The 2026-27 Budget: California's Fiscal Outlook

analysis full 2026-27 BUDGET The 2026-27 Budget: California’s Fiscal Outlook GABRIEL PETEK LEGISLATIVE ANALYST NOVEMBER 2025 www.lao.ca.gov 1 analysis full 2026-27 BUDGET 2 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET Executive Summary Not Safe to Bet Artificial Intelligence (AI) Fueled Exuberance Is Sustainable. Both the California and U.S. economies currently face significant headwinds. Borrowing costs, a key factor in business expansions and major consumer purchases, remain high. New tariffs on imports into the U.S. are creating cost pressures for businesses and consumers. Despite this, income tax collections have been strong in recent months, growing at double-digit rates. These strong income tax collections are being driven by enthusiasm around AI, which has pushed the stock market to record highs and boosted compensation among the state’s tech workers. With so much exuberance surrounding AI, it now appears time to take seriously the notion that the stock market has become overheated. History suggests that the stock market is prone to overreact to major technological advances, even if the technology itself turns out to be revolutionary. Our Revenue Outlook Builds in Some Insurance Against a Stock Market Downturn. Reflecting concerns about the potential effects of tariffs, the budget act enacted in June assumed revenues would decline in 2025-26 and grow modestly in 2026-27. Looking primarily at strong trends in income tax collections since June would suggest a significant upgrade to budget act revenues is warranted. However, our Fiscal Outlook revenue forecast reflects a smaller, temporary upgrade which reverses beginning in 2026-27. This is because our forecast incorporates the strong risk that recent income tax gains are tied to an unsustainable stock market. This does not mean our forecast assumes a stock market downturn will definitely happen. Instead, our forecast includes income tax collections that are somewhat weaker than suggested by cash trends, but still tens of billions of dollars above where they would be if stocks actually drop significantly. This middle-ground approach offers the state some insurance against revenue declines, resulting in smaller budget corrections should a market downturn actually occur. 2026-27 Budget Problem Now Larger Than Anticipated. Under our revenue and spending estimates, the Legislature faces an almost $18 billion budget problem in 2026-27. This is about $5 billion larger than the budget problem anticipated by the administration in June, despite improvements in revenue. This is because constitutional spending requirements under Proposition 98 (1988) and Proposition 2 (2014) almost entirely offset revenue gains. Moreover, we estimate costs in other programs to be about $6 billion higher than anticipated. Starting in 2027-28, we estimate structural deficits to grow to about $35 billion annually due to spending growth continuing to outstrip revenue growth. Budget Position Is Weak. We advise the Legislature to address the budget problem through a combination of ongoing solutions—namely, achievable spending reductions and/or revenue increases. There are three reasons these actions are now critical. First, the budget problem is now larger than anticipated, despite improvements in revenue, and the structural deficits are significant and growing. Second, while our revenue estimates hedge against a market downturn, they do not reflect the revenue declines the state would experience in a recession. Third, the state has used most of its budget resiliency tools to address prior deficits. If our estimates hold, the Legislature will face a fourth consecutive year of budget problems—all during a period of overall revenue growth. As it stands—with larger forecasted deficits and many fewer tools available to address them—California’s budget is undeniably less prepared for downturns. www.lao.ca.gov 3 analysis full 2026-27 BUDGET INTRODUCTION Each year, our office publishes the Fiscal Outlook new laws or policies are enacted. This is not a in anticipation of the upcoming budget season. prediction of what will happen—state and federal This report gives the Legislature our independent laws and policies will change in the coming estimates and analysis of the state’s General Fund years—but rather serves as a baseline to help the budget condition with the goal of helping lawmakers Legislature understand its starting place. This year, prepare for the 2026-27 budget