On Friday, state finance officials unveiled Governor Newsom’s $323 billion budget proposal, which shows a $363 million surplus for fiscal year 2025-26. The surplus was a surprise as earlier forecasts predicted a multi-billion deficit heading into the new year.
Newsom is well-known for his detailed budget presentations. However, this year, his Finance Director, Joe Stephenshaw, stepped in as the Governor was managing the wildfire response in Los Angeles.
Stephenshaw attributed the balanced budget and surplus to a projected $16.5 billion boost in revenue from an improved stock market and general fund savings from not filling 6,500 state employee vacancies.
Top Line Items
- Master Plan for Career Education: The proposal includes $100 million one-time Proposition 98 funding for California Community Colleges to expand Credit for Prior Learning and to build a “Career Passport.” The Passport system will allow students to create formal documentation of their marketable skills and abilities developed through work, classes, apprenticeships, internships, and other experiences inside and outside the classroom.
- Education and Workforce Development Coordinating Council: The proposal includes $5 million in 2025-26 for California’s Government Operations Agency to establish a planning and coordinating entity to improve resource coordination in alignment with the Master Plan for Career Education. This entity would coordinate educators and state economic and labor agencies.
- Regional Coordination for Career Education and Training: The proposal includes $4 million in one-time funding for the Labor and Workforce Development Agency to evaluate how regional coordination models can be expanded to create forums where educators, workforce training providers, and employers can work to align programs with employer needs. This work is aligned with the 13 regional economic plans submitted to the Governor this past fall.
- California Competes: The proposal includes $60 million in one-time funding to award new tax credit grants in 2025-26. The program provides incentives for businesses to stay and expand in California.
- California Film and Television Tax Credit Expansion: The proposal increases the tax credit from $330 million to $750 million for fiscal years 2025-26 through 2029-30. Newsom proposed the increase last fall to help stimulate the industry, which was one of the hardest hits during the pandemic.
- Climate and Wildfire: The Governor proposes spending nearly $2.7 billion of the $10 billion climate bond approved by voters in November to accelerate water and wildfire resilience projects. This includes $1 billion for drinking water, flood, and drought prevention projects and $335 million for fire and forest management. The remainder will go to other projects.
- Homelessness: The proposal maintains $100 million to clear homeless encampments and get people into shelters. Newsom also proposed creating a new state agency, the Housing and Homeless Agency, to consolidate the state’s response to housing and homelessness.
- Education: The proposal includes over $137 billion for all pre-K through 12th grade school spending. Newsom included his top educational initiatives, including universal pre-kindergarten, free school meals for all students, and screening all students up to 2nd grade for reading difficulties.
- Infrastructure: The proposal begins to allocate funds for the following voter-approved propositions:
- Proposition 1: Behavioral Health InfrastructureBond ($6.4 billion), approved in March 2024. These funds will be allocated to counties and distributed to local government agencies, nonprofits, and community-based organizations to provide mental health services.
- Proposition 2: Education Facilities Modernization and Repair ($10 billion) – approved in November 2024. Over the next several years, the budget will allocate funds across four areas:
- $4 billion for modernization projects
- $3.3 billion for new construction
- $600 million for charter schools
- $600 million for career technical education projects
- Proposition 4: Safe Drinking Water, Wildfire Prevention, Drought Preparedness, and Clean Air Bond Act ($10 billion) – approved in November 2024. As mentioned above, the budget proposal allocates the first $2.7 billion, with most funding proposed for water and wildfire projects.
- Criminal Justice: The proposal reduces the state’s prison budget by over $400 million. This comes as the state begins implementing stiffer penalties for theft, which voters passed via Proposition 36 in November. As a result of Prop. 36, the Governor expects the prison population to grow by about 1% in the coming years, and spending on incarceration will likely increase.
- Cannabis Tax Fund Allocation: The proposal estimates $468.2 million will be available for the following, as prescribed by law:
- Education, prevention, and treatment of youth substance use disorders and school retention – 60% ($281 million)
- Clean-up, remediation, and enforcement of environmental impacts created by illegal cannabis cultivation – 20% ($93.6 million)
- Public safety-related activities – 20% (93.6 million)
Budget Timeline
The Governor’s proposal is a first draft that will be reviewed, debated, and modified between now and June, when lawmakers and the Governor approve a final spending plan. Early engagement in the budget process is critical, and below is a timeline of the key milestones in the process:
- January 10 – The Governor submits a budget proposal to the legislature.
- January/February – Assembly and Senate Budget Committees hold preliminary hearings on the Governor’s budget proposal.
- March/April – The Assembly and Senate Budget Subcommittees hold hearings to review the budget proposal details and present their proposals.
- April – The Department of Finance releases “April Letters” to amend the Governor’s January proposal to reflect actual tax revenues collected.
- May 15 – The Governor releases the May Revise, which begins a sprint to finalize the budget.
- June 15 – The Legislature must pass a balanced budget and send it to the Governor.
- June 30 – The Governor must sign the budget.
- July 1 – 2025-26 fiscal year begins.
- July/August – After the main budget bill is passed, the legislature will enact policies to implement the budget. These are called “trailer bills.”
- July/October – The Department of Finance begins crafting the fiscal year 2026-27 budget.
If you have questions about the budget, please contact us.
This is a product of CPRA Strategies, Inc.
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