New state budget proposal asks cities to do more with less

May 14, 2026

By Cal Cities Staff

Gov. Gavin Newsom unveiled a revised budget blueprint with his usual bragging about California’s economy, salvos at political opponents, and record-touting — and of course, a slide on revenue volatility. But what good is economic dominance if the state cannot help its most vulnerable residents and backs away from supporting what many Californians need the most: affordable housing.

Carolyn Coleman, Cal Cities executive director and CEO, praised the Governor’s proposed digital software tax. But she also noted that the budget proposal falls short in many areas for cities and their residents.

“At the same time, the Governor touted the state’s progress on reducing unsheltered homelessness, he proposes cutting round 7 of the Homeless Housing, Assistance and Prevention grant program — the backbone of the state’s local homelessness response system,” she said in a statement. “This will slow hard-won progress by forcing cities to close shelter beds and reduce homelessness prevention programs. Cities need an ongoing funding commitment to reduce the homelessness crisis, not a decrease in funding.”

The $349.9 May Revision — up slightly from January — purports to close the structural deficit through July 2028. First, the notable positives for cities: The budget maintains investments in transportation and infrastructure and creates a $100 million loan program for victims of the Los Angeles wildfires. The Governor also proposed a new tax on certain types of software that could direct money toward local governments. End of list.

What’s noticeably absent in the budget is new money for affordable housing production, a full restoration of the Homeless Housing, Assistance, and Prevention (HHAP) grant program, new money for Proposition 36 implementation, or an early resolution to several high-profile environmental funding discussions. Despite higher-than-projected revenues, somehow the budget math doesn't work for the millions of Californians who depend on local services.

Keep reading for an analysis of the May Revision from Cal Cities lobbyists.

- Brian Hendershot, Cal Cities Advocate managing editor

Revenue and Taxation

Since January, the state’s revenues have surpassed expectations. The Legislative Analyst’s Office (LAO) recently published an increased General Fund revenue estimate, showing revenues up nearly $25 billion over the Governor’s January Budget proposal estimates. The LAO attributed the increase to the current stock market boom, driven by artificial intelligence companies. However, they urged caution, warning that the growth is likely unsustainable.

Governor Newsom also noted the surge in revenues when rolling out his May Revision. His team estimates revenues will come in $16.5 billion higher than their January estimate, but did not commit those funds to ongoing spending. Rather, the Governor unveiled a $349.9 billion budget proposal, with a $1.8 billion General Fund reduction from January. The updated budget proposal includes increases to the state’s reserve accounts, with combined balances reaching $39.9 billion — including nearly $10 billion in a newly created special surplus fund.

The revised budget proposal seeks to balance not just this fiscal year, but also FY 27-28: The Governor emphasized that there will be no structural deficits through July 2028, and that his budget reduces structural deficits in further outyears.

To achieve a balanced budget, the Governor proposed both reduced spending and new revenue streams. Spending solutions — representing $411 million in FY 26-27 — primarily come from changes to the Medi-Cal system. On the revenue side, the Governor touted over $3.6 billion in total solutions for FY 26-27, with most increases deriving from the Managed Care Organization Tax and reforms to certain business tax credits.

Notable to cities, the Governor proposed expanding the state’s sales tax to digital prewritten software and software as a service. The Administration estimates that this will result in local sales tax revenues increasing by $560 million in FY 26-27 and approximately $1.1 billion annually thereafter. Governor Newsom emphasized that the sales tax will not apply to streaming services.

Recently, the Senate released its own budget plan, while the Assembly released a high-level “road map.” Both laid significant blame at the feet of the Trump Administration for health care cuts in H.R. 1 that, in their view, the state must backfill. A cornerstone of the Senate’s plan includes a new health care tax on some of the state’s largest employers, expected to generate $5 to $8 billion in annual revenues. The Assembly’s road map mentions “closing tax loopholes” but is light on specifics. Both committed to no new major ongoing spending commitments and the need to reform the state’s reserves policy to allow for higher savings, views held by the Governor as well.

