California: Governor Newsom announces proposed budget that refills the state's "Rainy Day Fund," protects previous accomplishments, and makes historic investments in education

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Jan 9, 2026

Governor Newsom announces proposed budget that refills the state's "Rainy Day Fund," protects previous accomplishments, and makes historic investments in education

Putting money in state reserves — to total $23 billion

Funding new reproductive health grants to fight Trump's war on women

Accountability, fraud, and waste prevention

What you need to know: Governor Newsom's 2026-27 budget proposal reflects a balanced yet cautionary approach built on stronger-than-expected revenues and disciplined spending, while refilling the state's "Rainy Day Fund," preserving progress, and making targeted investments in education, affordability measures, public safety, wildfire resilience, and government efficiency.

SACRAMENTO – Governor Gavin Newsom today submitted his proposed 2026-27 state budget to the Legislature, outlining a balanced spending plan for the budget year that reflects California's underlying economic strength, higher-than-projected revenues, and total deposits of $23 billion into the state's reserves. The proposal limits new ongoing spending and continues historic progress through investments in universal transitional kindergarten, childcare, health care, and other programs that save working families money.

This budget reflects both confidence and caution. California's economy is strong, revenues are outperforming expectations, and our fiscal position is stable because of years of prudent fiscal management — but we remain disciplined and focused on sustaining progress, not overextending it. As we continue our work to place the state on a sound fiscal footing into the future, we must ensure the budget remains balanced beyond the upcoming fiscal year, and I look forward to partnering with the Legislature to do just that. We must continue our prudent fiscal management, funding our reserves, and continuing the investments Californians rely on, from education to public safety, all while preparing for Trump's volatility outside our control. This is what responsible governance looks like.

Governor Gavin Newsom

A balanced, cautionary budget built on stronger revenues

The Governor's proposal outlines a $348.9 billion balanced budget for the 2026-27 fiscal year supported by stronger-than-anticipated cash receipts, resilient financial markets, and an estimated improved economic outlook. The plan reflects more than $42 billion in additional General Fund revenue over the three-year budget window (2024-25 through 2026-27) compared to last year's enacted budget, resulting in a modest projected deficit of $2.9 billion that is solved. Our solutions did not account for strong December revenues of nearly $3 billion above the previous forecast, that are not yet factored into the budget proposal.

Despite the better-than-expected revenues, this budget reflects a cautionary approach to spending in anticipation of future headwinds. California enters the 2026-27 fiscal year with $23 billion in total reserves, including $14.4 billion in California's Rainy Day Fund. Recognizing the very real risks of out-year deficits, rather than overextending new commitments, the budget prioritizes implementation of existing investments, fiscal restraint, and long-term planning. This is all exacerbated by federal policy changes and global uncertainty, accounting for unpredictable and tumultuous federal policies, tariffs and immigration and their potential impact on inflation, the labor market, investment, and overall demand.

Fiscal discipline, accountability with taxpayer funds

Building on efforts that have blocked fraud and waste, the budget proposes continued programs and measures to strengthen oversight, enforcement, and safeguards to protect taxpayers. It also proposes reductions in state operations spending totaling $1.55 billion, paired with continued savings from eliminating approximately 6,000 long-vacant positions, generating $1.2 billion in savings over two years.

The budget continues California's focus on efficiency, accountability, and cost controls:

• Improving TK–12 governance and accountability: Proposes a new education governance structure by moving the California Department of Education under the Executive Branch and strengthening the State Superintendent's ability to align policy from early childhood through higher education — improving coordination, clarity, and accountability across the system.
• Housing and homelessness agency framework: The Governor's Reorganization Plan from 2025 establishes a dedicated housing and homelessness agency to oversee the coordination, accountability, and effective program delivery across state programs. The Budget advances that framework by supporting programmatic consolidations, streamlined processes, and stronger alignment among the state's major housing programs to improve efficiency and maximize the impact of available resources.
• Homelessness funding and accountability measures: The state continues to deploy significant resources to prevent homelessness through the Homeless Housing, Assistance, and Prevention. This includes a seventh year of this funding to be allocated in 2026-27 totaling $500 million. This funding is contingent on enhanced accountability and performance requirements.