process. As always, for example, our outlook reflects our best estimates our Fiscal Outlook evaluates the budget’s condition of the effects of H.R. 1: One Big Beautiful Bill Act on based on current law and policy both at the state the state budget but does not make assumptions and federal level. This means we are assessing about future federal policy changes. the state’s spending and revenues assuming no AI ENTHUSIASM BOOSTING REVENUES, BUT FOR HOW LONG? Middling Corporation and Sales Tax tech workers. The stock market (S&P 500) has Collections in Line With Generally Weak risen 50 percent in the last two years. Most of these Economic Conditions. Both the California gains come from the meteoric rise in the value of and U.S. economies currently face significant a handful of tech companies that investors believe headwinds. Borrowing costs, a key factor in will be major beneficiaries of recent advances in business expansions and major consumer AI. These companies have made big bets on AI, purchases, remain high. New tariffs on imports into spending hundreds of billions of dollars on data the U.S. are creating cost pressures for businesses centers and offering extraordinary pay packages and consumers. And uncertainty with the federal to recruit AI researchers. This spending, coupled government appears to be contributing to a general with sizable gains to investors and tech company anxiety about the economy. Amid these conditions, employees via stock options, is boosting state California businesses have pared back hiring, income tax receipts. resulting in no payroll job growth in the state so far This Time Might Be Different, but It Is Not this year. California consumers similarly are limiting Safe to Bet on It. With so much enthusiasm spending, with sales of taxable goods flat over surrounding AI, it now appears time to take the last year. Consumers also continue to report seriously the notion that the stock market has historically low optimism about the economy’s become overheated. History suggests that the future. Consistent with these trends, collections stock market is prone to overreact to major from the sales tax and corporation tax (adjusted for technological advances, even if the technology recent policy changes) have posted below-average itself turns out to be revolutionary. For California, growth in recent months. the dot-com era—when stocks rose and then fell Income Tax, Fueled by Exuberance Over precipitously in response to widespread adoption Artificial Intelligence (AI), Remains Lone Bright of the internet—offers the most salient example. Spot. In stark contrast, income tax collections The internet has proven to be a transformative have been strong in recent months, growing technology and, yet, the stock market’s initial at double-digit rates. These strong income tax reaction was clearly overly exuberant. As shown in collections are being driven by enthusiasm around Figure 1, many signs of an overly exuberant stock AI, which has pushed the stock market to record market are present today: measures of whether highs and boosted compensation among the state’s stocks are “expensive” are at historically high levels, 4 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET Figure 1 Signs the Stock Market May Be Due for a Downturn Below, we compare stock market metrics from right now to prior overheated markets that ended in crashes and show that current conditions look a lot like prior overheated stock markets. The data is quartely and covers 1952 to present. Growth in borrowing and stock ownership are changes from two years prior. What Returns Are Investors Accepting to Hold Stocks? When likely returns are low, it could mean investors are paying too much for stocks. Overheated Markets Now Normal Times 1 2 3 4 5% How Much Has Investor Borrowing to Buy Stocks Grown? When borrowing grows quickly, it could mean prices are being propped up by debt. 10 20 30 40 50% How Much Have Households Increased Their Holdings of Stocks? When households are highly invested in stocks, it could signal overoptimism. 