Governor Newsom’s May Revise, Executive Order on AI, and Key Legislative Updates
May Revise
On May 14, Governor Newsom unveiled his 2026-27 May Revision budget proposal, outlining a total spending plan of $349.4 billion. This final "May Revise" of Newsom's governorship updates the January draft with a significantly improved fiscal outlook. The January budget projected a $2.9 billion shortfall in fiscal year 2026-27, with a discretionary reserve of $4.5 billion. Fueled by revenue projections that jumped $16.8 billion higher than earlier forecasts, the updated May proposal eliminates the state's immediate projected deficit, aiming for a $0 structural deficit through July 2028.
A central priority of the revised budget is not introducing major new ongoing expenditures and stabilizing state reserves while protecting core public services. The plan increases total projected state reserves to nearly $30 billion by the end of the 2026-27 fiscal year. For the first time, the state will utilize a "Projected Surplus Temporary Holding Account," depositing roughly $10 billion to act as a buffer for the following fiscal year's expenses.
Key Policy Implications and Spending Reductions
To raise ongoing funds, Newsom proposed permanently limiting corporate tax credits to $5 million or 50% of corporate tax liability starting in 2027. The state is also broadening revenue by expanding the sales tax to digital, prewritten software downloads.
Substantial adjustments were made to healthcare and Medi-Cal spending, heavily influenced by federal policy updates. To comply with federal guidance, the budget transitions roughly 2 million state-funded immigrants from managed care to a fee-for-service model. While this shift reduces administrative overhead and saves the state $583.8 million in the short term, it will have impacts to community supports and services. The revision also reinstates Medi-Cal asset limits for seniors and disabled adults to further curb costs.
In education, the budget preserves foundational investments through Proposition 98. It expands the one-time Student Support and Professional Development Discretionary Block Grant to $5 billion to afford local schools spending flexibility. The proposal also backs a mandate providing up to 14 weeks of paid pregnancy leave for TK-12 and community college staff, increases special education funding by $2.4 billion, and spends $500 million on literacy and math specialists in high-need schools. Despite the increase in education funding, teacher unions groups are challenging parts of the budget because it withholds $3.9 billion in constitutionally required funding for TK-12 schools and community colleges.
For housing affordability and homelessness, the budget allows several previous investments to sunset without new 2026-2027 funding. Instead of allocating new state dollars to combat homelessness, the governor opted for regulatory reform. The policy bars local governments from charging impact fees on affordable housing projects tied to state funding, attempting to slash tens of thousands of dollars in construction costs per unit.
Another major focus of expenditure reductions targets the state's transportation and climate funds. Due to volatile Cap-and-Trade revenues and shifting general fund priorities, the May Revise outlines notable adjustments to transportation programs. The budget proposes reducing continuous appropriations from the Greenhouse Gas Reduction Fund (GGRF) for climate-centric transit initiatives. Programs that rely heavily on these state funds—such as the Transit and Intercity Rail Capital Program (TIRCP) and the Low Carbon Transit Operations Program (LCTOP)—face structural funding caps and potential reallocations, which would hit public transit agencies across the state particularly hard. The impacts on the GGRF are also compounded by the California Air Resources Board’s proposed changes to the Cap-and-Invest program which will significantly reduce the number of free allowances available for entities to comply with their greenhouse gas emission reductions.
The Legislative Analyst’s Office (LAO) warns that while the current year balances out, underlying long-term structural deficits could reappear if stock trends falter. The budget now sits with the California Legislature, which must pass a finalized version by the constitutional June 15 deadline.
The Legislative Budget Subcommittees have been reviewing the Governor’s revised budget with quite a bit of consternation and disagreement in the areas of health and human services. Both the Assembly and the Senate have released their budget outlines, and the Senate in particular will be trying to push revenue solutions to stave off cuts to health coverage. The Governor, Assembly Speaker, and Senate President Pro Tem will be negotiating the final package, leaving the advocacy community in suspense before the final deal is announced for a June 15 vote. The Governor must sign the budget by July 1st, which is the start of the fiscal year.
Governor Newsom's Executive Order on AI
In other news, on May 21, 2026, Gov. Newsom signed a first-of-its-kind executive order (EO) requiring state agencies to proactively address the economic and workforce issues related to artificial intelligence. Among other things, the EO encourages integration of on-the-job training and AI preparation with the state’s higher education system. The good news is that rather than create immediate mandates for employers, the order establishes a policy roadmap and ensures state agencies, labor leaders, economists, and academic experts will collaborate to address potential worker displacement issues.
