Revised state budget nixes key funding and neglects voter-approved priorities

May 14, 2025

By Cal Cities Staff

There are a few tried-and-true ways to bury bad news. You can drop it on a Friday. You can blame someone else. You can paper over it with good news. Or you can spike it down the road. In his revised budget proposal today, Gov. Gavin Newsom chose all but the former.

To be fair, policymakers are working in what he called a "climate of deep uncertainty" amid capricious federal policy changes. The ongoing trade détente will have an outsized impact on California's economy. And as longtime budget watchers know, the state's revenues go up and down with the fortunes of its wealthiest contributors. A budget deficit was all but certain. The only question was how big it would become.

The $321.9 billion budget proposal put forth by Newsom accounts for a $12 billion shortfall — not including possible federal spending cuts later this year. Equally notable is what's not in the budget: funding for homelessness or Proposition 36 implementation. He also suggested using some climate bond funding to balance the budget.

As usual, Newsom found time to lob a few barbs at local governments for the ongoing homelessness crisis. "It is not the state of California that remains the biggest impediment," he said. "The obstacle remains at the local level."

It's worth noting that his administration has placed an inflated high price on a Cal Cities co-sponsored bill that would increase coordination between state agencies and cities when removing encampments. The budget also contains no new funding for affordable housing.

"California cities are not the obstacle to reducing and preventing homelessness," Cal Cities Executive Director and CEO Carolyn Coleman said in a statement. "This crisis has deep roots and won’t be resolved without a partnership between state and local governments.” "

-Brian Hendershot, Cal Cities Advocate managing editor

Revenue and Taxation

When Gov. Gavin Newsom unveiled a $322.3 billion budget proposal this January, analysts urged caution. The proposal was a noticeable increase from last year’s $297 billion budget — which had to close a $47 billion deficit. But California’s tax structure relies on the top 1% of earners. Dramatic swings in the stock market leave California’s revenues vulnerable, and once balanced budgets can face looming deficits.

Since January, uncertainty and numerous macroeconomic changes have impacted California’s budgetary outlook. It’s unclear whether there will be federal cuts to large state-funded programs such as Medi-Cal. The state already has difficulty funding Medi-Cal at existing levels, let alone backfilling federal cuts.

Reimbursement for wildfire recovery is another billion-dollar question mark. Earlier this year, Governor Newsom requested $40 billion from Congress for recovery efforts, which they have yet to grant. Finally, the whipsaw in the stock market due to changes in federal trade policy left many wondering what California’s revenues will look like later this year once those impacts are fully felt.

That caution was warranted. Today, the Governor unveiled a $321.9 billion updated budget proposal that included a $12 billion budget shortfall — despite state revenues coming in above estimates through April. He placed much of the blame at the feet of the Trump Administration, noting that instability and tariffs have negatively impacted California’s future revenues.

However, Newsom also noted that the state’s expenditures have grown, partially due to the state’s Medi-Cal expansion to all income-eligible Californians, regardless of immigration status. The May Revision does not consider any impacts from federal cuts that are under consideration by Congress.

The Governor proposed bridging this deficit through $5 billion in reductions (primarily to the Medi-Cal program), $5.3 billion in revenue/borrowing, and $1.7 billion in fund shifts. The May Revision maintains the previous levels of withdrawals from the state’s reserves, and total reserve balances of approximately $15.7 billion.

- Ben Triffo, legislative advocate

Environmental Quality

The Governor's May Revision includes a mix of funding and policy news for cities regarding climate priorities. Building on the January budget, it includes clawbacks in funding for offshore wind and lead acid battery clean-up, water supply reliability policy changes, and a proposal to extend the Cap-and-Trade program.

