Key Features of the 2025-26 Budget
On June 27, 2025, Governor Newsom signed the Budget Act of 2025. In the face of an additional deficit of approximately $12 billion for 2025-26, California’s adopted state budget reflects a careful balancing act between fiscal responsibility and maintaining support for critical public services. With expenditures totaling $321 billion, the budget avoids broad-based tax increases and instead relies on strategic measures such as fund transfers, payment deferrals, and borrowing from special funds to close the gap. Despite these constraints, the state preserves $15.7 billion in reserves, including the Rainy Day Fund, ensuring a cushion for future economic uncertainties.
Key features of the final budget include:
• Total state expenditures increasing by 7.8% over the 2024-25 enacted budget.
General Fund spending increases of approximately the same percentage;
• A California Community Colleges budget that focuses on maintaining stability
in a challenging fiscal environment, including no core ongoing reductions to
programs or services, with overall funding roughly flat compared to 2024-25;
• Approximately $404 million in ongoing adjustments, including $217.4 million for
a 2.3% cost-of-living adjustment (COLA) to the Student Centered Funding Formula
(SCFF) and $26.8 million for the same COLA for selected categorical programs;
• Nearly $140 million provision to cover enrollment growth of 2.35% over two years
(2024-2026);
• One-time funding largely focused on implementation of efforts related to the
Master Plan for Career Education and supports for students.
Budget Overview
In January, the Administration projected a roughly balanced budget for 2025-26
based on the two-year budget planning process in the 2024 Budget Act that
addressed a projected deficit of over $30 billion for 2025-26. Updated revenue
and spending estimates indicated a need to address an additional deficit of approximately
$12 billion for 2025-26. These projected deficits reflect stock market volatility,
the potential impact of federal tariffs, significant increases in state costs for
certain programs, and the potential for federal cuts currently under consideration
for health and social service programs.
The budget addresses the expected remaining deficit (about $12 billion) through a combination of fund shifts and reserves, along with program reductions, revenues and borrowing, and deferrals. The enacted budget continues to use some of the state’s constitutional reserves amassed in recent years to address the budget deficit. Total remaining reserves are estimated to be about $15.7 billion in 2025-26.
• The budget includes a pre-planned withdrawal of over $7 billion from the Budget
Stabilization Account (also known as the “rainy day fund”).
• While the enacted budget reflects a withdrawal from the Public School System
Stabilization Account (PSSSA), additional statutory authority will first need to
be adopted.
• The budget includes $4.5 billion in the Special Fund for Economic Uncertainties
(SFEU) in 2025-26. This discretionary reserve provides the state with flexibility
to
adapt to unexpected changes in revenues or spending needs during the year.