Gov. Gavin Newsom and the Legislature announced they had reached an agreement on the 2026-27 State Budget on June 26. Described as balanced for the next two fiscal years, spanning 2026–27 and 2027–28, it is Gov. Newsom’s last budget, capping the end of his two terms in office.

In its review of the Governor’s May Budget Revise, the nonpartisan Legislative Analyst’s Office estimated that the state’s year-over-year operational budget deficit will be close to $10 billion annually. This estimate reflects the reality that the state continues to spend more than it is taking in via state general fund revenues. And although the budget is projected to be balanced through the 2026–27 fiscal year, it is unclear whether actions taken by the Legislature and Governor to generate additional revenue — by extending and increasing some specific taxes and capping tax credits large corporations can claim — will resolve the state’s projected operational deficits.

The adopted 2026–27 State Budget includes spending of $351.7 billion spanning special funds, bond money and overall general fund expenditures.

The 2026–27 Budget Act calculates the Proposition 98 Guarantee at $124.9 billion for 2024–25, $125.5 billion for 2025–26 and $128 billion for 2026–27. This represents an increase in Prop 98 funding over the three-year budget period of approximately $30 billion. However, the actual appropriated funding for 2025–26 is lower than required by $3.9 billion due to the adoption of the Governor’s proposal to withhold constitutionally guaranteed funds. Language in the Budget Act specifies that Prop 98 will be first in line to be paid back with new revenues, that materialize by May 2027 to pay down the withholding. Any additional revenues would be deposited into the Prop 98 Rainy Day Fund.

A portion of the increased funding comes from a higher required repayment of the “maintenance factor,” which was created when the state suspended the Prop 98 guarantee by $8.3 billion in the 2023–24 fiscal year. Another term for debt, “maintenance factor” reflects the amount of money owed to public education when the state suspends or is otherwise unable to fund Prop 98 at its estimated level. With increased revenues due to the growth of artificial intelligence the state is required to repay the full maintenance factor amount of $8.3 billion created by the suspension of Prop 98.

Reserves also account for a significant portion of the new funding. Constitutional formulas dictate that $8.7 billion be deposited into the Prop 98 Reserve, also known as the Rainy Day Fund, while the Budget Act includes an additional $500 million discretionary deposit. In total, this brings the current balance of the fund from $0 to $9.2 billion. This triggers a requirement to cap local school district reserves at 10 percent. However, small school districts and community-funded districts are exempt from the local reserve cap.

The final annual cost-of-living adjustment (COLA) is 2.87 percent, which will be made available for all categorical programs statutorily required to receive the COLA, except for the state preschool program, which will receive a lower COLA of 2.01 percent. The statutory programs include Special Education, child nutrition, Foster Youth Services Coordinating Program, mandates block grant, Adults in Correctional Facilities Program, Charter School Facility Grant Program, American Indian Education Centers and American Indian Early Childhood Education Program.

Notably, the Legislature adopted the Governor’s proposed “super” COLA for the Local Control Funding Formula (LCFF) of 4.31 percent. However, unlike prior super COLAs, which typically exceed the statutory COLA by several percentage points or more, this COLA is only slightly higher than the level required by statute. While the new funding is welcome, it has significant strings attached. Specifically, local educational agencies are required to provide 14 weeks of paid pregnancy disability to employees.

As part of the budget agreement, the Legislature pushed for adding non-LEA-based preschools into Prop 98. Although the budget includes an initial re-bench of Prop 98 by approximately $1 billion to accommodate the growth in costs, the amount of the increase is based on current costs. As the program grows in the future, either due to expansions or annual COLAs, those costs will likely exceed the additional funding from the rebench and divert money that could otherwise be used to invest in LCFF.

Retained in the budget is the proposed increase in state support for special education. In the January Budget Proposal, the Governor proposed a $509 million increase in base special education funding. This rose by $1.9 billion to $2.4 billion, a 43 percent increase from the January proposal.

Included in the final budget is the proposed increase of $13.3 million for a total of $131.9 million in universal and targeted assistance funding for county offices of education (COEs), which CSBA supported to enhance supports for universal and targeted assistance through the Statewide System of Support.

COEs will also receive $48.3 million to help cover changes in average daily attendance (ADA), which includes the proposed augmented LCFF COLA of 4.31 percent. CSBA continues to support the proposed increase in funding to support COEs’ role in providing universal and targeted assistance.

Retained in the budget is the proposal from January to increase Necessary Small School funding rates of 20 percent. This reflects a continued effort by CSBA to advocate for increased funding for small school districts, which is especially necessary due to the impact of increasing costs and economies of scale on small school districts.

Two block grants were included in the 2026–27 State Budget. The second iteration of the Student Support and Professional Development (SSPD) Block Grant increases it to $5 billion that will be distributed on an ADA basis. The grant will be fully discretionary and will help LEAs address growing operational costs. The Learning Recovery Emergency (LRE) Block Grant restores $757.3 million in prior cuts to the LRE Block Grant. As opposed to the SSPD Block Grant, the LRE Block Grant is not fully discretionary and receipt of funds will continue the grant’s requirements.