10 20 30 40% investors are borrowing more to buy stocks, and revenues would decline in 2025-26 and grow households are more invested in the stock market modestly in 2026-27. Looking primarily at strong than they have been in at least 70 years. In the trends in income tax collections since June would past, these patterns have been a sign that a stock suggest a significant upgrade to budget act market downturn will occur in the next couple of revenues is warranted. However, our Fiscal Outlook years. There certainly is some chance that this time revenue forecast, shown in Figure 2 on the next is different and such a downturn is not forthcoming. page, reflects a smaller, temporary upgrade which Nonetheless, the risk appears strong enough— reverses beginning in 2026-27—resulting in 2026-27 and the potential consequences for the state revenues being in line with budget act estimates. budget dire enough—that we think it should be This is because our forecast incorporates the incorporated in the state’s revenue outlook. strong risk that recent income tax gains are tied to Our Revenue Outlook Builds in Some an unsustainable stock market. This does not mean Insurance Against a Stock Market Downturn. our forecast assumes a stock market downturn Reflecting concerns about the potential effects of will definitely happen. Instead, because a market tariffs, the budget act enacted in June assumed downturn is only a risk but not a certainty, our www.lao.ca.gov 5 analysis full 2026-27 BUDGET Figure 2 forecast includes income tax collections that are somewhat LAO Revenue Outlook weaker than suggested by cash Total Revenues (In Billions) trends, but still tens of billions of dollars above where they would be $300 if stocks actually drop significantly. The shaded area shows how far This middle-ground approach 280 revenues could deviate from our main forecast. Outcomes beyond the offers the state some insurance shaded area are possible, but revenues against revenue declines, resulting 260 most likely will fall in the shaded area. in smaller budget corrections 240 should a market downturn actually LAO Fiscal Outlook occur. On the other hand, if a 220 market downturn does not occur, 200 revenues very likely will beat our Budget Act forecast. Should this occur, we 180 advise the Legislature to treat these extra revenues as temporary for the 160 2023-24 2024-25 2025-26 2026-27 2027-28 2028-29 2029-30 time being. WHY DO BUDGET PROBLEMS GROW? $18 Billion Budget Problem in 2026-27 problem anticipated by the administration in June. Figure 3 provides our estimates of the General 2025-26 Budget Act Anticipated Deficits Fund condition, including our estimate of the Through the Multiyear. The Legislature has budget problem. The budget’s bottom line is the needed to address budget problems for three accumulated change in General Fund revenues and years in a row. The state solved a $27 billion deficit spending across the three fiscal years in the budget in 2023-24, a $55 billion deficit in 2024-25, and a window—2024-25, 2025-26, and 2026-27—and $15 billion deficit in 2025-26 (in addition to roughly reflected in the ending balance in the Special Fund $28 billion in proactive budget-balancing actions for Economic Uncertainties in 2026-27. taken the year before). At the time of the 2025-26 Budget Act, the administration anticipated the state would face Figure 3 an almost $13 billion budget General Fund Condition Under Fiscal Outlook problem in 2026-27. In addition, the (In Millions) administration estimated the state would continue to face structural 2024-25 2025-26 2026-27 deficits between $15 billion and Prior-year balance $41,978 $33,386 $23,833 $25 billion through 2028-29. Revenues and transfers 228,694 222,639 212,400 2026-27 Budget Problem Total expenditures 237,286 232,193 235,931 Ending fund balance $33,386 $23,833 $302 Now Larger Than Anticipated. Encumbrances $18,001 $18,001 $18,001 Under our revenue and spending SFEU balance $15,385 $5,832 -$17,699 estimates, the Legislature faces Reserves an almost $18 billion budget BSA balance 18,351 14,023 14,023 problem in 2026-27. This is about SFEU = Special Fund for Economic Uncertainties and BSA = Budget Stabilization Account. $5 billion larger than the budget 6 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET Revenue Improvement Almost Entirely 2026-27, constitutional requirements would actually Offset by Constitutional Requirements. Across exceed the state’s revenue gains under our outlook. 