Legislative Updates
While the Governor and Legislature will soon be in the thick of round-the-clock budget negotiations to meet the constitutional deadlines, the Legislature is also up against a critical deadline where all bills must pass their house of origin by May 29th to remain alive. Below is a list of key bills KP advocates are actively involved in and/or monitoring for key industry sectors:
Anti-Trust
AB 1776 (Aguiar-Curry): Significantly expands California's anti-trust law (Cartwright Act), by creating new prohibitions against single-firm conduct as opposed to focusing on the actions between multiple parties. This will subject businesses to greater scrutiny from the courts and expose them to significant civil penalties and private damages. Amendments taken in the Appropriations Committee exempt small businesses and require plaintiffs to prove market power in court. There is still significant opposition to the bill from the business community. Status: Pending on Assembly Third Reading
Social Media
AB 1709 (Lowenthal): Prohibits social media platforms that utilize addictive feeds from allowing users under the age of 16 on to the platform and establishes an e-Safety Advisory Commission. Exposes social media companies to civil penalties in the tens of thousands of dollars. Significant opposition remains from tech companies, civil liberties organizations, and LGBT advocacy groups.
Status: Pending on Assembly Third Reading
Online Age Verification
AB 1856 (Wicks): Amends the state's Digital Age Assurance Act to clarify scope, address multi-user/family-account scenarios raised by streaming services, add data minimization requirements, and create a parallel age-signal framework for browsers and websites that are otherwise required by law to verify users' ages. Status: Pending on Assembly Third Reading
AI Kid's Chatbot Safety
AB 2023 (Wicks): Strengthens protections around California's kid's chatbot safety law and adds new requirements for operators of AI chatbots to obtain an independent audit of their AI system. There is opposition from the business community due to concerns about the bill′s interactions and conflicts with last year′s SB 243 (Padilla), burdensome audit requirements, overly prescriptive requirements, and overlapping enforcement requirements. Status: Pending in Assembly Third Reading
SB 1119 (Padilla): Strengthens protections around California's kid's chatbot safety law and adds new requirements for operators of AI chatbots to obtain an independent audit of their AI system. There is opposition from the business community due to concerns about the bill′s interactions and conflicts with last year′s SB 243 (Padilla), burdensome audit requirements, overly prescriptive requirements, and overlapping enforcement requirements. Status: Pending in Senate Third Reading
AI Workplace Bills
AB 1898 (Schultz): Sponsored by the California Labor Fed. The bill would require an employer to notify employees of AI tools used in the workplace. Significant concern among business community due to the breadth of the notice requirements and confidentiality concerns. The bill also subjects businesses of every size and state and local entities to litigation, including civil penalties. Status: Held on suspense
AB 2027 (Ward): Sponsored by the California Labor Fed. The bill would prohibit an employer from using a worker’s personal information to train an artificial intelligence (AI) system to replicate, automate, or replace a worker’s job. The business community had significant concerns given the proposed restrictions and how it could hinder a company's ability to innovate and would expose employers to costly litigation. Status: Held on suspense
SB 1011 (McNerney) would require the CPUC to adopt by January 1, 2028, statewide safety, oversight, and labor standards for electrical and gas utilities to implement artificial intelligence models, specifically for high-risk, safety-sensitive AI applications with the goal of limiting displacement for utility workers. Coming off suspense the bill was amended to remove specific provisions to establish requirements for human review and approval of AI models. Status: On Senate Floor.
"Surveillance Pricing"
AB 2564 (Ward): Creates a new ban on using personal information for personalized pricing or "surveillance pricing." The bill is sponsored by UFCW. There is significant opposition from the retail industry who believes the bill will inadvertently hurt consumers by restricting the use of discounts based on a consumer's personal information (i.e. veterans' status or loyalty programs.) Status: Pending on Assembly Third Reading
Taxes
AB 1790 (Connolly): Eliminates the Water's Edge election for corporations. Supported by the California Labor Fed who argue the elimination of the Water's Edge election would lead to more state revenues. Status: Held on Suspense.
Data Center Regulations
AB 1577 (Bauer-Kahan): would establish a state reporting process for data center power use effectiveness, which includes fiscal committee amendments that shift the bill's data center reporting framework away from water usage to focus strictly on power use, onsite generation, and renewable energy consumption upon energization. Opposed by Data Center Coalition. Status: On Assembly Floor.
SB 1168 (McNerney): would require the CPUC to design utility rate structures that shift transmission and distribution cost burdens from residential ratepayers to the data centers driving that infrastructure demand. Status: Opposed by Data Center Coalition. On Senate Floor.
SB 886 (Padilla): would require a dedicated CPUC tariff and interconnection framework for large data centers to ensure their grid integration does not cause cost-shifting or instability for regular ratepayers. Status: Opposed by Data Center Coalition. On Senate Floor.
AB 2619 (Papan): would require data center operators to disclose projected and actual water use during the business licensing process, while integrating data center water demands into local drought and water shortage planning. Opposed by Data Center Coalition. Status: On Assembly Floor.
