California Roundup: The Final 2026-27 Budget, Key Policy Updates, and What's Headed to the November Ballot
Executive Summary
The Legislature is wrapping up its business this week in anticipation of the summer break. In addition to the policy deadline, the Legislature and Governor Newsom agreed on a $351 billion 2026-27 state budget. The budget is bolstered by a $16 billion revenue surge and new taxes, allowing lawmakers to eliminate immediate deficits and reverse previously proposed cuts to core healthcare and social programs.
Key Policy & Fiscal Highlights
Taxation: Implements an MCO tax, creates a new sales tax on electronically delivered pre-written software (starting 2027), and significantly impacts the California Research and Development tax credit by suspending it for an additional three years and reducing it to 70% of expenses in year four and beyond.
Education: Increases K-12 funding and shifts core duties from the elected Superintendent of Public Instruction to a new Governor-appointed commissioner.
Housing & Climate: Dedicates $700 million for affordable housing and $135 million for EV discounts, while reorganizing the Business, Consumer Services and Housing Agency into two separate cabinet-level entities.
The Legislature returns on August 3rd to finalize trailer bills and legislative vehicles before the August 31st deadline. Looking ahead to the November 3rd General Election, voters will decide on 14 statewide propositions, with the most contentious battles centering on taxation (Prop 40's wealth tax vs. competing nullification measures Props 41 and 42), housing bonds, and healthcare revenues.
California’s Final 2026-27 Budget
On June 29th, Governor Gavin Newsom signed his final budget as governor, placing his signature on AB 109 and SB 111. The 2026–27 state budget projects no deficit this year or the following year. It also reduces the operating deficit estimated for the 2029-30 fiscal year to $8.4 billion (down from $23 billion in the Governor’s January budget proposal). This is largely due to a surge of $16 billion in tax revenues and new taxes that will help address this year’s deficit and an ongoing structural deficit.
With more revenues coming in from stock market gains and AI companies, the Governor’s signing of the $351 billion budget was accompanied by a video message emphasizing his record on economic growth and transformative investments. The Governor’s primary quote on the budget was: "We're leaving California stronger than we found it—and leaving the next generation a state that's fiscally sound, economically dominant, and ready for whatever comes next."
Despite emphasizing fiscal restraint, the enacted budget exceeds the May Revision by $5 billion. This additional funding largely reverses the proposed reductions to healthcare and social programs that were initially proposed to address ongoing deficits. These efforts have been framed as the state trying to respond to deep cuts in health care funding due to the Trump Administration’s implementation of H.R. 1.
To curb the deficit, the Governor secured legislative approval for spending caps and three tax measures conservatively projected to bring in $5 billion annually. Despite holding $29 billion in reserves and a $6.4 billion surplus for 2027-28, the budget also relies on a controversial $4 billion loan from constitutionally guaranteed education funds under Proposition 98, which drew sharp opposition from education groups. But there were billions more reserved for other areas to address expansions in special education and childcare, alongside significant investments in universal transitional kindergarten, wildfire resilience, affordable housing, and behavioral health.
It remains to be seen how long the AI boom will sustain revenue to support the above programs, or if the temporary tax increases can offset future deficits. But this year’s and next year’s budgets are technically balanced on paper—providing the next governor a clean slate for future planning during their first year in office.
Along with the two enacted budget bills, several ballot initiatives (see below) qualified for the November 3rd General Election. The Legislature also passed several budget trailer bills to implement various policies contained in the budget. When legislators return from summer recess on August 3rd, they will revisit outstanding budget issues and complete the policy process by August 31st—the last day the Legislature can pass bills in the 2026 session.
Key Aspects of the 2026-27 Budget
Healthcare Tax: Imposes a controversial expansion of the Managed Care Organizational (MCO) tax that may or may not be accepted by the federal government as a state match to create additional federal funding.
Software Tax: Expands the sales and use tax on the sale of electronically delivered pre-written software products, commencing January 1, 2027.
Business Tax Credits: Adopts tighter caps on business tax credits, effectively diminishing the utility of the California research and development tax credit.