  • Climate bond clawbacks. In his January budget proposal, Newsom floated using $273 million of Prop. 4 funding to balance the budget. Today, the Governor doubled down and suggested moving an additional $42.8 million for offshore wind from General Fund to Prop. 4. Cal Cities and the long list of Prop. 4 champions oppose the Governor's use of climate bond funding, which was intended to be supplemental, to backfill the General Fund. The challenge that remains? Hundreds of millions of dollars less for climate resilience programs.
  • Further shifts to offset the deficit. The Governor suggested shifting $35 million from the General Fund to the Lead-Acid Battery Cleanup Fund to decontaminate residential properties near the former Exide lead-acid battery recycling facility.
  • Water supply reliability streamlining. The Governor also used the May Revision to unveil his commitment to streamline and modernize improvements to critical water supply infrastructure, including the Delta Conveyance Project. The proposed streamlined administrative processes could save billions of dollars.

Governor affirms commitment to Cap-and-Trade Program

Leading up to the May Revision in April, the Governor, Senate Pro Tem, and Assembly Speaker announced their intent to extend the Cap-and-Trade program beyond 2030. In his remarks, the Governor committed to extending the program through 2045 — 20 more years — to align with the state's carbon neutrality goals and provide market certainty. He also recommended renaming the program to the Cap-and-Invest program to better characterize the need for deeper investments in carbon reduction and clean technologies.

Tied to the program’s reauthorization is the continuation of the California Climate Credit, which could result in approximately $60 billion for utility bill credits to Californians.

The Cap-and-Trade Program has funded nearly $33 billion in investments through the Greenhouse Gas Reduction Fund (GGRF). That is roughly equal to taking 1.3 million gas-powered cars off the road. $7.4 billion has been dedicated to the High-Speed Rail Authority in the last ten years. The Governor identified his priority, to allocate at least $1 billion for the project annually moving forward, to establish a stable and predictable funding stream to deliver on the capital investment.

So, what happens next to reauthorize the program? The Governor said his administration will work with the Legislature to design an expenditure plan associated with the program extension. Cal Cities will continue to advocate for aligning the GGRF with state-mandated climate programs that cities are implementing.

- Melissa Sparks-Kranz, legislative advocate

Community Services

For the second year in a row, the Governor’s revised budget does not include any new funding to address homelessness. This isn’t surprising, as the Governor has previously withheld funding from the Homeless Housing, Assistance and Prevention (HHAP) grant program, while demanding more action and results from local governments. The future of the program is now up to the Legislature.

This comes as the Governor earlier this week announced a new model ordinance for local governments to address encampments on public property, and as homelessness in California continues to grow, with over 187,000 people sleeping on the street or in shelters.

Instead of announcing new funding, the Governor pointed to the recent release of $3 billion in Proposition 1 funds. While this funding will support 5,000 new behavioral health beds, only four cities received direct awards. Grantees cannot use the funds to implement the new encampment ordinance.

Below is a breakdown of major allocations, reductions, and policies announced:

Homelessness

  • The May Revision does not include any new funding for round seven of the Homeless Housing, Assistance and Prevention (HHAP) grant program. Cal Cities, along with local government partners and homeless services providers, have called for $1 billion in ongoing funding for the program.
  • The May Revision maintains $100 million for Encampment Resolution Fund grants committed to in last year's budget.
    • The Governor also announced an expansion to the state’s housing and homelessness accountability website that now includes the number of individuals served by the Encampment Resolution Fund.

 California Housing and Homelessness Agency

  • The May Revision includes $4.2 million in 2025-26, $6.4 million in 2026-27, and $6.2 million in 2027-28 to support the reorganization of the Business, Consumer Services, and Housing Agency. Part of this funding would go toward creating the new California Housing and Homelessness Agency (CHHA) and the Housing Development and Finance Committee (HDFC).
    • The CHHA will integrate housing programs, streamline policies, and simplify the administration of state affordable housing programs. CHHA will include the Department of Housing and Community Development, California Interagency Council on Homelessness, California Housing Finance Agency, Civil Rights Department, and Housing Development and Finance Committee.
    • The HDFC will administer multifamily affordable housing programs to streamline the administration and oversight of housing funding and reduce the administrative burden for housing developers.

Children and childcare

  • The May Revision maintains previous funding commitments to implement Universal Transitional Kindergarten and Universal School Meals.
  • The May Revision includes a reduction of $60.7 million General Fund in 2025-26 and ongoing suspension of the childcare cost-of-living adjustment in 2025-26.

