With the state facing a significant budget deficit that analysts believe will extend into the coming fiscal years, California lawmakers and Gov. Gavin Newsom enacted a spending plan that includes cuts, deferrals, and delays that hit hundreds of programs and every government agency but calls for no layoffs.
More than half of the state’s reserves—including from school and safety net nest eggs—will be tapped over the next two fiscal years. That amounts to borrowing from future revenues, Joe Stephenshaw—director of the state’s Department of Finance—said during a July 10 webinar hosted by the California Endowment.
During the webinar, community advocates expressed concern that low-income communities will be most affected.
About $3 billion will be trimmed from state operations, as all agencies are ordered to cut their budgets by 8 percent this year.
It remains unclear how the cuts will be determined—though no job losses are anticipated—but Mr. Stephenshaw said the Finance Department will be working with agencies later this year to formulate a plan.
While education funding for preschool and kindergarten through high school increased slightly, the Education Department will need to cut administrative outlays, and the University of California and California State University systems were targeted with delays and reductions.
Cal State schools are navigating a $200 million funding gap in the current fiscal year, according to administrators.
Health care assistance for illegal immigrants—with a price tag of $3 billion to $6.5 billion annually—remained untouched by the cuts, but the state’s plan to provide food aid for such individuals is now delayed until 2027.
Some communities and program leaders are concerned that services offered to residents will be limited because of the state’s fiscal dilemma.
Homelessness and housing programs are among those facing cuts—with reductions totaling more than $1 billion over the next two fiscal years.
After negotiations between the governor and the Legislature, the Homeless Housing Assistance and Prevention Program will receive $1 billion in one-time funding to provide local governments resources—with the money tied to increased accountability measures.
Also, $250 million in encampment grants are included in the budget—with $150 million allocated for the current fiscal year and the remainder in the next.
Medi-Cal programs will benefit from increased taxes on managed care plans—with an anticipated boost of $133 million this year, $728 million in 2025–2026, and $1.2 billion in 2026–2027, according to the governor’s office.
Lawmakers were forced to cut funding for some pet projects, including climate-related programs, where spending will decline by about $20 billion, according to the state’s finance department.
While individuals in California will not see their income tax increase, businesses will pay more to help balance the spending gap—including billions of dollars statewide annually over the next three fiscal years because net operating losses are suspended and a limit of $5 million in tax credits was included in the agreement.
According to the governor, the budget “prioritizes foundational programs”—including offering financial relief on household bills, providing a pathway to economic security and mobility through education, and issuing funding to support quality of life.
“This agreement sets the state on a path for long-term fiscal stability—addressing the current shortfall and strengthening budget resilience down the road,” Mr. Newsom said in a June 22 statement. “We’re making sure to preserve programs that serve millions of Californians, including key funding for education, health care, expanded behavioral health services, and combatting homelessness.”
One lawmaker instrumental in crafting the budget agreement said the state is facing financial difficulties but will persevere.
“Make no mistake: This is a tough budget year, but it also isn’t the budget situation we were originally fearing,” Senate President pro Tempore Mike McGuire said in the governor’s statement. “Thanks to hard work, tough decisions, and early actions, we’ve been able to shrink the shortfall, protect our progress, and maintain responsible reserves.”
Setting a new precedent, the budget includes solutions for the current and next fiscal year.
The plan also includes proposing legislation later this year to allow the state to put aside anticipated surplus revenues to help stabilize the budget in future years. Additionally, lawmakers will pursue a constitutional amendment in 2026 to allow the state to grow its rainy day fund beyond current formulaic limitations.
Assembly Speaker Robert Rivas said “accountability was a cornerstone” of the chamber’s 72 budget hearings—which he believes demonstrated the Legislature’s focus on establishing fiscal sustainability.
“The Assembly fought hard to protect the public services that matter most to Californians, and we are delivering a budget that prioritizes affordability and long-term stability,” Mr. Rivas said in the governor’s statement. “And by balancing our budget this year and next ... we are prepared for the future.”