2024-25 to 2026-27, our revenue estimates are All Other Costs Increase Budget Problem by up $11 billion compared to the budget act. These Almost $6 Billion. Across all other programs, total revenue improvements do not, on net, improve the spending increases about $6 billion compared to budget’s bottom line, however. This is because of budget act estimates. These changes are described the requirements of Proposition 98 (1988), which below and summarized in Figure 5 on page 9. governs school and community college funding, • Statewide Expenditures Higher by and Proposition 2 (2014), which specifies reserve $2.4 Billion. Statewide expenditures include deposits and debt payments, as seen in Figure 4. items like retiree health care, pension Together, due to higher revenue estimates, these payments, and statewide administrative requirements increase by over $10 billion— costs, as well as set-asides for major state representing nearly all of the revenue gain. The costs or savings that are not easily reflected share of revenues going to these requirements is in departments’ budgets. At the time of the more than typical. Specifically, over 60 percent budget act, the administration assumed of the revenue improvement—$7 billion—goes to savings in statewide expenditures that are not schools and community colleges. Of this increase, reflected in our outlook. $5.1 billion reflects formula-driven increases in • H.R. 1 Increases Costs by $1.3 Billion the Proposition 98 requirement resulting from Across Medi-Cal and CalFresh. H.R. 1 our higher revenue estimates. (A portion of this made a number of changes to Medicaid, increase is due to “maintenance factor”—a formula known as Medi-Cal in California, and the requiring the state to accelerate funding in 2024-25 Supplemental Nutrition Assistance Program, to compensate for the suspension of the minimum known as CalFresh in California. Generally, requirement in the previous year.) The remaining these changes will result in fewer program $1.9 billion is related to paying a preexisting beneficiaries and increased state costs. “settle-up” obligation from the June 2025 budget. In 2026-27, we anticipate state costs for (More information about funding for schools and Medi-Cal and CalFresh to increase about by community colleges under our outlook can be $1 billion and $300 million, respectively, due found in the box on the next page.) In addition, to H.R. 1. Importantly, our estimate assumes while we assume Proposition 2 reserve deposits the state can continue levying provider taxes for 2026-27 are suspended—due to the anticipated at their existing levels. (Shortly before we budget problem—revenue improvements in 2024-25 released this report, federal administrators and 2025-26 require the state to make $2.8 billion issued preliminary guidance suggesting that in “true up” reserve deposits. Under our revenue the state would need to start adjusting certain estimates, the state also is required to make roughly provider taxes beginning July 2026. Our $600 million more in debt payments in 2026-27 estimates do not reflect this recent guidance.) compared to budget act assumptions. If the state did not choose to suspend the BSA deposit for • Corrections Costs Higher by About $850 Million. Our estimates for corrections costs are higher across the budget window Figure 4 by a total of about $850 million compared to Revenue Improvement More Than the administration’s estimates. Fundamentally, Offset by Higher Costs these higher cost estimates reflect an (In Billions) imbalance between the California Department of Corrections and Rehabilitation costs Anticipated Deficit at 2025-26 Budget Act -$12.6 and the amount provided in its budget. Revenues higher $11.1 The imbalance includes two components: Proposition 98 higher -7.0 Proposition 2 higher -3.4 (1) the partial continuation of a gap between All other spending higher -5.7 its budget and its ongoing costs that were Anticipated Deficit at LAO Fiscal Outlook -$17.7 identified in 2024-25 but that have not been www.lao.ca.gov 7 analysis full 2026-27 BUDGET School and Community College Funding Proposition 98 Requirement Controlled by Formulas. Proposition 98 (1988) establishes a minimum annual funding level for schools and community colleges. The state calculates this requirement each year using formulas in the State Constitution that account for changes in General Fund revenue, per capita personal income, student attendance, and other inputs. The state meets the requirement through General Fund spending and local property tax revenue. For any given budget, the state has new estimates for the previous, current, and upcoming years. Formula-Driven Requirements Increase General Fund Spending by $5.1 Billion. We estimate the Proposition 98 formulas require a $5.1 billion increase in General Fund spending across the 2024-25 through 2026-27 period (relative to the June 2025 estimates). This increase mainly reflects our higher revenue estimates in 2024-25 and 2025-26. Specifically, the