Final state budget delivers on homeless prevention and housing but punts climate decisions to later this summer

By Cal Cities Staff

Gov. Gavin Newsom and the Legislature on Monday passed a budget deal after weeks of negotiations. The agreement is largely the same as the deal struck in June between both houses and includes some hard-won homeless prevention and housing investments that the Governor and others resisted adding earlier this year.

"At a time of tough budget choices for cities and the state alike, Cal Cities appreciates the Legislature and Governor's investments in housing and homelessness, and their commitment to ensuring every Californian has a place to call home,” said Cal Cities Executive Director and CEO Carolyn Coleman in a statement. “We appreciate the $900 million for the Homeless Housing, Assistance and Prevention program, which recognizes this important work and helps build on the progress already underway."

However, that funding does come with some caveats for cities, including a new requirement for direct HHAP recipients. The budget deal also contains funding for Proposition 36 implementation and lifelines for some transit agencies. The budget does not include an agreement on how to spend two major sources of climate funding.

With budget negotiations (mostly) finished, lawmakers are now focused on getting their bills to the floor for a final vote and gearing up for several major ballot box fights in November.

-Brian Hendershot, Cal Cities Advocate managing editor

Revenue and Taxation

As with previous budget announcements this year, lawmakers described this final iteration as a direct response to sweeping federal cuts, specifically HR 1. The agreed-upon budget deal comes in at $351.7 billion for Fiscal Year 26-27, approximately $1.5 billion lower than the legislative deal announced on June 15.

The framework adopts lower revenue estimates, more aligned with the Governor’s May Revision. Like the previous budget agreement, it balances next year’s budget and reduces the structural deficit for FY29-30 to $8.4 billion (down nearly $1 billion from the May Revision). The budget deal also includes a collective $28.8 billion in reserve accounts and places ACA 20 (Gabriel) on the November ballot. The initiative proposes reforms to the state’s Rainy Day Fund. Finally, the agreement includes an additional $6.4 billion for a Projected Surplus Temporary Holding Account, which state leaders will use to balance the FY 27-28 budget.

Perhaps most notable for cities is the expansion of the sales and use tax to digital prewritten software and software as a service (SB 122). This proposal, estimated to generate over $1 billion in local tax dollars, comes at a cost: Cities are not exempt from paying the tax on their own purchases.

- Ben Triffo, legislative advocate

Community Services

In a win for local governments, the final budget includes $900 million for the state’s flagship homelessness grant program: the Homeless Housing, Assistance and Prevention (HHAP) grant program. That is $400 million more than the Governor included in his May Revision, which proposed slashing the next round of HHAP to $500 million. Cal Cities has long urged the Governor and the Legislature to restore HHAP funding to its historic levels of $1 billion and make the program an ongoing funding source.     

“HHAP has proven that when the state invests in local communities, local communities deliver results,” said the Bring California Home Coalition, which includes Cal Cities. “This funding will help cities, counties, and Continuums of Care expand housing, connect more Californians to services, and keep that progress moving forward.”

The proposed housing trailer bill, AB/SB 179, also outlines new accountability requirements for jurisdictions that directly receive HHAP funding. The requirements are a bit of a mixed bag. The good news: Applicants will not need to submit a new application to access the funding, which will expedite disbursement. The bad news: Cities that directly receive HHAP funding must obtain a pro-housing designation and meet a 35% match requirement, which may create new delays and barriers to receiving funding.

Cal Cities and its allies submitted a letter in response to the May Revision outlining concerns with several of these changes. Since then, lawmakers have refined the requirements to address implementation concerns. The trailer bill now includes language that requires the Department of Housing and Community Development to quickly help jurisdictions obtain a pro-housing designation through an expedited process. The scope of what qualifies as a local match was also broadened to provide some greater flexibility for cities.

- Caroline Grinder, legislative advocate

Housing, Community, and Economic Development

The final budget deal is a mixed bag for local governments: It provides more funding for affordable housing but also strongly encourages cities to waive impact fees for state-funded affordable housing projects.

The budget agreement provides $500 million for the Low-Income Housing Tax Credit and $200 million for the Multi-Family Housing program — two important programs that promote, build, rehabilitate, and preserve affordable housing. The budget bill also provides $7 million for the Infill Infrastructure Grant program, which supports additional infrastructure for new housing projects, and creates a $100 million Disaster Rebuilding Fund to assist homeowners impacted by disasters.

