Facing a massive budget shortfall, California legislators and Governor Gavin Newsom’s budget proposal includes cutting funding, delaying payments, and postponing implementation, affecting hundreds of projects and all government departments, but without plans for layoffs.
More than half of the state’s reserves – including savings for schools and social safety nets – will be tapped into over the next two fiscal years.
State Treasurer Joe Stephenshaw stated in a webinar hosted by the California Donor Foundation on July 10 that this is equivalent to borrowing from future income. Advocates in the community expressed concerns about the significant impact on low-income communities during the webinar.
Approximately $30 billion will be cut from the state’s operating budget, with all departments required to cut 8% of their budgets this year. While the specifics of the cuts are not yet clear, job losses are not expected. Stephenshaw mentioned that the Treasury Department will work with departments later this year to develop specific plans.
Although there has been a slight increase in funding for early childhood and K-12 education, the education sector needs to cut administrative expenses, while the University of California and California State University systems face delayed funding disbursements and cuts.
The California State University system currently faces a $200 million funding gap.
Mildred Garcia, President of the California State University, stated on July 1, “The financial challenges of the CSU system still exist,” explaining, “Further budget cuts and delayed disbursements of funds over the next two years will increase our financial pressure and complicate cost-saving measures that our 23 universities are already struggling to implement.”
However, medical aid provided to illegal immigrants (costing between $30 billion to $65 billion annually) remains unaffected by budget cuts, but food assistance programs for this group have been delayed until 2027.
Some community and project leaders worry that due to the state’s financial crisis, residents will face limited services they can access.
Homelessness and housing projects are among the targets of the budget cuts this time, with a total of over $1 billion in cuts over the next two fiscal years.
The League of California Cities stated in a release on June 27, “The funding cuts to affordable housing projects and lack of ongoing funding to alleviate homelessness will only perpetuate the crisis and threaten the health and safety of California residents most in need of help.” They also emphasized the necessity for the state’s budget investments to focus on long-term solutions to address homelessness and increase affordable housing supply.
Following negotiations between the governor and the legislature, a one-time fund of $1 billion will be allocated for homeless housing assistance and prevention programs, to provide resources to local governments, aimed at enhancing accountability measures.
Additionally, the budget includes $250 million in camping subsidies, with $150 million allocated for the current fiscal year and the remainder for the next fiscal year.
The Medi-Cal healthcare program will benefit from increased taxation on managed care plans, with the Governor’s office estimating an increase of $133 million this year, $728 million from 2025-2026, and $1.2 billion from 2026-2027.
Legislators had to cut funding for certain pet projects, including climate-related programs. According to data from the State Treasury Department, expenditures on these programs will decrease by approximately $20 billion.
While personal income taxes for California residents will not increase, businesses will pay more taxes to offset the spending gap, including paying tens of billions more annually for the next three fiscal years, as deductions for net operating losses are suspended and the tax credit limit is set at $5 million.
The governor stated that the budget “prioritizes foundational programs,” including financial relief to help families pay bills, creating economic security through education pathways, and allocating funds to support quality of life.
On June 22, Newsom said in a statement, “This budget agreement sets a path for long-term fiscal stability for the state, addressing current shortfalls and strengthening the resilience of future budgets.” He added, “We preserve plans that serve millions of Californians, including education, healthcare, expanding behavioral health services, and crucial funding to combat homelessness.”