The ‘final’ budget could be worse, but the worst may still be ahead
By Cal Cities Staff
It’s not as bad as it could have been — but check back in a few months. Gov. Gavin Newsom on Friday signed a $321 billion budget deal that impacts several city priorities. The budget slashes homelessness funding and diverts voter-approved climate bond funding to fill the deficit. On the positive side, it invests $100 million in one-time funding to implement the Proposition 36 public safety initiative and revives a few of the state’s most valued affordable housing programs.
In an unusual move, the signed budget bill includes a clause stating that if the Legislature fails to pass a sweeping CEQA reform bill today, the entire budget is void. After hours of debate, the Legislature passed SB 131 (Committee on Budget and Fiscal Review), which the Governor promptly signed.
The state’s massive budget closes a nearly $12 billion deficit through a combination of borrowing, cuts, delays, deferrals, and shifts. The budget deal, built upon a theme of “uncertainty,” seems to broadly align with the proposal the Legislature adopted a few weeks ago, though elements of the May Revision are incorporated.
Now that the CEQA bill has passed and the Governor has signed the budget, negotiations over the state’s spending for the 2025-26 fiscal year — which begins tomorrow — are relatively buttoned up … for now. Federal policies, specifically around tariffs, have caused a downturn in economic forecasts. With further uncertainty at the federal level, it would not be surprising to see the Legislature reconvene for a special session in the fall to address any fiscal challenges California faces, especially if federal funds do not materialize.
Keep reading for an analysis of major funding cuts, allocations, and policy proposals.
- Ben Triffo, legislative advocate,and Kayla Sherwood, senior communications and media manager
Community Services
As expected, the budget deal between the Governor and the Legislature slashes funding for the Homeless Housing, Assistance, and Prevention (HHAP) grant program. SB 131 (Committee on Budget) establishes Round 7 of the program, but at $500 million — half of what was invested in previous rounds. The funding will not be fully distributed until the 2026-27 fiscal year.
“Investing no new money this year and only half as much for next year will stop progress in its tracks,” said Cal Cities and the California State Association of Counties in response.
Furthermore, this allocation is contingent on funding from the last round being fully allocated and the enactment of new accountability metrics for Round 7. The legislation would require HHAP applicants to satisfy the following requirements:
- Have a compliant housing element.
- Have a local encampment policy consistent with administration guidance.
- Have a pro-housing designation.
- Leverage local resources to scale state investments.
- Demonstrate progress on key housing performance metrics.
- Demonstrate urgency and measurable results in housing and homelessness prevention.
The budget also provides $100 million for the Encampment Resolution Fund. This funding is more critical than ever, with the Governor calling on cities to adopt ordinances to address encampments in communities.
- Caroline Grinder, legislative advocate
Environmental Quality
Unsurprisingly, the final budget punts the details of the major climate resilience programs to later this summer. However, the Governor did scoop up some major policy language in his budget trailer bills related to the California Environmental Quality Act (CEQA), which can be found in the housing section of this summary.
Greenhouse Gas Reduction Fund
The budget deal moves $1 billion in 2025-26 from the General Fund to the Greenhouse Gas Reduction Fund (GGRF) for Cal Fire’s state operations costs. The agreement is a compromise between the Legislature’s two-year allocation and the Governor’s proposal to sweep up $1.5 billion in annual ongoing funding. If the state remains in a deficit, lawmakers could move an additional $1.25 billion in 2026-27, with smaller shifts in the following years.
The deal also expresses intent to restore $1.07 billion in GGRF spending from Transit Flex funding — which supports capital projects, operations, and zero-emission buses — when GGRF funding is appropriated in a later budget bill.
Lawmakers moved the full reauthorization of the GGRF and Cap-and-Trade program to later this summer. The Governor’s goal, to reauthorize the program until 2045 to align with the state’s carbon neutrality goals, also includes $1 billion annually for high-speed rail.
Cal Cities is ramping up its advocacy on the GGRF with its coalition partners: Continued city support is crucial to securing much-needed funding for climate adaptation, clean transportation, and affordable housing projects.
