Legislative budget deal departs from Governor’s proposal, but the devil is in the details
By Cal Cities Staff
State lawmakers on Tuesday announced a nearly $325 billion budget proposal that largely rejects or softens the cuts proposed by Gov. Gavin Newsom in May. The blueprint is far from final, and an agreement between the Legislature and Governor has yet to be reached. However, it would restore some of the housing, homelessness, and transit funding that many cities rely on.
It would also help local governments implement last year's public safety ballot measure and largely recognizes that the climate bond funding voters approved should remain available for its stated uses.
“Cities play an integral role in carrying out the state’s goals, and in a climate of fiscal uncertainty, the Legislature’s budget blueprint makes progress on several city priorities," said Cal Cities Executive Director and CEO Carolyn Coleman. "But there’s more work to be done."
But even in a normal year when federal funding can be relied on, such an announcement would be far from final. (Notably, the bill does not account for potential federal cuts, setting the need for a special session on the budget later this year.) Lawmakers will continue to hammer out the details throughout the year. To learn how you can get involved, stay subscribed to Cal Cities Advocate or contact your regional public affairs manager.
-Brian Hendershot, Cal Cities Advocate managing editor
Revenue and Taxation
Rather than rely on the Governor’s over $5 billion in suggested cuts, the legislative proposal borrows from other state funds, while rejecting, delaying, and downsizing some of the Governor’s largest cuts. However, one of his core cost savers, changes to Medi-Cal eligibility, seems to have gained the support of the Legislature — though with some changes.
When all is said and done, the nearly $325 billion legislative compromise would close the budget gap with $7.8 billion in borrowing, $3.5 billion in cuts, and $1 billion in delays, deferrals, and shifts. The Legislature also proposes withdrawing $2.5 billion from the state’s Special Fund for Economic Uncertainties, something the Governor did not put forth in the May Revision.
While this is a major milestone, there is still a long road ahead. There will inevitably be “budget bill juniors” (budget bills to amend previous budget acts) and budget trailer bills that reflect their agreements. Lawmakers will formally approve the deal on Friday, after which it will head to the Governor’s desk. He can then sign, veto, or “blue pencil” (line-item veto) the bill. Below is a breakdown of additional major changes announced in the final budget deal.
Vehicle License Fee Shortfall
- $118 million for local governments to backfill the Vehicle License Fee (VLF) shortfall when their VLF shortfall exceeds available funding in their Education Revenue Augmentation Fund revenues. Funding for the counties and the cities therein of San Mateo, Alpine, and Mono.
California Film and Television Tax Credit
- Increases the California Film and Television Tax Credit up to $750 million annually, an increase from the current $330 million.
- Ben Triffo, legislative advocate
Community Services
Unlike the Governor’s proposal, the Legislature’s budget plan contains critical funding to help cities address homelessness. The deal includes intent language that would invest $500 million in the Homeless Housing, Assistance, and Prevention (HHAP) program in Fiscal Year 2026-27.
This would fund the seventh round of the program, which provides direct and flexible funding to local governments. The state has provided around $1 billion annually for the program since FY 2021-22, with successful results. Over 225,000 people accessed shelter, services, and housing between January 2023 and June 2024 because of the program.
Cal Cities and its allies have long urged state leaders to invest a minimum of $1 billion in ongoing funding for the program. The current one-time funding makes it difficult for local leaders and service providers to develop and sustain long-term, comprehensive services needed to address a protracted humanitarian crisis.
The Legislature’s deal fails to provide ongoing funding and cuts program funding in half, which will result in the loss of thousands of shelter beds and housing units and a scaling back of critical outreach services. These cuts potentially threaten the state’s momentum in reducing homelessness. Below is a breakdown of major changes and policies announced in the final budget deal.
Homelessness
- Provides $500 million to the Homeless Housing, Assistance, and Prevention program in FY 2026-27.
- Rejects the Governor’s proposal for $4 million of General Fund in FY 2025-26 and $6 million in General Fund annually to pay for the proposed reorganization of the Business, Consumer Services, and Housing Agency.
- Approves additional staff and resources for the Housing and Homelessness Accountability, Results, and Partnership unit within the Housing and Community Development Department to enforce local compliance with state housing and homelessness laws.
- Caroline Grinder, legislative advocate
Environmental Quality
The Legislature’s proposed budget departs significantly from the Governor’s budget on climate-related issues. However, funding from both the climate bond (Proposition 4) and the Cap-and-Trade Program could face a bumpy road, with major policy negotiations still to come for each program.
Climate Bond (Prop. 4)
The Legislature’s budget outline would restore some of the funding voters approved in Prop. 4 for their specified use. However, the details are not yet clear. In his January proposal, the Governor outlined a $2.7 billion spending plan for the first year of Prop. 4, including using some Prop. 4 funding to backfill the General Fund. In the May Revision, the Governor increased the amount of Prop. 4 funding to use as backfill, totaling nearly $316 million.
The Legislature’s budget deal reduced the Prop. 4 backfill to $176 million. However, it’s unclear which programs’ funding will be reduced. The agreement rejects the Governor’s overall spending plan and defers the details to a budget trailer bill that will move forward later this summer.
Voters approved Prop. 4 as additional funding to help their communities become more resilient to the impacts of a changing climate. Every dollar counts when it comes to home hardening grants and water infrastructure improvements that ensure communities can weather future catastrophes like firestorms and droughts. As negotiations proceed, Cal Cities will continue to advocate for allocating all Prop. 4 funds as promised to voters and not diverting them to other uses.
