New Budget begins with modest surplus, no major problems

The Governor’s proposed budget for Fiscal Year 2025-26, which starts July 1, is balanced and slightly smaller than the current budget, FY 24-25.

In his press release, Newsom said, “The budget I present to you today builds on a framework that balanced the books over two years instead of just one—an unprecedented effort to address the budget shortfall we faced. However, work remains to ensure California’s finances remain in order in the years to come.

The total budget of $322.3 billion is balanced with a small $363 million surplus. The General Fund portion is $228.9 billion, $3.2 billion less than FY 24-25. At the end of the fiscal year, the State is expecting a reserve balance of $16.9 billion.

On Monday, Jan. 6, Gov. Gavin Newsom gave a preview of the proposed budget. On Friday, Jan. 10, when it was released, Joseph Stephenshaw, Director of the California Department of Finance, presented it, since Newsom was in Washington, D.C. for former President Jimmy Carter’s funeral.

“It’s a balanced budget, no deficits, and we’re adding to reserves,” Newsom announced. “And we continue to pay down liabilities.”

An unanticipated increase of $16.5 billion in revenues was the principal reason the proposed budget is balanced. Both men also credited the efforts of the Legislature and Administration last spring to balance the FY 24-25 budget and produce a two-year budget plan.

“Last year, we endeavored to make this year’s budget a non-event,” Newsom affirmed. “We endeavored to solve problems for this year too, not just the current year, but we addressed the next year.”

Stephenshaw added, “The two-year budget framework positioned California on a more stable fiscal footing. . . The budget remains balanced. We made great strides and there is no need for additional solutions in this budget, which reflects a modest surplus.”

Revenues were greater than expected for several reasons. The stronger-than-anticipated performance of the economy, stock market, and cash receipts, combined with an improved economic outlook, all contributed to the upgraded revenue forecast, according to the Budget Summary.

As part of the May 2024 budget plan, the state is transferring $7.1 billion of reserves to budget accounts. Nevertheless, the reserves balance will be approximately $17 billion at the end of the fiscal year.

There are limited new commitments in the 25-26 budget, Stephenshaw stressed.

Propositions 98 school funding will be $118.9 billion and total funding for pre-kindergarten through high school will be $137.1 billion. And higher education funding will total $45.1 billion, of which $28.5 billion is in the General Fund.

Education highlights include full funding for universal transitional kindergarten and universal before, after, and summer school for TK-6th grade students. This budget doubles the $500 million for literacy coaches and adds funding for math coaches. Funding is available to help launch the State’s Master Plan for Career Education.

However, concerns have already been expressed over the educational funding amounts. “We are excited to see so many transformative education initiatives supported by CTA members come to fruition in this state budget, including investments in transitional kindergarten, school nutrition and professional development. However, we are concerned that the proposed budget does not allocate the full funding guaranteed by Proposition 98,” said David Goldberg, president of the California Teachers Association, in an Edsource press release. “In the coming months, our union will carefully monitor the required funding levels for schools and community colleges to ensure full funding is provided to our students in a timely manner, without unnecessary delay.”

The educational package includes money authorized by the approval of Proposition 2 on the November ballot. Also $2.7 billion of the $10 billion authorized by Prop 4 for environmental programs are part of this budget. That includes $1.5 billion for wildfire and forest resilience.

Total proposed funding for the Department of Forestry and Fire Protection is $4.3 billion, up slightly from $4.2 billion in fiscal 24-25. Staffing will grow by slightly more than 750 positions to a total of 13,289.

The Wildfire Mitigation Program will have $9.1 million for financial assistance to populations in wildfire‑prone areas for cost-effective structure hardening and retrofitting to create fire-resistant homes, as well as defensible space and vegetation management activities.

The major savings in this budget proposal is $1.2 billion over two years as a result of eliminating 6,500 vacant positions, Stephenshaw noted. But he stressed that Cal Fire firefighters and emergency response personnel were exempt from these position cuts.

Other savings include operational efficiencies, such as a reduction in state travel budgets, printing, and IT system modernization that result in $3.5 billion in reduced taxpayer costs.

The budget proposal includes funding for homeless programs, but it also reflects stronger accountability measures for homelessness funding, requiring frequent reporting of data and expenditures of the Homeless Housing, Assistance, and Prevention program, increased oversight of existing funds, and strict eligibility and accountability measures for any new homelessness funding.

The Legislature’s response to the proposed budget followed party lines. Senator Lola Smallwood-Cuevas (D-Los Angeles), Chair of the Senate Labor, Public Employment and Retirement Committee, said in her statement, “The Governor’s 2025-26 budget plan reflects a fiscally responsible approach while prioritizing vital initiatives that support working families and everyday Californians. I commend the Governor’s efforts to propose a budget that reflects a commitment to economic development and worker health and safety.”

Across the aisle, Assembly Republican Leader James Gallagher said in his statement, “Newsom is doubling down on the same failed programs that stuck Californians with record homelessness, soaring energy and housing costs, and one of the highest unemployment rates in the nation. The only new thing in this budget is a giveaway to the governor’s Hollywood donors and even higher taxes on small businesses. Californians were clear in the last election – they want lower prices, safer streets and a government that works for them. This budget doesn’t even come close to getting that done.”

Gallagher was referring to the tax proposal to increase the total annual California Film and Television Tax Credit cap from $330 million to $750 million for fiscal years 25-26 through 2029-30. This proposal is expected to reduce revenues by $15 million in 2025-26.

To improve the Administration’s ability to budget and use reserves, Newsom is proposing some changes to Prop 2, enacted in 2014, and Prop 4, approved in 1979. He wants to increase the Prop 2 10% limit of funds to the Budget Stabilization Account, also called the Rainy Day Fund, to 20%. But Newsom is also recommending a change to Prop 4 so that these funds are not deemed an expenditure.