2026 Governor’s Proposed Budget Overview
On January 9, Governor Newsom released his proposed $349 billion state budget ($248 billion General Fund), his last as he nears the end of his gubernatorial term. The budget release, which includes a $23 billion reserve, paints a much more optimistic scenario than expected; however, the state’s nonpartisan, independent Legislative Analyst’s Office (LAO) had identified an $18 billion deficit late last year, noting there were significant concerns state revenues would be much lower due to a potential bubble for AI stocks, ongoing federal tariffs, and federal health care cuts. The LAO’s updated analysis of the Governor’s budget notes the Governor’s proposed budget “does not incorporate the strong risk of a stock market downturn… and that it poses serious risk to revenues.”
But the Governor’s Director of Finance (DOF) presented a more optimistic picture, suggesting the state will only have a $3 billion deficit in 2026-27. The Newsom Administration is relying on an unexpected $42 billion revenue increase to buffer the LAO’s analysis, but the Governor’s projections are based on a three-year budget compared to last year’s budget. While DOF doesn’t factor in downturns in the stock market, they do foresee a structural deficit of $22 billion by 2027-28, then shortfalls through 2030. They also agree there will be volatility in the stock market and fears of a tech-related economic downturn, but chose not to include it as an issue for the proposed 2026-27 budget.
The Governor’s better-than-anticipated budget numbers could help tamp down discussions on new tax revenues. To that end, this is effectively a “workload” budget meaning no new initiatives, nor large-scale cuts, but there could be some deferrals for large budget programs like education funding which has a constitutionally mandated spending formula under Proposition 98.
Over the next four months, the Newsom Administration will submit Budget Change Proposals and related budget trailer bills to be introduced as legislation. These bills are designed to implement specific policy proposals and provide a roadmap for agencies to implement spending. As new budget numbers come in, Governor Newsom will submit a revised budget by May 15 which will reflect the most up-to-date fiscal projections before the Legislature adopts a final budget by June 15. In the meantime, progressive legislators and advocates will be pushing forward other revenue solutions to replace federal funding cut off by the Trump Administration, including efforts to seek tax increases such as a proposed wealth tax on billionaires which is being circulated for voter consideration during the statewide November ballot.
See some of the highlights of the Governor’s proposed budget below.
Healthcare
Rural Health Transformation Program: California received $233.6 million to expand access to care, strengthen the workforce, and enhance health infrastructure in rural communities. HCAI will oversee this funding.
Behavioral Health: $150 million from the Behavioral Health Services Fund for workforce and prevention programming. HCAI and CDPH will oversee these funds, and more details will come to light by the May Revise.
Reproductive Health Grant Program: $60 million one-time General Fund in 2025-26 for HCAI to provide grants to reproductive health care providers.
Menopause Services: $3.4 million in 2026-27 and $391,000 Managed Care Fund ongoing, to support health care coverage for perimenopause and menopause, including enrollee access to care, provider education, and a statewide public awareness campaign.
Energy and Climate
Includes $2.1 billion from the $10 billion Climate Bond (Proposition 4) to fund clean air, clean water, and clean energy projects, including:
$336 million for clean air and energy,
$173 million for drinking water projects,
$19.6 million for technical and financial assistance to help homeowners in wildfire-vulnerable areas to implement defensible space, and
$15.2 million for grants to reduce wildfire risk around transmission lines.
Provides $1.9 million ongoing and eight positions to the California Energy Commission to continue implementation of petroleum market oversight.
Funds $5.7 million ongoing and 18 positions across multiple energy agencies to support new workload related to wildfire mitigation plans.
Provides $668,000 in funding for three positions to conduct a study of energy impacts from data centers as required under SB 57 (2025).
Appropriates $5.7 million ongoing and authorizes 17 positions to implement the Cap-and-Invest program and greenhouse gas reduction fund under SB 840 and AB 1207 (2025).
Provides $1.7 million ongoing and 10 positions to implement the state and local government elements of the Advanced Clean Fleets regulation.
Education
Estimates $125.5 billion for Proposition 98 funding for 2026-27 to fund state preschool, TK-12 public education, and community colleges.
Proposes a per-pupil funding rate of $27,418 per student.
Increases the projected Proposition 98 “Rainy Day” fund to a total of $4.1 billion.
Provides a 2.4 percent cost-of-living adjustment (COLA) in 2026-27.
Proposes $100 million, one-time for expanding high school career and college pathway programs.
Proposes to restructure state education governance by moving administration of the California Department of Education programs from the State Superintendent of Public Instruction to the Governor-appointed State Board of Education.
Proposes yet-to-be announced new requirements for charter schools to address verified data, fraud, and accountability.
Questions?
Contact Vanessa Cajina at vcajina@ka-pow.com