- Caroline Grinder, legislative advocate

Housing, Community, and Economic Development

Last year, the Governor announced $1.7 billion in cuts to key housing programs that cities rely on to increase affordable housing in their communities. Despite the continued focus on California’s housing crisis, the Governor further reduced the amount of affordable housing programs available to cities by cutting $31.7 million from the Infill Infrastructure Grant Program in his budget proposal.

Instead of providing new funding for affordable housing in the May Revision, the Governor determined that a better use of California’s limited financial resources should be spent on establishing a new agency. (Please see the Community Services report above for more information on this reorganization effort.)

Although most of the May Revision housing proposals focus on cuts to affordable housing programs and the administration’s housing priorities for the rest of the year, there are efforts to provide some funding for disaster recovery and rental aid programs. Below is a breakdown of notable priorities, allocations, and cuts.

Local government accountability

The May Revision says that the Governor will focus on holding local permitting agencies accountable to the existing statutory process, shortening permitting timelines, and targeting existing streamlining tools and financing strategies that reduce vehicle miles traveled through affordable, transit-oriented housing.

Housing finance and disaster recovery

  • The May Revision states that the Governor will work with the Legislature on statewide bond measures to fund investments in housing and infrastructure.
  • $416.6 million in new one-time funding through the Community Development Block Grant to support long-term recovery efforts related to 2023 and 2024 natural disasters.
  • $200 million in Prop. 35 funds over two years for a Flexible Housing Pool rental assistance program to support individuals with significant behavioral health conditions who are experiencing or at risk of homelessness to enter stable, long-term housing.

- Brady Guertin, legislative advocate

Transportation, Communications, and Public Works

The Governor proposed a total of $19.8 billion in expenditures for the state transportation agency, a 2.9% spending reduction that will result in eliminating over 500 positions at the department. Newsom hopes to extend the Cap-and-Trade program to fund major climate projects like high-speed rail and provide a utility credit for ratepayers to offset higher rates through 2045.

Additionally, the Governor is seeking to focus efforts on building electric charging infrastructure by allowing grantees to use the California Energy Commission’s Clean Transportation Program grant funding on charging infrastructure.

Below is a breakdown of other allocations, reductions, and policies announced:

  • Transit. Proposes a total of $1.1 billion for transit.
  • High-Speed Rail. Proposes $882 million for the High-Speed Rail project.
  • Active Transportation Program (ATP): $100 million for 2025-2026. This is the second consecutive year the governor has removed $400 million from ATP, which funds biking and walking infrastructure.
  • Battery energy storage systems. $6.6 million allocated through 2028 to support compliance and enforcement of safety standards for large-scale, electric grid-connected battery energy storage systems.  
  • Clean energy. $1.9 million through 2028-29 to fund the California Energy Commission’s “Opt-in” clean energy permitting program. The May Revision also includes statutory changes to the program’s project application fee structure to align it with current program needs.
  • Los Angeles Olympics. The May Revision includes $17.6 million one-time from the State Highway Account to support transportation project planning associated with the 2028 Olympic Games.

- Damon Conklin, legislative advocate

Public Safety 

The May Revision proposes significant new funding for fire prevention and fire control to Cal FIRE to address the recent wildfires and the need for more resources, but no new funding to implement Proposition 36.

Wildfires

  • Fire prevention and fire control. A shift of $1.54 billion from the General Fund to the Greenhouse Gas Reduction Fund to support CAL FIRE's fire prevention, fire control, and resource management activities on an ongoing basis. The proposal also includes a General Fund backstop to protect CAL FIRE’s operations if the Cap-and-Trade auction proceeds fall below projected revenues.
  • CAL FIRE training center. A reversion of $31.5 million General Fund appropriated for the acquisition of a new CAL FIRE training center. CAL FIRE is exploring other ways to meet its training needs.