- Ben Triffo, legislative advocate

Community Services

The Governor’s May Revision does not include new funding to address homelessness through the state’s flagship Homeless Housing, Assistance, and Prevention (HHAP) grant program. Instead, the May Revision maintains the Governor’s proposed cuts to HHAP and includes increased accountability requirements.

In January, the Governor proposed slashing the next round of HHAP to $500 million, half its historic funding level. Cal Cities and its allies urged the Governor and the Legislature to restore HHAP funding to $1 billion and make the program ongoing. The proposed cuts threaten the progress the cities have made in reducing unsheltered homelessness, which dropped 9% last year. According to California’s largest cities, the cuts would result in a loss of 6,000 shelter beds across the state, forcing thousands of people back to the streets.

The Governor’s office also released budget trailer bill language today detailing new accountability requirements to access HHAP funding. This includes requiring HHAP recipients to have a pro-housing designation and provide local matching funds to receive HHAP in the future.  

The May Revision maintains the Governor’s proposed shift of the Medi-Cal Mobile Crisis benefit from a statewide mandatory benefit to an optional, county-funded benefit, which could force local governments to scale back or eliminate mobile crisis teams. This policy change — opposed by Cal Cities and a coalition of local governments and behavioral health advocates — would force cuts to critical behavioral health services in communities across the state.

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

  • Homeless Housing, Assistance, and Prevention (HHAP): Maintains $500 million for round 7 of the HHAP program, consistent with the Governor’s January budget proposal.
  • Homeless encampment liaisons: The May Revision includes a two-year investment of $6.2 million General Fund annually to sustain efforts addressing homelessness and encampments on the state highway right-of-way. 
  • Child care infrastructure: The May Revision includes a one-time increase of $28 million in federal funds for child care facilities affected by the 2023 and 2024 natural disasters.
  • CalFood: Includes an increase of $30 million one-time General Fund for food banks in 2026-27.

- Caroline Grinder, legislative advocate

Housing, Community, and Economic Development

Governor Newsom continued an all-too-familiar tune: No new funding for some of the most effective programs local governments have historically used to help promote affordable housing. The only new investment is a $7 million reappropriation to the Infill Infrastructure Grant Program — a drop in the bucket for California’s dire housing needs. Other successful programs, such as the Multifamily Housing Program and the Low-Income Housing Tax Credits, would not receive any new funding under the Governor’s proposal.

If anything, the Governor wants to further tighten the screws on local governments. He unveiled a policy proposal that prohibits local governments from charging impact fees on state-funded affordable housing projects if they are a lead or co-applicant. The Governor added salt to the wound during his press conference, stating that “locals are pocketing the state money by taking fees on these projects in essence.”

This is an inaccurate statement. Local governments do not make revenue from impact fees. They can only levy impact fees for the cost of service, as determined by nexus studies, which require evidence-based reasoning and must be completed before local governments adopt impact fees, per the state’s Mitigation Fee Act.

As always, the devil will be in the details — or rather, a budget trailer bill. But such a policy would create barriers for the very jurisdictions that need affordable housing the most: It is unlikely that less-resourced communities will be able to front the General Fund cash needed to provide the infrastructure and public services necessary to develop livable, equitable, and thriving communities. This would perversely disincentivize cities from applying for state-funded affordable housing projects.

One final (positive) takeaway: The Governor proposed a $100 million investment to help homeowners impacted by last year’s devastating wildfires rebuild.

- Brady Guertin, legislative advocate

Environmental Quality

The Governor's May Revision was relatively silent on several swirling funding and policy discussions that would impact cities’ disaster and climate priorities. In fact, the Governor largely avoided touching any environmental issues, aside from wildfire rebuilding as noted above. The Senate signaled earlier this week 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.

However, the Governor’s May Revision did announce a budget trailer bill related to wildfire recovery, which will likely further tee up an end-of-session play, including on the wildfire liability cost debate.

The updated budget proposal also maintains two important sources of climate funding: $2.1 billion from the 2024 climate bond and $3.77 billion from the Greenhouse Gas Reduction Fund (GGRF). However, what the GGRF actually funds could quickly change. The California Air Resources Board proposed dissolving the Cap-and-Invest framework authorized just last year, which would reduce funding for key city priorities, including affordable housing and wildfire mitigation. That decision will come later this month and impact negotiations in the Legislature over hard-fought climate program dollars.