Refilling the Rainy Day Fund

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The Governor's budget adds billions to the Rainy Day Fund and aggressively pays down long-term pension obligations, strengthening California's fiscal resilience amid ongoing economic volatility:

• Restocking our reserves: As California's population and economy continue to grow, the budget proposes rebuilding reserves – totaling $23 billion – including a $3 billion deposit into the Rainy Day Fund, which has been a key component of budget resiliency, a buffer against revenue volatility, and an insurance policy that has protected core state programs.
• Addressing our obligations: Mindful of the erratic nature of our state budget revenues, the budget proposes an investment in our long-term future by paying down our pension obligations to the tune of $11.8 billion over the next four years, including $3 billion alone in next year's budget.

Historic spending on students

Education remains the cornerstone of the budget, with record per-pupil funding of $27,418, a 61% increase since 2018, while preserving long-term affordability and fiscal balance. It proposes to continue funding for:

• Pre-K for All: Proposes fully funding the whole new school grade – universal access to free transitional kindergarten for more than 400,000 four-year-olds, with increased access to the California State Preschool Program for two-, three-, and four-year-olds.
• Community Schools: Proposes a $1 billion expansion of the community schools model, a whole-child approach that focuses on school engagement with families and community organizations, shared decision making, and coordination of services. The first cohort of schools that benefited from this investment are showing significant reductions in chronic absenteeism, reduced suspensions, and improved test scores and academic achievement, with the largest gains for historically underserved students.
• Before, After, and Summer School Programs: Proposes fully funding free before, after, and summer school for families.
• Universal School Meals: Proposes funding access to two high-quality, free school meals per school day for every TK-12th grade student.
• Improving Literacy for All Students: Proposes fulling funding the continued implementation of the Golden State Literacy Plan, reaching 2.6 million TK–5 students statewide and supporting more than 800 high-need elementary schools with literacy coaches and specialists. The proposal also maintains annual statewide screening for all K–2nd grade students to identify reading challenges, including dyslexia, and deliver early, evidence-based supports.
• Expanding college and career pathways: Proposes new funding to help high school students earn college credit and explore career pathways earlier — including expanding dual enrollment and dual credit programs — while prioritizing these opportunities through existing student support funding.
• L.A. County school fire recovery: Proposes new funding to support LEAs that are continuing to recover from the January 2025 Los Angeles County fires.
• Strengthening higher education and affordability: Proposes historic investments across higher education, $5.3 billion for the University of California, $5.6 billion for the California State University, and $15.4 billion for the California Community Colleges — each representing nearly 50% growth or more since 2018–19. These supports are paying off: 65% of UC and CSU students graduated without student loan debt in 2023-24; significantly more than in 2018-19.

Supporting communities

• Affordable housing: Proposes new affordable housing through Cap-and-Invest auction proceeds, administered by the Housing Development and Finance Committee as part of the Administration's modernization of the Affordable Housing and Sustainable Communities Program.
• Reproductive health care grants: Proposes new funding for grants to reproductive health care providers, strengthening access to care statewide.
• Public safety: The Governor's 2026–27 budget proposes $194.6 million in new public safety investments, bringing California's total commitment since 2021–22 to $2.1 billion to strengthen law enforcement, prevent crime, and keep communities safe. These new investments build on strategies that are already delivering results. New data show crime declining nearly across the board statewide, including an 18% drop in homicides, an 18% reduction in robberies, and a 9% decrease in aggravated assaults year over year. Violent crime declined in every California jurisdiction reporting data, with the largest reductions in Oakland (25%) and San Francisco (21%).

Protecting Californians in a hotter, drier world

• Zero-emission vehicle incentives: Proposes a new light-duty ZEV incentive program to help keep clean vehicles affordable and accessible for Californians.
• Safe drinking water: Proposes more support for drinking water and wastewater projects serving small, disadvantaged, and tribal communities — addressing failing or at-risk systems, unsafe private wells, and connecting unsewered homes to centralized systems.
• Wildfire and forest resilience: Proposes even more critical wildfire and forest resilience efforts, including supporting Cal FIRE aerial firefighting capacity.

Instability in Washington, D.C.

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The Trump Administration signed into law significant federal policy changes for Health and Human Services programs that translate into an additional cost of $1.4 billion for California. Of this amount, $1.1 billion are in Medi-Cal, which provides basic health care services for more than 14 million low-income Californians. In addition, this federal change adds nearly $300 million in costs to CalFresh, the state's program providing food assistance for more than 3 million California households.

The full text of the Governor's Budget summary document is available at ebudget.ca.gov.

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