formulas automatically direct nearly 40 percent of the additional revenue to schools and community colleges, and they also require the state to make a larger “maintenance factor” payment. Maintenance factor accelerates the required funding increase in 2024-25 to compensate for the suspension of the minimum requirement in 2023-24. Preexisting “Settle-Up” Obligation Increases Spending by $1.9 Billion. The June 2025 budget approved school and community funding at a level $1.9 billion below the estimated requirement for 2024-25. This gap created a one-time obligation commonly known as settle up. We assume the state pays this obligation in the upcoming budget, consistent with its practice since 2018-19. Trailer legislation specifies that the state will use the payment to support existing education programs, eliminate payment deferrals, and/or avoid future deferrals. Large One-Time Windfall and Modest Ongoing Increase for School and Community College Programs. Accounting for the formula-driven increases and the settle-up payment, total General Fund spending is up nearly $7 billion from the June 2025 estimates (see “Proposition 98 Funding Changes for Schools and Community Colleges” in the appendix). We estimate this higher spending—combined with growth in local property tax revenue and several smaller adjustments— makes $7.4 billion in one-time funds available for school and community college purposes in the upcoming budget. Regarding ongoing funds, we estimate the state could cover a 2.51 percent statutory cost-of-living adjustment for existing programs, but no other ongoing increases. State Has Options to Help Protect Ongoing Programs. If state revenues decline, the funding set aside under Proposition 98 would decrease by about 40 cents for each $1 in lower revenue. Moreover, our outlook projects a zero balance in the state’s school reserve by the end of 2026-27. The Legislature could use the one-time funding to build a buffer that would protect school and community college programs. Specifically, it could (1) eliminate the payment deferrals included in the June budget, (2) provide schools and community colleges with an advance payment toward their future funding allocations, and (3) expedite the restoration of a block grant that it previously reduced. We explain these options in The 2026-27 Budget: Fiscal Outlook for Schools and Community Colleges. 8 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET difference between revenue and spending growth Figure 5 rates were driving structural deficits. In addressing Other Spending Up by About $6 Billion the budget problem, the Legislature enacted some (In Billions) ongoing spending solutions that reduced spending by an estimated $2.5 billion in 2025-26, which at Other Spending Changes the time were expected to grow to over $10 billion Statewide expenditures $2.4 by 2028-29. These ongoing solutions largely were H.R. 1 1.3 focused in Medi-Cal, which prior to the budget Corrections 0.9 act had been expected to grow over 7 percent Solutions erosion 0.8 on average annually. While the costs of H.R. 1 Other 0.3 Total $5.7 increase Medi-Cal spending, which we describe in the nearby box, we now anticipate Medi-Cal growth to be 4.1 percent on average from 2025-26 addressed fully and (2) additional efficiencies through 2029-30. assumed as part of the 2025-26 budget …Spending Growth Remains Elevated. that we estimate will yield less savings Despite these solutions, the gap between spending than anticipated. and revenues widens by over $10 billion in 2027-28. • All Other Costs Up by $1.1 Billion. We reflect This widening gap is due to both faster spending a solutions erosion of close to $800 million growth in 2027-28 as well as below-average related to employee compensation changes revenue growth in that year. Faster spending growth adopted as part of the budget package. is driven by a few factors, including: (1) the costs In addition, all other costs, mostly in health of H.R. 1 ramping up, (2) the expiration of certain and human services programs, are up close one-time solutions, namely furloughs, (3) the to $300 million. planned repayment of budgetary borrowing (like the Proposition 98 and Medi-Cal maneuvers), and Out-Year Budget Problems (4) the planned expansion of certain programs, of About $35 Billion Each Year like child care slots and foster care rate reform. After 2027-28, although forecasted spending and While Some Recent Solutions Tempered revenue growth rates roughly even out, the gap Spending