $1.3 billion from the 2025 Budget Act

CalFresh Cost Sharing and Eligibility Changes. The 2025 federal budget reconciliation bill, H.R. 1, shifts a portion of CalFresh administrative costs to California. The increased costs are estimated to be $383 million, reflecting a federal cost sharing change from 50 percent to 25 percent. CalFresh "benefits" cost sharing will not begin until October 2027, and the Newsom administration continues to monitor that potential fiscal impact. Early estimates have put the impact up to $2 billion. The budget also includes $66 million in reduced General Fund costs in 2026-27 due to federal eligibility changes.

In-Home Supportive Services (IHSS) Changes. The Governor's budget includes several modest reductions related to IHSS, including $86 million General Fund to conform the IHSS residual program with the timing of Medi-Cal coverage, $3.5 million General Fund to eliminate the Backup Provider System, and $234 million to remove the state's share of costs for growth in IHSS hours per case. Details have not been provided on how the state's share of the IHSS hours per case growth will be "removed". The Newsom administration indicates that discussions are underway with counties on how to achieve this.

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Child Care Increases and Infrastructure. The Governor's budget includes $6.8 billion ($5.1 billion General Fund) for child care and development programs in 2026-27. The budget includes $89 million to provide a cost-of-living (COLA) adjustment for Department of Social Services child care programs. The budget also includes an increase of $12 million one-time Proposition 64 (marijuana taxes) for child care infrastructure and notes that the funding is specifically for fire-impacted communities.

Silent on Potential Fraud in Health and Human Services. Recent reports have documented widespread fraud in various health and human services programs in other states, including allegations of $1 billion in fraudulent claims in Minnesota. Senate Republicans called for greater anti-fraud efforts in their recent priority letter, but the Governor's budget proposal is notably silent on potential fraud mitigation or investigations across health and human services programs.

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Public Safety

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Governor Rebuffs Voter-Enacted Crime Reduction Initiative…Again. Last month, Senate Republicans issued a letter setting out budget priorities for the upcoming year, including sufficiently funding Proposition 36. Unfortunately, the Governor's budget fails to provide any new funding for this key public safety initiative that 68 percent of Californians voted to support in 2024. Notably, there is still no funding proposed for county probation departments that play a critical role in ensuring offenders' adherence to court-ordered treatment under the measure. Equally notable, the Governor's plan does not provide any additional funding for county behavioral health departments beyond the initial $50 million in 2025-26, which is somewhere between eight and fifty percent of the identified need. It seems he is intent on ensuring the failure of this important public safety initiative.

Funding for State to Sue Federal Administration Expands. The 2024-25 Budget included $25 million one time, available through June 30, 2026, for the state (led by the Attorney General) to sue the federal administration in order to slow or stop the President's agenda. In addition, the 2025-26 budget provided nearly $17 million annually for this purpose. The Governor's proposed 2026-27 budget adds $10 million to the ongoing $17 million (for a total of $27 million annually) for the Attorney General to litigate against the federal administration. To date, the Attorney General has filed 53 cases against the current administration in just under a year.

Fentanyl Interdiction Funding Continues. A bright spot in the Governor's 2026-27 budget proposal is that it would continue funding for the California Military Department to support law enforcement efforts to interdict illicit trafficking of fentanyl within the state that is set to expire at the end of 2025-26. The budget includes $30 million ($15 million in 2026-27 and $15 million in 2027-28) to continue this effort for another two years.

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Resources and Environment

Wildfire Is Now a Permanent Cost for Taxpayers. The Governor's Budget shows that wildfire and climate spending are no longer temporary or episodic. They are now built into California's ongoing cost structure. Wildfire response is treated as a standing state responsibility rather than an emergency expense. CAL FIRE is funded at $5.3 billion with more than 14,000 permanent positions, locking in payroll, overtime, and pension costs that continue to grow regardless of fire activity.

Costs Shifted to Cap and Invest and Households. To support these obligations, the budget moves away from stable General Fund support and relies more heavily on Cap-and-Invest revenues and borrowing. In 2026-27, $1.25 billion in Cap-and-Invest revenue is used to backfill CAL FIRE wildfire costs. Those costs are passed through to households through higher electricity, fuel, and energy bills, raising the cost of living while tying permanent wildfire spending to volatile auction revenue.

