BUDGET
State budget largely balanced, but dark clouds are approaching
Governor’s January Budget Proposal includes worrisome trend of undermining Prop 98
Close-up dark overlay layered shadow cropped portrait orientation photograph of a balanced even scales of justice object on a light to medium sky baby blue background
Due to the early budget actions taken by Gov. Gavin Newsom and the Legislature in April of last year, which helped to offset the state’s ongoing operational budget deficit, the Governor’s January Budget Proposal is largely balanced. In welcome news, the 2025–26 State Budget is projected to have a modest surplus, which is in stark contrast to where the state was just a year ago where a projected $38 billion deficit was announced in January 2024.

Soon after the Governor proposed his 2025–26 budget, however, three substantial factors immediately come into play, testing the health and resilience of the state’s budget. First, within the same week of the budget announcement, major wildfires erupted in the greater Los Angeles area and in Ventura County, raising recovery cost concerns and concerns about the ability of the state to help with homeowner insurance claims. The second is the immediate and rapid executive actions of the Trump Administration, from the stated intention of closing the U.S. Department of Education — which would impact the federal funding the state receives — to increased immigration enforcement actions, which contributes to worsening student enrollment and attendance. Third is the volatile nature of the state’s revenue structure — where 50 percent of state income tax revenues come from the top 1 percent of income earners. Additionally, the state’s nonpartisan Legislative Analyst’s Office (LAO) estimates that California is facing an annual operating deficit of between $20 and $30 billion beginning in 2026–27.

Most concerning is that this is the second effort by the Governor to manipulate Prop 98, setting a worrisome trend.
It is also worth noting that the three-year budget period — spanning the prior 2023–24 budget year, the current 2024–25 budget year and the coming 2025–26 budget year — did not come without its challenges. Included in the 2024–25 budget year was the suspension of Proposition 98, which, without the aggressive advocacy of CSBA, the California Teachers Association and others to ensure the Legislature follow the constitution regarding Prop 98, would have created significant challenges in adopting a balanced budget last June.
Prop 98 budget maneuver
Included in last year’s education budget trailer bill was language that provided the state the authority to permanently lower the Prop 98 Minimum Funding Guarantee if two things were to happen:

  1. The collection of the state’s income tax revenues is delayed by more than two weeks.
  2. The delay in revenues amounts to more than 50 percent of the state’s overall revenues.

This is important because at the time of the maneuver’s adoption, which CSBA opposed, the state argued that it was a limited and watered-down approach compared to the originally proposed maneuver contained in the Governor’s proposed 2024–25 budget. Due to the natural disasters in Los Angeles and Ventura counties, income tax filings in those two counties will be delayed from April until October of this year. Although currently limited to these two counties, the LAO estimates this will delay the collection of approximately 22 percent of overall state revenues. This demonstrates how the state could be permitted to invoke the “maneuver” and permanently lower Prop 98. Had these disasters been more far-reaching or should the state experience other devastating natural disasters, further expanding the delay of income tax collections and thus increasing the amount of tax revenue collections that are delayed to other counties, it could permit the state to utilize the maneuver, which would have disastrous consequences on Prop 98.

Recognizing this and its unconstitutionality, CSBA has filed a lawsuit against the state to challenge the maneuver, protect Prop 98 and defend the State Constitution.

A second budget maneuver?
Although the State Budget is balanced over the three-year period, the Governor is proposing to hold back $1.6 billion in current year Prop 98 funds due to an “inherent risk in revenue projections.” This proposal would lower the funding of the guarantee from $119.2 billion to $117.6 billion for 2024–25. According to the Administration, the intent is “to mitigate the risk of potentially appropriating more resources to the Prop 98 Guarantee than are ultimately available in the final calculation for 2024–25.” Depending on whether the projected amount ($1.6 billion) grows or decreases, the intent is to “settle up” when the 2024–25 Prop 98 Guarantee is certified in summer 2026.

However, this is not how the guarantee functions. Set forth in the State Constitution, it is set by formula and must follow the formula. Manipulating the formula is contrary to the intent and spirit of Prop 98. As such, CSBA is adamantly opposed to this manipulation, which is unprecedented in its approach.

Most concerning is that this is the second effort by the Governor to manipulate Prop 98, setting a worrisome trend.

What’s next?
The Legislature’s budget committees will be holding hearings to review the Governor’s proposed budget until May 15 when the Governor will release his May Budget Revision.

Negotiations between his Administration and the Legislature and the public will then accelerate as the state approaches the June 15 deadline to pass the budget bill. The Governor will then have until June 30 to sign the budget.

CSBA will continue to provide updates and opportunities for advocacy as the budget cycle continues.

Back to Newsletter