Growth… In our November 2024 between their respective levels remains, causing outlook, we highlighted that both the difference in structural deficits to persist. the levels of revenue and spending as well as the Estimated Fiscal Effects of H.R. 1 on Medi-Cal and CalFresh In total, we estimate H.R. 1 will increase state costs by about $5 billion by 2029-30. Specifically, we estimate Medi-Cal costs will increase on net by $3 billion and CalFresh costs will increase by almost $2 billion. The largest drivers of the costs in Medi-Cal are the restrictions on provider taxes and an increase in the state’s share of costs for limited-scope coverage for immigrant populations. These costs are offset by the anticipated decline in enrollment of childless adults due to the new community engagement (or work) requirements. In CalFresh, increased costs largely are driven by the state’s share of costs for benefits. (While the state is taking steps to reduce the state’s share of costs for benefits, the success of those efforts is yet to be known.) Importantly, our estimate of state costs under H.R. 1 are limited to only those costs the state must pay due to changes in cost sharing ratios and other changes in law. Our estimates do not include any costs of changes in policy that are under the Legislature’s discretion, like backfilling reductions in federal funds due to eligibility changes. www.lao.ca.gov 9 analysis full 2026-27 BUDGET Structural Deficits Now Figure 6 Moving in the Wrong Direction. Under our estimates, structural Budget Problems Now Moving in the Wrong Direction deficits would be around $35 billion (Dollars in Billions) annually starting in 2027-28. These out-year deficits are larger than Budget Year +1 Budget Year +2 Budget Year +3 our recent outlooks as shown in Figure 6. There are two main -$5 drivers of these deficits. One, -10 revenues dropped significantly in -15 2022-23 and today remain below where they were projected to be. -20 Two, the state has not adjusted -25 the current level of ongoing -30 state services to fully reflect this -35 more limited capacity. To some degree, this is because certain -40 solutions, particularly related to 2023-24 Fiscal Outlook 2024-25 Fiscal Outlook state operational efficiencies, were 2025-26 Fiscal Outlook 2026-27 Fiscal Outlook overly optimistic in their assumed level of savings. COMMENTS Budget Position Is Weak. We advise the using budgetary borrowing, withdrawing reserves, Legislature to address the budget problem through and temporarily increasing revenues. Some options a combination of ongoing solutions—namely, remain, however. The state has $14 billion in achievable spending reductions and/or revenue reserves and could likely find additional capacity increases. There are three reasons these actions for budgetary borrowing, if needed. That said, are now critical. First, the budget problem is now at this point, the state has used over $20 billion larger than anticipated, despite improvements in in borrowing, one-time and temporary spending revenue, and the structural deficits are significant solutions are exhausted, and budget reserves are and growing. Second, while our revenue estimates at about half of their peak. As it stands—with larger hedge against a market downturn, they do not forecasted deficits and many fewer tools available reflect the revenue declines the state would to address them—California’s budget is undeniably experience in a recession. Third, as explained less prepared for downturns. below, the state has used most of its budget Ignoring Risks Could Create Serious resiliency tools to address prior deficits. If our Challenges Later. While important components of estimates hold, the Legislature will face a fourth the state economy are sluggish, revenues are not consecutive year of budget problems—all during a falling, nor are conditions as bad as they would be period of overall revenue growth. in an outright recession. This makes solving the Budget Resilience Waning. In solving the budget problem with ongoing solutions all the more last few years of deficits, the Legislature largely important. Continuing to use temporary tools— was able to avoid making ongoing spending cuts like budgetary borrowing—would only defer the to the state’s core programs. Rather, the budget problem and, ultimately, leave the state ill-equipped problems were addressed mostly with temporary to respond to a recession or downturn in the stock fixes, which included reducing one-time spending, market. Our revenue forecast