Bond Funds Replace General Fund Financing. The budget also commits $2.1 billion in Proposition 4 climate bond funds for wildfire prevention, forest health, water, and environmental programs. This approach replaces prior General Fund support with debt, shifting routine program costs onto future taxpayers and leaving the state responsible for long-term debt service after project funds are spent.

Includes One-Time Spending on Top of Ongoing Commitments. On top of these commitments, the budget includes additional one-time climate spending, including $200 million for a new light-duty zero-emission vehicle incentive program. Taken together, the Resources and Environment budget prioritizes permanent staffing and increases reliance on volatile revenues and borrowing, raising long-term fiscal and cost-of-living risks.

Tax Policy

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Changes to Marketplace Facilitators Provides Additional Revenue. The Governor's budget proposes to change the tax delivery requirements for businesses facilitating the delivery of local goods, such as prepared food, known as Delivery Network Companies. These companies are currently exempt from the requirement to register as a marketplace facilitator (consistent with other large online marketplaces). The proposal would provide consistency between facilitators of goods, as well as $20 million in additional General Fund revenue.

Early Extension of CalCompetes Tax Credit Program. Although the CalCompetes Tax Credit program is not set to expire until 2027-28, the Governor's January budget proposes to extend the program at its current level of $180 million annually through 2032-33.

Tax Credits for Sustainable Aviation Fuel. The January budget proposes to provide tax credits against diesel tax liability to incentivize the development and production of sustainable aviation fuels. While proposal details are forthcoming, the Newsom administration provided an estimate of lost diesel tax revenues of $165 million initially, ramping up to $300 million at full program implementation. These revenues fund various transportation programs, and it is unknown which programs would be impacted.

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Business Support and Employment

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Unemployment Insurance Debt. The January budget proposes $662 million to pay the annual interest payment on the state's Unemployment Insurance (UI) loan from the federal government, as required under existing law. Last month Senate Republicans issued a letter setting out budget priorities for the upcoming year, including supporting job creators by reducing the UI debt burden placed on them. Unfortunately, the Governor's budget fails to provide any new funding to pay down this debt, resulting in increased federal tax burdens on California employers to repay the debt caused by state-mandated pandemic shutdowns. California is the only state that failed to pay the federal government back for its pandemic-era UI loan.

Subsequent Injuries Benefits Trust Fund Program Growth. The Governor's budget proposes an increase of $13 million from an employer-funded account to handle claims backlog and support growth of the Subsequent Injuries Benefits Trust Fund program. Program growth has resulted in massive increases in the employer assessment to fund the increased claims.

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Transportation

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Gas Taxes Increase Again. Despite claims to prioritize affordability for Californians, the Governor proposes no changes to existing law, continuing the automatic annual tax increases to gasoline and diesel fuel. Gasoline taxes are estimated to increase as of July 1, 2026, by 2.2 cents per gallon (cpg), or 3.6 percent, to 63.4 cpg, and diesel fuel taxes would increase by 1.6 cpg, or 3.4 percent, to 48.2 cpg.

High-Speed Rail Funding. The proposed budget includes $1 billion from Cap-and-Invest revenues for the California High-Speed Rail Project, consistent with SB 840 (2025), bringing total funding for the project in 2026-27 to $1.5 billion.

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General Government

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Facing Multiyear Deficits, Governor Continues to Expand Bureaucracy. Despite years of deficits ahead, the Governor continues to propose yet more bureaucracy that would cost Californians millions of dollars annually. The budget includes a new Office of Civil Rights within the Government Operations Agency (to provide educational resources and training to local education agencies) and the reinstatement of the California Education Learning Lab with $4 million in General Fund (the Lab was eliminated in the 2025 Budget Act), to name a few.

Billions in Deficits, Yet Budget Includes Governor Newsom's High-Priced Portrait. As 2026 will be the last year of Governor Newsom's tenure, the budget proposes $33,000 for some lucky artist to paint his portrait. Given the significant deficits facing the state due to the Newsom administration's expansion of several costly programs, it seems tone-deaf for the Governor to spend tens of thousands of dollars on a portrait while Californians continue to struggle with the state's high cost of living.

Related Topics

• Budget
• Affordability
• Cost of Living