The May Revision includes an additional $25 million one-time General Fund to deliver environmental, habitat restoration, science, and monitoring to support the management of the Sacramento-San Joaquin Bay Delta. This funding supports both flow for environmental purposes and the habitat and scientific investments necessary to achieve measurable ecosystem improvements in the Bay Delta.

- Melissa Sparks-Kranz, legislative advocate

Public Safety 

The Governor’s May Revision still does not provide any new funding for Proposition 36 implementation, but notes that the prison population will likely rise from 592 to 1,547 upon full implementation. The Governor stated that the $100 million allocated last year was sufficient for the implementation of Proposition 36.

There are no changes to the January proposal regarding wildfire resiliency and mitigation, except for a new $100 million Disaster Rebuilding Fund, as noted in the housing section above. Other major adjustments and changes include:

  • Organized retail theft. $2.2 million one-time General Fund to help the Department of Justice resolve 27 existing cases from 2022-23.
  • Combat human trafficking. $10 million one-time General Fund for the Board of State and Community Corrections to administer a competitive Vertical Prosecution grant program to prevent human trafficking.
  • Next Generation 9-1-1 transition. $141.9 million one-time funds to continue the Next Generation 9-1-1 deployment and transition the system from a regional model to a unified statewide system model.
  • Cannabis Tax Fund. $414.1 million will be available to address the impacts of Proposition 64, the Adult Use of Marijuana Act:
    • $248.5 million for education, prevention, and treatment of youth substance use disorders and school retention.
    • $82.8 million for the clean-up, remediation, and enforcement of environmental impacts created by illegal cannabis cultivation.
    • $82.8 million for public safety-related activities.

- Jolena Voorhis, legislative advocate

Transportation, Communications, and Public Works

Governor Newsom’s May Revision maintains investments in transportation and infrastructure despite broader budget pressures. The proposal continues to provide approximately $18 billion in state highway repair and rehabilitation projects through the State Highway Operations and Protections Program and $2.5 billion in transportation improvements through the State Transportation and Improvement Program.

To incentivize the transition to zero-emission vehicles, the Governor announced a Clean Fuel Reward rebate program — between $7,500 to $120,000 — that local governments can use to obtain zero-emission medium- and heavy-duty vehicles. Funded through the Low Carbon Fuel Standard, the program will provide $250 million this year and more than $1 billion through 2030.

In preparation for the 2028 Los Angeles Olympic and Paralympic Games, the Administration proposed statutory changes authorizing automated enforcement along the planned Games Route Network. Newsom’s office signaled that more transportation funding will be necessary to complete related infrastructure improvements.

Other noteworthy transportation and public works proposals include:

  • $40 million one-time General Fund for continued Clean California litter abatement and encampment cleanup efforts along state highways.
  • $16.4 million for Caltrans to deploy generative artificial intelligence tools intended to improve roadway safety and traffic mobility analysis.
  • $6.2 million funding for homeless encampment liaison programs to coordinate state and local responses along highway rights-of-ways.

Notably, the May Revision does not include major new broadband or middle-mile internet infrastructure proposals. It also warns that the state’s Motor Vehicle Account — which funds California Highway Patrol and Department of Motor Vehicles operations — could become insolvent as early as FY 2028-29, signaling potential future transportation funding challenges.

- Damon Conklin, legislative advocate

Governance, Transparency, and Labor Relations

The May Revision includes several changes to employee benefits of note from January. This includes $9.6 billion for the state’s contribution to CalPERS. This is a decrease of $107.2 million. It also provides $307.2 million to reflect updated employee compensation and projected health care and dental premiums for active state employees for the 2027 plan year. This is an increase of $40.4 million.

Notably, the May Revision also includes a commitment from the Governor’s Administration to “work collaboratively with the Legislature to identify ways to continue to protect democracy in the state of California.”

- Johnnie Piña, legislative advocate

Next steps

Lawmakers must pass a balanced budget by June 15. To learn how you can get involved, stay subscribed to Cal Cities Advocate or contact your regional public affairs manager.