begins to factor in the 10 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET possibility of such a downturn. As such, building a revenues would need to be about $60 billion budget using these revenues would mean taking higher than we forecast to close the out-year gaps. important steps toward bringing the state into Revenue gains of this magnitude are quite unlikely. structural balance before a crisis arrives. …Or Be Sustainable. In the near term, a Upside on Revenue Unlikely to Balance key source of upside is continued stock market Budget… Revenues could come in higher than strength. If this occurs, we advise the Legislature to our forecast. Even with significant revenue consider such an upside as temporary and still take improvement, however, the state likely would still steps to bring the budget into structural balance. face deficits in future years. As a rough rule of We recommend the Legislature use any additional thumb, due to the requirements of Proposition 98 revenues to rebuild budget resilience either and Proposition 2, to balance the budget, revenue through reserve deposits or repaying outstanding improvement needs to be almost double the size budgetary debts. of the deficit. As such, under our estimates, annual www.lao.ca.gov 11 analysis full 2026-27 BUDGET APPENDIX Appendix Figure 1 LAO Fiscal Outlook Revenues (In Billions) 2024-25 2025-26 2026-27 2027-28 2028-29 2029-30 Personal Income Tax $128.8 $130.4 $125.2 $133.6 $141.4 $151.9 Corporation Tax 41.3 41.7 41.7 41.5 43.0 45.2 Sales Tax 33.6 34.0 34.3 35.4 36.5 37.5 Total “Big Three” Revenue $203.7 $206.1 $201.2 $210.4 $220.9 $234.7 Other Revenues $11.4 $10.0 $11.7 $8.5 $8.9 $9.2 Total Revenues $215.0 $216.1 $213.0 $219.0 $229.8 $243.9 BSA Deposit or Withdrawal $4.8 $4.3 — -$2.3 -$3.0 -$2.3 Other Transfers 8.8 2.2 -$0.6 0.7 -0.3 -0.3 Total Revenues and Transfers $228.7 $222.6 $212.4 $217.4 $226.4 $241.3 BSA = Budget Stabilization Account. Appendix Figure 2 General Fund Spending by Agency Through 2029-30 (Dollars in Billions) Average Annual Agency 2024-25 2025-26 2026-27 2027-28 2028-29 2029-30 Growthb Legislative, Executive $7.6 $5.1 $3.6 $3.6 $3.0 $3.0 -5.5% Courts 3.2 3.3 3.4 3.5 3.7 3.8 4.2 Business, Consumer Services, and Housing 3.7 0.7 1.0 0.6 0.6 0.6 -16.8 Transportation 0.3 0.2 — — — — — Natural Resources 7.5 2.7 2.5 3.4 3.5 4.0 16.8 Environmental Protection 0.6 0.1 0.1 0.1 0.1 0.1 0.1 Health and Human Services 76.2 86.5 91.8 99.8 104.5 108.9 5.9 Corrections and Rehabilitation 13.6 13.3 13.1 13.0 12.9 13.0 -0.2 Education 19.9 19.3 21.6 23.5 24.3 25.3 5.5 Labor and Workforce Development 1.1 1.0 0.9 1.0 1.0 1.0 1.0 Government Operations 3.5 2.8 3.5 3.2 3.9 3.8 2.4 General Government Non-Agency Departments 2.4 1.2 1.1 1.7 1.1 1.1 -0.7 Tax Relief/Local Government 0.7 0.8 0.6 0.7 0.7 0.7 4.3 Statewide Expenditures 1.1 4.4 4.4 6.3 7.5 8.4 23.7 Capital Outlay 0.8 0.7 0.2 0.3 0.2 0.2 -10.6 Debt Service 5.5 5.8 5.9 5.9 5.9 6.0 0.6 Non-98 Spending Total $147.8 $147.9 $153.8 $166.6 $173.1 $179.9 5.4% Proposition 98a $89.5 $84.3 $82.1 $85.8 $90.2 $97.7 6.0% Total Forecasted Spending $237.3 $232.2 $235.9 $252.3 $263.2 $277.5 5.6% a Reflects General Fund component of the Proposition 98 guarantee. b From 2026-27 to 2029-30. 12 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET Appendix Figure 3 Proposition 98 Funding Changes for Schools and Community Colleges (Dollars in Millions) Change June Budget November LAO Estimates Estimates Amount Percent 2024-25 General Funda $85,711 $89,520 $3,809 4.4% Local property tax 32,317 32,581 263 0.8 Totals $118,029 $122,101 $4,072 3.5% 2025-26 General Fund $80,738 $84,326 $3,588 4.4% Local property tax 33,821 34,029 208 0.6 Totals $114,558 $118,355 $3,796 3.3% 2026-27 General Fund $82,536 $82,130 -$406 -0.5% Local property tax 35,556 35,671 115 0.3 Totals $118,092 $117,800 -$291 -0.2% Three-Year Totals General Fund $248,985 $255,976 $6,991 2.8% Local property tax 101,694 102,280 586 0.6 Totals $350,679 $358,256 $7,577 2.2% a June budget amount excludes $1.9 billion “settle-up” obligation. Our November outlook assumes the state pays this obligation. www.lao.ca.gov 13 analysis full 2026-27 BUDGET 14 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET www.lao.ca.gov 15 analysis full 2026-27 BUDGET LAO PUBLICATIONS This report was prepared by Carolyn Chu, Ann Hollingshead, and Brian Uhler, with contributions from others across the office. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, California 95814. 16 LEGISLATIVE ANALYST’S OFFICE