Rainy-Day Fund: Increases the size of the fund (ACA 20).
Affordable Housing: Provides $700 million for affordable housing programs, including the Multifamily Housing Program and the Low-Income Housing Tax Credit program.
Education Adjustments: Approves a significant 4.31 percent cost-of-living adjustment for K-12 education programs, above the previous 2.8 COLA.
Teacher Recruitment: Provides over $400 million for teacher recruitment and training in high-need fields and priority schools.
CalCompetes: Approves a five-year extension of the CalCompetes tax credit program at $180 million per year.
Key Policy Implications and Spending Reductions
Healthcare
The Governor and Legislature ultimately agreed to a budget that averts immediate cuts and impacts to Medi-Cal, and contemplates how large employers with employees enrolled in Medi-Cal should contribute to those offsets. The budget increases access to care and screening for people experiencing menopausal symptoms. The budget also implements an untested, new managed care organization tax to attempt to comply with new federal regulations, though implementation will be contentious due to costs borne by health plan consumers.
Education
In addition to providing billions of dollars to expand special education and community schools, the budget adopts substantial policy language establishing significant reforms to improve public charter school audits and authorizer oversight (AB 126). It mandates up to 14 weeks of paid pregnancy disability leave for all TK–12 and community college employees, and shifts the core responsibilities of the constitutionally-elected Superintendent of Public Instruction (SPI) to a new Governor-appointed education commissioner, to be confirmed by the state Senate (AB 181). While voters will continue to elect the SPI, the role will transition into a ceremonial figurehead focused on advocacy, though the Superintendent will gain a voting seat on the Board of Education.
Housing Affordability and Homelessness
Maintains a commitment to housing and homelessness with $500 million for the low-income housing tax credit and $200 million for the multi-family housing program. It also includes trailer bill language to dissolve the Business, Consumer Services and Housing Agency and create two stand-alone, cabinet-level agencies to assume its duties: the California Housing and Homeless Agency and the Business Consumer and Services Agency.
Transportation
Preserves multi-year funding for various programs, including the Port and Freight Infrastructure Program (PFIP) to help modernize ports and supply chain corridors. However, budget control language prohibits the allocation of state funds for various transportation programs involving the purchase of fully automated cargo handling equipment, as well as improvements or replacements to support fully automated cargo handling equipment. Previous language removed from the budget bill would have prohibited state funds for the purchase of automated infrastructure.
Climate and Energy
The budget commits $135 million from the Greenhouse Gas Reduction Fund (GGRF), which will provide a $3,500 instant discount ($1,750 matched by participating automakers) to help buyers cover the loss of federal tax credits used to buy electric vehicles. It also adopts trailer bill language to shift $22 million of unspent funds for the Distributed Electricity Backup Assets program to the Demand Side Grid Support program. The budget defers action on other GGRF funding, however, including action on a future trailer bill to allocate $250 million from the new discretionary funding formula and ongoing discussions of how to address the state's new Cap-and-Invest regulations. Legislative action to allocate funds from the $10 billion climate change bond (Proposition 4) will also be deferred until August.
KP Budget Wins
On behalf of our clients, KP was engaged on many of the debates central to the resolution of this year’s budget, including the ultimately unsuccessful effort to remove the wealth tax from the fall ballot, and negotiations over the scope and structure of new corporate tax obligations. A few specific examples of client budget work are summarized below.
California Mortgage Bankers Association
Following California MBA’s active engagement with the Administration on practical recovery solutions to support disaster-impacted homeowners’ access to financing for rebuilding costs, the Legislature passed AB 179, which establishes the Disaster Rebuilding Assistance Program administered by the California Housing Finance Agency. The program is designed to support construction, reconstruction, and renovation loans for properties damaged or destroyed in a qualified disaster. The budget provides $100 million to support the program.
Secured $10 million in each of the next two fiscal years for the California Civic Media Fund at Go-Biz, which will fund grants to news publishers to support the work of local journalists. This state funding supports a 2024 agreement to provide a combination of public and private funding to support California journalism.
