Gov. Newsom announces his final state budget proposal

Includes third manipulation of Prop 98 in as many years

On Jan. 9, Department of Finance Director Joe Stephenshaw presented Gov. Gavin Newsom’s January Budget Proposal, creating a juxtaposition between the positive legacy-setting narrative presented in the Governor’s State of the State address with the fiscal realities of the State Budget. On one hand, the Governor highlighted various financial investments the state has made in transformational educational programs. On the other, the budget includes another manipulation of Proposition 98 that foretells serious concerns about how the state may continue to approach public education funding.

“Although the Governor’s 2026–27 Budget Proposal appears to maintain public education funding at current levels, for the third time in as many years, it includes a deeply concerning manipulation of Proposition 98 — the bedrock of public education funding for California’s schools and students,” said CSBA President Dr. Debra Schade. “CSBA urges the administration and Legislature to reconsider this approach, honor the Prop 98 Guarantee and prioritize elevating school funding to the level of the top 10 states.”

State Budget and economic outlook

Stephenshaw cited a $2.9 billion shortfall, but stated the budget is largely balanced, continues investments in existing programs and builds on the state’s long-term resilience. However, he also emphasized that the budget does not come without risks. Factors including stock market volatility and declines, uncertainty about federal budget and policy changes and national economic developments — such as inflationary costs and the federal government’s on-again, off-again approach to tariffs — could upend the state’s approach to a balanced budget.

The overall budget is projected at $348.9 billion, with overall estimated reserves of $23 billion. The projected $23 billion in reserves break down into three categories: $14.4 billion for the state’s General Fund reserve, $4.5 billion for the state’s newly created Special Fund for Economic Uncertainties and $4.1 billion for the Prop 98 rainy day fund.

Proposition 98

The Prop 98 funding level across the budget window is calculated to be $123.8 billion in 2024–25, $121.4 billion in 2025–26 and $125.5 billion in 2026–27, significantly more funding for education than was projected when the 2025–26 budget was adopted in June 2025.

While the Governor proposes repaying the $1.9 billion that was withheld from Prop 98 in 2023–24 in last year’s budget, he unfortunately also proposed to withhold $5.6 billion from 2025–26, the third manipulation of Prop 98 in as many years. This has the effect of reducing actual funding in 2025–26 from $121.4 billion to $115.9 billion. Once again, the Governor cites persistent uncertainty in revenue projects as the justification for this manipulation.

“It is unacceptable that, at a time when funding from the federal government is uncertain and student achievement gaps persist, the state would propose yet another Prop 98 maneuver that would deny schools their constitutionally mandated, voter-approved funding,” CSBA CEO & Executive Director Vernon M. Billy said. “Now is the time to provide the full funding owed to schools and for the state to move beyond disconnected programs, funding gimmicks and underfunded mandates, and instead take responsibility for aligning state agencies, policies and budgets around a single goal: closing the achievement gap.”

Prop 98 rainy day fund and maintenance factor

The revised state revenues that buoy Prop 98 in the Governor’s Budget Proposal also trigger changes in previously projected maintenance factor payments and rainy day fund deposits. Specifically, the $8.3 billion maintenance factor obligation, which was created as a result of a suspension of the Prop 98 Guarantee in 2023–24, is now repaid by $7.8 billion, a significant increase from the $5.5 billion repayment that was previously projected.

The rainy day fund swings from an estimated $0 balance to a $4.1 billion balance, which is projected to trigger district reserve caps in 2025–26 and 2026–27, limiting the amount of money certain LEAs can legally keep in reserve.

Local Control Funding Formula cost-of-living adjustment

The state calculates that the annual cost-of-living adjustment (COLA) is 2.41 percent. This COLA applies to both the Local Control Funding Formula (LCFF), as well as specified categorical programs funded outside of LCFF, which include: state preschool, 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 the American Indian early childhood education program.

Small school districts

In another win for CSBA advocacy, the proposed budget includes an increase of 20 percent in Necessary Small School funding rates. CSBA has continually pushed for increased funding for small school districts, especially those with necessary small schools, due to increasing costs and economies of scale impacts on these districts.

County offices of education

In a win for joint advocacy by CSBA and the California County Superintendents, the budget includes an additional $13.3 million for a total of $131.9 million in universal and targeted assistance funding for county offices of education (COEs). This will be used to support COEs in their work providing assistance to eligible local educational agencies (LEAs) through the Statewide System of Support. COEs will also receive the same LCFF COLA.

Block grants

The Governor is proposing a second Student Support and Professional Development Discretionary Block Grant at $2.8 billion, which includes professional development for transitional kindergarten (TK) teachers and site administrators related to developmentally appropriate TK instruction. Similarly, the Governor also proposes to fully restore previously reduced Learning Recovery Emergency Block Grant funding by providing the final $757.3 million.

Special education

Special education funding will receive the estimated 2.41 percent COLA. The budget proposal also includes an effort to equalize special education rates across the state, such that all LEAs will receive the same rate per pupil. This will increase special education funding by $509 million.

Teacher preparation

Also included is a proposed increase of $250 million in one-time Prop 98 funding for the state’s educator residency programs. The money is proposed to be spread out over the next four years through the 2029–30 fiscal year.

Charter school accountability

The budget includes a proposal that would require charter school authorizers to continue to use verified data in charter school renewal proceedings through June 30, 2028. It also includes new requirements for charter schools intended to prevent hundreds of millions of dollars of fraud involving charter school operators in the state.

Literacy

State support for the ongoing, required literacy screenings to identify student reading difficulties, including dyslexia, would continue with a proposal for a one-time allocation of $40 million from Prop 98.

Community schools

The budget proposes an additional $1 billion in ongoing Prop 98 funds for the California Community Schools Partnership Program.

Discrimination prevention

Consistent with the enactment of Assembly Bill 715 and Senate Bill 48 from 2025, the administration proposes $6.4 million from the General Fund over two years to establish an Office for Civil Rights within the Government Operations Agency to house five new discrimination-prevention coordinator positions.

Career technical education

Utilizing $100 million in funding from the proposed second Student Support and Discretionary Block Grant, the budget proposes this funding be used to expand dual enrollment/credit opportunities to increase high school student access to college and career pathways.

Expanded Learning Opportunities Program (ELO-P)

Added to the budget is an additional $62.4 million in ongoing Prop 98 general funds for ELO-P to increase per-pupil funding for Tier 2 LEAs to $1,800.