AB 2469 (Papan): would prohibit local agencies from approving new or expanded data centers unless the applicant provides a detailed water supply assessment. Opposed by Data Center Coalition. On Assembly Floor.
High-Speed Rail Encroachments
SB 1425 (Cortese): would grant the High-Speed Rail Authority with new encroachment permit power over “new crossings” and “new work,” including creation of new civil and criminal penalties imposed on any entity that is in non-compliance, which may include non-permitted encroachments that are needed to conduct utility emergency repairs or routine maintenance. Status: On Senate Floor.
Clean Energy
SB 1350 (McNerney): would make hydrogen-to-electricity facilities eligible for renewable portfolio compliance but must meet strict green feedstock sourcing, including a 20% minimum fuel blend and mandatory hourly matching by 2030. Status: On Senate Floor.
SB 925 (McNerney): sponsored by KP client General Atomics, would direct the state’s energy planning agency to develop a comprehensive strategic plan and regulatory roadmap to accelerate the development, licensing, and scaling of fusion energy in the state. Status: On Senate Floor.
SB 868 (Weiner) would exempt plug-in-solar devices (“balcony solar”) from all utility interconnection requirements imposed and prohibit utilities from charging fees to customers who use a standard 120-volt outlet to operate the plug-in solar devices. Status: Passed Senate, to Assembly.
AB 2647 (Calderon) would require the CEC to prepare a comprehensive assessment, by July 1, 2027, of the potential role for advanced nuclear technologies in supporting critical infrastructure in California, and of the potential for new, in-state nuclear powerplants. Status: On Assembly Floor.
Environmental Regulations
AB 1777 (Garica): grants the state’s air quality regulator expansive new authority to adopt statewide indirect source rules (ISRs), targeting mobile source pollution at commercial and industrial sites beyond its existing power over fuels and fleets. Status: On Assembly Floor.
SB 1123 (Weiner): would ignore existing mandate for state agencies to consider economic impacts of proposed state regulations and instead requires state agencies to calculate and offset those costs with economic benefits when estimating financial impact of adopting, amending, or repealing regulations. Status: On Senate Floor.
Banking/ Finance
AB 1842 (Harabedian): would significantly expand existing disaster-related mortgage requirements by applying them statewide during a state or federally declared emergency including to require a mortgage servicer to offer mortgage payment forbearance up to a maximum period of 12 months, unless prohibited by the terms of the applicable investor contract or servicing guidelines. Status: Pending a full vote of the Assembly.
AB 1847 (Harabedian): would extend mortgage forbearance for borrowers impacted by the Los Angeles wildfires from 12 months up to 36 months, unless prohibited by the terms of the applicable investor contract or servicing guidelines. The bill creates unrealistic borrower expectations and imposes requirements that conflict with existing federal mortgage servicing and investor standards. Status: Pending a full vote of the Assembly.
SB 1288 (Laird): seeks to streamline the non-probate transfer-on-death process under the Uniform TOD Security Registration Act and would establish a new requirement that financial institutions make an affirmative effort to find beneficiaries of transfer on death securities accounts. The new obligations under the bill create increased legal and compliance risks, operational/administrative challenges and fraud and misidentification concerns. Status: Pending referral in the Assembly.
AB 2145 (Garcia): the prior version of the bill would have allowed borrowers at retirement age to transfer their mortgage interest rate and loan terms to a new primary residence, including retroactively and significantly disrupt the secondary mortgage market, potentially reducing credit availability and increasing borrowing costs. Status: held on Suspense.
SB 1041 (Arreguín): would expand the laws allowing Property Assessed Clean Energy (PACE) assessments to include wildfire safety improvements. The bill does not address the broader structural issues associated with PACE financing, particularly the first-priority lien status that can create barriers to refinancing, home sales, and access to traditional mortgage financing. Status: held on Suspense.
AB 2243 (Haney): would establish the State Bank Commission and require the commission, by July 1, 2027, to contract with one or more independent entities with appropriate expertise to develop a state bank plan by June 1, 2028. Status: held on Suspense.
Water
AB 2447 (Bauer-Kahan): The bill would have imposed accelerated and onerous water quality permitting requirements on agricultural producers that apply nitrogen fertilizers. This would have had severe impacts on California’s agricultural sector, especially fresh produce, would have imposed substantial costs on the State Water Board to implement, and would have reduced access to safe drinking water for impacted communities. Status: held on Suspense.
Housing
AB 1751 (Quirk-Silva): This bill would streamline the approval process for townhome developments throughout the state and would increase wages for workers on those projects. This bill is a meaningful step toward improving homeownership opportunities for middle-income Californians. Status: moved out of Suspense and recently passed the Assembly Floor.