CalPACE
KP represented CalPACE, the statewide association of Programs of All-Inclusive Care for the Elderly, in successfully defeating proposed cuts to the rates their members are paid to care for frail, elderly Medi-Cal enrollees. By combining strong member engagement and policy arguments on the harm of the cut, KP was able to showcase CalPACE’s excellent care in front of budget committees, rallying the Legislature around this care model.
Visión y Compromiso
KP secured $15 million for Visión y Compromiso (VyC), the statewide network of promotoras and community health workers who will be on the front lines in helping Californians navigate eligibility changes to Medi-Cal and food assistance due to H.R. 1. VyC members will receive additional training on eligibility assistance and capacity building to keep Californians from losing health coverage.
November Ballot Measure Update
June 25th was the last day to place or pull ballot measures from the November 3rd ballot. Following extensive negotiations between the Governor, legislative leaders, and various stakeholder groups, California voters will decide the fate of 14 statewide ballot measures addressing the environment, elections, housing, healthcare policy, and taxes. This includes what will likely be the most expensive campaign with the so-called “billionaire’s tax” measure, which has already caused several prominent billionaires to move out of the state, threatening the state’s long-term financial stability.
The good news for now is that five other measures were removed from the ballot through the legislative process, including proposals that would have:
Limited compensation for healthcare executives.
Restricted political spending by healthcare unions.
Established a more sweeping requirement for a two-thirds voter majority to approve local special tax increases, replaced by Proposition 43.
Capped medical care payouts and attorney settlement fees for auto accidents.
Expanded rideshare company liability for driver sexual misconduct.
The 14 measures that qualified for the November 3rd ballot include the following:
Proposition 1: Affordable Housing Bond – Authorizes $11.25 billion in bonds for affordable housing construction, preservation, and veterans' home loans.
Proposition 2: Rainy Day Fund – Doubles the size of the Rainy Day Fund from 10% to 20% of General Fund revenues, allowing the state to save significantly more money during prosperous years.
Proposition 3: Permanent High-Earner Income Tax – Makes permanent the temporary top-bracket income tax rates enacted under previous voter-approved Prop. 30 and Prop. 55 on incomes over $360,000 and $721,000 to fund education.
Proposition 4: Public Campaign Financing – Repeals the 1988 ban to allow state and local governments to establish public financing systems for political candidates.
Proposition 5: Recall Election Reform – Eliminates the immediate successor election during a state officer recall, leaving the office vacant until filled by standard state law.
Proposition 37: Home Buyer Mortgage Loan Program – Authorizes up to $25 billion in bonds to offer eligible middle-and-low-income buyers fixed-rate down payment assistance loans.
Proposition 38: Immunology and Immunotherapy Research Bonds – Authorizes $8.4 billion in state general obligation bonds for medical research into immune system-based technologies.
Proposition 39: Voter Identification and Roll Maintenance – Imposes mandatory government-issued ID for in-person voting, partial ID verification for mail-in voting, and strict citizenship verification.
Proposition 40: One-Time Billionaire Wealth Tax – Imposes a one-time 5% tax on assets over $1 billion to fund low-income healthcare, education, and food assistance.
Proposition 41: Audits for New Tax Spending – Requires state audits of programs funded by new taxes and subjects them to the state spending cap. (Note: if it is approved and receives more votes than Prop. 40, Prop. 41 would effectively nullify implementation of Prop 40).
Proposition 42: Personal Property and Retroactive Tax Prohibition – Prohibits new state personal property taxes and taxes that apply retroactively based on past conduct. (Note: like Prop 41, Prop 42 would help nullify Prop. 40 if it receives more votes).
Proposition 43: Local Taxes Limitation – A constitutional amendment that raises the voter threshold required to pass citizen-driven local special tax initiatives from a simple majority to a two-thirds supermajority.
Proposition 44: Healthcare Revenue Allocation – Requires nonprofit Federally Qualified Health Centers to spend at least 90% of their revenue on direct patient care rather than administrative overhead.
Proposition 45: Expedited Environmental Review – Amends CEQA to shorten review deadlines and limit court-ordered project delays for housing, clean energy, transportation, and healthcare developments.