Greenhouse Gas Reduction Fund (GGRF)
In a similar fashion, the Governor’s May Revision included $1.5 billion (increasing up to $1.9 billion by 2030) in Greenhouse Gas Reduction Funds (GGRF) for Cal Fire’s operational costs, along with a dedicated $1 billion annually for the high-speed rail project. The Legislature approved $500 million in GGRF spending for this coming year and $500 million for the following fiscal year to rely on the GGRF.
This would create $500 million in General Fund savings for two years without making Cal Fire, an essential state department, reliant on what will likely become a diminishing fund as greenhouse gas emissions go down over time. Lawmakers also moved the negotiations over the Cap-and-Trade Program’s reauthorization to the non-budgetary legislative process. With about five weeks left for policy committee hearings, expect major policy and funding decisions to arrive soon.
- Melissa Sparks-Kranz, legislative advocate
Public Safety
The Legislative budget deal includes significant funding to help local governments implement Proposition 36, which was not in the Governor’s May Revision. Cal Cities had urged lawmakers to include funding for implementation in the budget. The Legislature is proposing $110 million in one-time funding for county behavioral health, the courts, public defenders, and county probation. The $110 million in funding will be allocated as follows:
- $30 million to the courts for the Judicial Council to distribute to trial courts, which may be used to establish collaborative courts, which are created for specific populations to address their unique needs with services rather than jail time.
- $50 million for county behavioral health to be distributed by the Department of Health Care Services as non-competitive grants to help counties implement Prop. 36.
- $15 million to the State Public Defender for Prop. 36 cases.
- $15 million to the Judicial Council for pre-trial services for people subject to treatment-mandated felonies under Prop. 36. Courts must contract with any county department, including county probation, to provide these services.
Other major budget allocations and changes include the following:
- Provides $221.6 million General Fund to transition 3,000 seasonal firefighters to year-round firefighters.
- Provides $12.5 million for a Community Home Hardening Program and placeholder trailer bill language. The Community Home Hardening Program will include a home hardening certification program and a county wildfire coordinator program to help with community-level home hardening.
- Rejects the Governor’s proposal to shift illegal enforcement of cannabis from the Cannabis Control Fund to the Cannabis Tax Fund.
- Approves the Governor’s proposal to close another state prison to be confirmed.
- Jolena Voorhis, legislative advocate
Housing, Community, and Economic Development
Last month, Newsom announced further cuts to affordable housing programs and the reorganization of a new state agency. The Legislature took a different route, rejecting the reorganization plan while reallocating and increasing funding for some key affordable housing programs, including the Low-Income Housing Tax Credits, the Multifamily Housing Program, and the California Dream for All homeownership loan program.
These proposed reallocations would help cities address the state’s most pressing and high-profile issue. But state leaders should also consider funding other important programs that local governments rely on, such as the Infill Infrastructure Grant program and the Regional Early Action Planning Grant program — especially given the $1.7 billion cuts in last year’s budget. Below is a summary of the notable funding changes.
- $500 million in funding for Low-Income Housing Tax Credits, an important program that promotes private investment in affordable rental housing for low-income Californians.
- The Legislature also proposed new reforms, subject to final trailer bill negotiations, to strengthen the Renters Tax Credits, especially for renters with dependents.
- $120 million in funding for the Multifamily Housing Program, which provides low-interest loans to support new construction, rehabilitate existing residential buildings, and preserve permanent and transitional rental housing for lower-income households.
- $300 million for the California Dream for All Program, which provides loans for first-time homebuyers.
- A cut of $31.7 million in unused funds to the Infill Infrastructure Grant Program.
CEQA Exemptions
The Legislature agreed with the Governor and announced their intent to pass AB 609 (Wicks) and SB 607 (Wiener) as a budget trailer bill later this summer. Both measures would exempt specific residential development projects from the California Environmental Quality Act (CEQA). Cal Cities supports SB 607, which includes relief for cities from frivolous litigation under CEQA. Cal Cities is closely tracking both proposals.
- Brady Guertin, legislative advocate
Transportation, Communications, and Public Works
Gov. Gavin Newsom in May proposed cutting $1.1 billion to support transit operations and denied a request for over $750 million in emergency funds for Bay Area transit systems. The Legislature’s spending plan rejects his proposal by restoring $1.1 billion ($812 million formula/$384 million competitive) for transit and providing a $750 million, interest-free loan to Bay Area transit systems to prevent major service cuts over the next two years.
While the budget proposed by the Legislature may have saved transit operators from falling off the fiscal cliff, it maintained cuts to the Active Transportation Program. In the last couple of years, lawmakers have cut $400 million from the program, originally as a one-time deal. This new norm of the Legislature concurring with the Governor to maintain cuts to active transportation makes it harder for cities to develop safe streets for all roadway users.
Additionally, the budget allocates $42 million in incentives for offshore wind infrastructure improvements to support California’s clean energy goals. The proposal would also direct $18 million to the Clean Energy Reliability Investment Plan Program to support near-term electric system reliability.
- Damon Conklin, legislative advocate
Governance, Transparency, and Labor Relations
The legislative budget deal approves the Governor’s proposal to loan $400 million from the Labor and Workforce Development Fund to the General Fund and directs $13 million one-time Labor and Workforce Development Fund to expand the California Workplace Outreach Program.
However, the deal rejects the Governor’s proposal to reduce $766.7 million ($283.3 million General Fund) salary and wage reductions from collective bargaining agreements and suspend salary and wage increases for state employees. It also rejects his proposal to cut 6,002 vacant positions until the enactment of the Budget Act of 2026.