Conversely, an accompanying trailer bill incentivizes local governments to waive, limit, or defer impact fees for affordable housing. Impact fees are not revenue generators; local governments may only charge the cost of providing the necessary infrastructure and public services (such as police and fire) to support the new development. 

In a somewhat palatable development, cities that are lead or co-applicants for state-funded housing projects are no longer required to limit, waive, or defer impact fees on the projects to qualify for funding. Instead, their funding awards will be reduced by the amount of impact fees they charged for the project. This will still create challenges for under-resourced communities that lack the General Fund revenue needed to front the cash for infrastructure and public services upgrades that support the new housing.

- Brady Guertin, legislative advocate

Environmental Quality

The final budget does not include two important sources of climate funding: $3.77 billion from the Greenhouse Gas Reduction Fund (GGRF) and $2.1 billion from the 2024 climate bond. The Governor and Legislature agreed to address both special funds in budget trailer bills in August.

Cal Cities submitted a letter outlining its priority areas in the climate bond — including wildfire, water, coastal, and parks. Cal Cities also urged lawmakers to fully fund key affordable housing ($800 million) and resilient forest ($200 million) programs, which receive funding each year under the Cap-and-Invest program. Cal Cities specifically asked the Legislature to prioritize $29 million for organic waste diversion and $100 million for clean fleet investments in its discretionary portion of the program.

However, the requests may not come to fruition. In late May, the California Air Resources Board proposed significant amendments to the program that alter GGRF revenues. The changes, backed by Gov. Gavin Newsom, ease costs for in-state oil refineries and create a new incentive for manufacturers to stay in state. The new rules will result in a roughly 50% drop in annual funding — a $8 billion total reduction through 2030. Cal Cities is urging the Legislature and the Governor to course correct on those changes so that cities have access to long-running funding for clean infrastructure, affordable housing, wildfire resilience, and climate adaptation.

Additionally, the Senate signaled in May budget discussions that it will dive deeper into the state’s electrical and insurance system policies, including wildfire liability standards that hold utilities accountable for causing wildfires. The issue will likely appear as an end-of-session play.

- Melissa Sparks-Kranz, legislative advocate

Public Safety 

The final budget deal still includes $50 million for Proposition 36 implementation, distributed to county behavioral health departments. Counties must spend at least half of the funding on planning and capacity-building and to accelerate services for housing and treatment, including court proceedings. The budget does not include funding specifically for probation, as requested by cities and counties.

The final budget also provides $141.9 million for the Next Generation 911 system. AB 172/SB 172 requires an independent evaluator to make recommendations on the development and implementation of the NextGen 911 system and prohibits Cal OES from contracting with any vendor until the report is completed.

There is no additional funding in this budget deal for home hardening or wildfire prevention.

- Jolena Voorhis, legislative advocate

Transportation, Communications, and Public Works

The final budget preserves $1.1 billion in transit funding and extends key flexibilities for transit agencies through FY 2026-27, allowing them to use state funds for operations or capital projects without meeting certain funding requirements. These provisions will help local transit operators maintain service and respond to ongoing fiscal challenges.

The budget also authorizes Caltrans to work with local and regional agencies to establish automated enforcement for designated Olympic traffic lanes during the 2028 Los Angeles Games. Participating cities should take note, as they will likely take on new responsibilities for traffic management, enforcement, and program administration.

Absent in the budget package is action on the proposed Sustainable Aviation Fuel tax credit, a jet fuel tax credit that could divert money away from local streets and roads. Cal Cities remain opposed to the proposal. Negotiations on the issue will stretch into the summer.

Notably, the budget deal seeks to increase oversight of the California High-Speed Rail Authority by requiring the Inspector General to publicly release audit reports with enhanced reporting to the Governor and Legislature.

- Damon Conklin, legislative advocate

Next steps

With budget negotiations (mostly) wrapped up, lawmakers are now focused on getting their bills through their final set of policy committee hurdles. July 2 is the last day to clear any non-fiscal committees; August 14 is the last day to get through appropriations. To learn how you can get involved, stay subscribed to Cal Cities Advocate or contact your regional public affairs manager.