|
Economic Outlook and Budget Priorities
Governor Gavin Newsom opened his May Revise press conference by emphasizing California’s global economic strength—now ranked the fourth-largest economy in the world—while attributing budgetary challenges to national economic conditions and federal policy uncertainty. Despite a $7.9 billion revenue increase over January projections (linked to 2024’s economic performance), state revenues are expected to decline by $16 billion in the 2025–26 fiscal year.
The projected revenue shortfall includes:
-
A $10 billion drop in capital gains
-
$2.5 billion less in corporate tax income
-
$2 billion from lower wage growth and withholding
-
$1.5 billion decline in other personal income tax sources
To close a $12 billion deficit in a proposed $321.9 billion budget, the administration is using:
-
$5 billion in spending reductions
-
$5.3 billion in borrowing
-
$1.7 billion in fund transfers
Much of the cost-saving measures affect health and human services, including a pause on expanding Medi-Cal access to undocumented adults. The May Revision also draws on $7.1 billion from reserves previously approved by lawmakers.
Transportation Funding: Olympics-Related Investments
The revised budget allocates a one-time $17.6 million from the State Highway Account to support preparations for the 2028 Olympic & Paralympic Games in Los Angeles. These funds will support infrastructure planning, venue readiness and the Games Route Network.
Cap-and-Trade Becomes “Cap-and-Invest”
The Governor reaffirmed his plan to reauthorize and extend California’s Cap-and-Trade program through 2045, with proposed legislation rebranding it as the Cap-and-Invest Program. While the proposal includes language to extend the program’s life, it does not detail broader structural reforms or changes to how the Greenhouse Gas Reduction Fund (GGRF) will be allocated.
As part of broader budget-balancing efforts, the proposal shifts $1.54 billion in existing GGRF funds to replace General Fund support for CalFIRE’s wildfire and natural resource programs.
Additionally, the Governor proposed a guaranteed $1 billion annual allocation for High-Speed Rail (HSR), decoupling it from the percentage-based formula that currently provides 25 percent of GGRF proceeds to the project. This change would stabilize HSR funding but could reduce available dollars for other climate investments.
Current statutory allocations from GGRF:
-
25% – High-Speed Rail
-
20% – Affordable Housing and Sustainable Communities
-
10% – Transit and Intercity Rail Capital Program
-
5% – Low Carbon Transit Operations
-
5% – Safe and Affordable Drinking Water Program
Climate-Aligned Housing Legislation
The May Revision emphasizes an intent to align housing development with climate goals, referencing collaboration with Senator Wiener and Assemblymember Wicks on CEQA reform legislation (SB 607 and AB 609) aimed at streamlining environmental reviews for infill development.
Proposed trailer bill language includes:
-
Repealing the Permit Streamlining Act exemption for the California Coastal Commission, bringing it in line with other agencies on approval timelines
-
Removing the $100 million cap on eligible projects under the Jobs & Economic Improvement Through Environmental Leadership Act, expanding eligibility to projects aligned with the state’s climate action plans—even if they result in a net emissions increase
-
Creating a Vehicle Miles Traveled (VMT) mitigation banking program, to be administered by the Governor’s Office of Land Use & Climate Innovation (LCI), with funds directed to HCD’s Transit-Oriented Development Implementation Fund by July 1, 2026. This effort incorporates elements of AB 1244 (Wicks, 2025) while providing more flexibility to support housing in “location-efficient” areas not currently served by robust transit infrastructure
Statewide Housing & Infrastructure Bond
The Governor expressed support for a 2024 statewide bond measure to fund housing and related infrastructure. Proposals from Assemblymember Wicks (AB 736) and Senator Cabaldon (SB 417) both seek $10 billion to support affordable housing and critical infrastructure, including funding for the Infill Infrastructure Grant Program of 2019.
Establishing the California Housing & Homelessness Agency
The Administration’s 2025–26 budget proposal includes the creation of a new California Housing & Homelessness Agency (CHHA) designed to unify and strengthen the state’s approach to housing and homelessness. CHHA will coordinate a comprehensive range of housing services—from preventing homelessness to supporting low-income renters and first-time homebuyers—while also advancing civil rights protections related to fair housing and employment.
The proposal allocates funding over several years to support the transition, including the reorganization of existing departments and the formation of a new Housing Development & Finance Committee. This reorganization aims to improve efficiency, reduce housing development costs and provide clear leadership and accountability across state housing programs.
Key components of CHHA will include:
- Department of Housing & Community Development
- California Interagency Council on Homelessness
- California Housing Finance Agency
- Civil Rights Department
- Housing Development & Finance Committee
This plan follows the Governor’s Reorganization Plan submitted earlier in 2025 and seeks to streamline policies and program administration to better meet California’s housing challenges.
Next Steps
As budget negotiations continue through the summer, the Newsom administration will work with legislators to finalize decisions on GGRF spending, Cap-and-Invest implementation and housing legislation. Organizations focused on climate, housing and economic equity will have opportunities to weigh in during this period.
Jason Bryant
CDA’s Legislative Advocate
Principal, Bryant Government Affairs
| 