Proposition 4: The Climate Bond
Absent in the final budget deal is the full climate bond appropriation, which voters approved in November. The 2025-26 fiscal year was supposed to be the first of a multiyear expenditure plan to implement the $10 billion climate bond. While the budget deal includes funding to administer the various forthcoming funding programs, it punts the first-year funding to a later trailer bill that Cal Cities anticipates will use nearly $300 million in Prop. 4 funding to backfill the General Fund.
Cal Cities and dozens of stakeholder groups that supported the bond push backed on the proposal, arguing that this clawback is not what voters approved in November. Legislators deferred the full details of the Prop. 4 funding to a trailer bill that will be taken up at the end of the session.
- Melissa Sparks-Kranz, legislative advocate
Public Safety
The budget deal includes $100 million for Proposition 36 implementation, down slightly from $110 million. The funding is allocated through four areas:
- $50 million to expand and accelerate county behavioral health through non-competitive grants to counties, distributed by the Department of Health Care Services.
- $20 million to the courts, including funding for collaborative courts (previously $30 million).
- $15 million to public defenders. Lawmakers removed previous language indicating the money could be used for treatment-mandated felonies.
- $15 million for pre-trial services by county probation.
Courts that tap into the $20 million funding allocation for Prop. 36 would be subject to significant reporting requirements. This includes the number of treatment-mandated felony cases filed, the number of cases in which the defendant chose treatment, and the number of instances where treatment was refused.
The budget deal also moves $12.5 million for a Community Home Hardening Program to the Department of Insurance instead of Cal Fire, to be implemented legislatively. Cal Fire received $3 million for home hardening grants for individuals and local governments.
- Jolena Voorhis, legislative advocate
Transportation, Communications, and Public Works
The budget allocates nearly $5 billion in funding to improve state highways, expand bus, train, and clean transportation services, and increase pedestrian and bicycle travel options. Of that amount, $2.44 billion comes from The Road Repair and Accountability Act of 2017, which cities rely on to improve the safety conditions of local streets and roads. $1.45 billion of this funding will go to zero- and low-emission transportation and new infrastructure.
Projects receiving funding from this budget include:
- $483 million to help communities invest in passenger rail extensions, bicycle and pedestrian safety, and rapid transit bus expansion.
- $202 million for projects in the Local Partnership Competitive Program to further upgrade rail, transit, bicycle, and pedestrian facilities.
- $28 million to install Level 3 electric vehicle charging stations along Interstate 5 and State Route 99.
Additionally, the budget covers a request from San Francisco-area transit systems for a $750 million, interest-free loan to prevent major service cuts over the next two years to avoid service cuts until voters can approve a new ballot measure. Finally, the budget funds 92 positions to plan and design the transportation network to support the Los Angeles 2028 Olympics.
- Damon Conklin, legislative advocate
Housing, Community, and Economic Development
The Legislature negotiated an agreement with the Governor to include funding for several key affordable housing programs, which was absent in his May Revision. Although the allocations are not nearly enough to address California’s dire need for housing, this is a positive step from earlier this year. Below is a summary of the key funding allocations:
- $500 million to the Low-Income Housing Tax Credits program, one of the most effective programs for promoting affordable housing in local communities.
- $300 million for the California Dream for All program, which provides first-time, first-generation homebuyers with low-cost loans to support a down payment.
- $120 million to the Multifamily Housing Program, which helps support new construction, rehabilitation, and preservation of existing affordable housing.
In addition to the new funding, three housing measures were rolled into the housing and homelessness trailer bills that will create significant changes to housing law.
Local building code and CEQA changes
AB 306 (Schultz), backed by Assembly Speaker Robert Rivas, will put a temporary moratorium on building codes to streamline the rebuilding of housing and reduce the overall costs of housing development. Recent changes delay the moratorium until Oct. 1, 2025, and give cities more flexibility to develop and implement reach codes so long as they were adopted before Sept. 20, 2025.
Cities may still adopt standards if they are necessary to protect health and safety, address home hardening, adopt the recent model codes, implement changes to align with a general plan approved before June 10, 2025, or if they relate to specific administrative practices to streamline the permitting of residential development.
SB 607 (Wiener) and AB 609 (Wicks) will provide CEQA exemptions for infill housing if the development meets specific local general plan and zoning requirements. The goal is to streamline infill housing development across California. SB 607 is laid out in AB/SB 131, while AB 609 is located in AB/SB 130, along with water, wildfire prevention, and other infrastructure projects exempted from CEQA.