Crime and cannabis

The Governor’s May Revision provides some funding to reduce crime, but no new funding for the implementation of Prop. 36. His proposal does note the modest impact Prop. 36 will have on prison populations, as well as a proposal to use Prop. 47 savings to fund Prop. 36 implementation. The major changes and adjustments to public safety are as follows:

  • California Highway Patrol Highway Violence Task Force. One-time funding of $4.9 million for an additional year of funding for the CHP’s Highway Violence Task Force to address violent crime statewide.
  • Prop. 47 funding. Additional $3.2 million General Fund in savings for Prop. 47, for a total General Fund savings of $91.5 million in 2025-26.
  • Prison population. Spring projections indicate the average daily adult incarcerated population for 2024-25 will drop to 91,471, an estimated decrease of 0.2 %, and 91,205 in the following fiscal year, a decrease of 2.2 %. The projected decrease recognizes a slower ramp-up of Prop. 36.
  • Prison closures. The May Revision proposes closing another prison by October 2026. This will save the state an estimated $150 million General Fund annually.
  • Cannabis tax fund. The May Revision estimates $454.3 million will be available for cannabis-related programs from the passage of Prop. 64. This includes $90.9 million for public safety activities. The Governor also proposed changes to the grant program that would prioritize local governments that prohibit cannabis cultivation if they authorize retail cannabis sales and prioritize grants for local illicit cannabis enforcement efforts.

-  Jolena Voorhis, legislative advocate

Governance, Transparency, and Labor Relations

The May Revision continues investments aimed at expanding workforce development opportunities. It also includes significant budget adjustments to address the budget shortfall while continuing to pay down the state’s retirement obligations. 

The May Revision proposes the following increases in spending:

  • Unemployment insurance trust fund loan interest. An increase of $8.5 million to pay the annual interest payment, bringing the total estimated interest payment for 2025-26 to $642.8 million.
  • Workforce Innovation and Opportunity Act-May Revision update. An increase of $20.4 million one-time in 2024-25 and an increase of $119.6 million one-time in 2025-26 to support various workforce development programs.
  • Department of Industrial Relations (DIR) apprenticeship training grant expansion. An increase of $18.2 million to support apprenticeship training in construction and related trades.
  • DIR Public Works information technology system enhancements. An increase of $19.1 million to continue modernizing DIR’s Public Works information technology system.

To address the projected budget shortfall, the May Revision includes General Fund solutions.

  • Labor and workforce development fund loan. A loan of $400 million from the Fund to the General Fund.
  • Regional coordination for career education. A reduction of $3 million one-time General Fund for the Labor and Workforce Development Agency in 2025-26.
  • Collective bargaining negotiations. A savings of $766.7 million for salaries and wages.
  • Ongoing vacancy and efficiency reductions. $34 million in vacancy and efficiency reductions across the Motor Vehicle Account’s major users, including the California Highway Patrol, Department of Motor Vehicles, and California Air Resources Board.

The May Revision makes contributions to the state’s retirement obligations.

  • The California Public Employees’ Retirement System (CalPERS). The state’s contributions to CalPERS have decreased by a net total of $103.9 million in 2025-26 because of the integration of CalPERS valuation results as of June 30, 2024.
  • Proposition 2 debt repayment. The May Revision estimates $573 million in one-time Proposition 2 debt repayment funding in 2025-26 to further reduce the unfunded liabilities of the CalPERS state plans.

- Johnnie Pina, legislative advocate

Next steps

Typically, budget negotiations wrap up a few days before June 15, when lawmakers must pass a budget bill. But this year, Congressional Republicans have proposed major cuts to social safety net programs that could impact the state’s budget. Legislators could return to Sacramento late this year or even early next year to revise the budget one more time. 

“Ninety percent of the ball game is in Washington,” Asm. Jesse Gabriel told CalMatters. “It’s frustrating to me that this is beyond our control.”

It’s clear that the Legislature and the Governor will need to make some difficult cuts. In the coming weeks and months, city advocacy will be crucial. To learn how you can get involved, stay subscribed to Cal Cities Advocate or contact your regional public affairs manager.