The 2026-27 Budget: Cap-and-Invest Expenditure Plan

analysis full 2026-27 BUDGET The 2026-27 Budget: Cap-and-Invest Expenditure Plan GABRIEL PETEK | LEGISLATIVE ANALYST | FEBRUARY 2026 SUMMARY 2026-27 Greenhouse Gas Reduction Fund (GGRF) Expenditure Plan Implements New Allocation Methodology. The Governor’s 2026-27 budget proposal is the first since the passage of Chapter 117 (AB 1207, Irwin) and Chapter 121 (SB 840, Limón). Together, these bills extended the cap-and-invest program and modified the methodology for allocating the associated GGRF revenues, including creating new allocation “tiers.” Expenditure Plan Allocates Discretionary Revenues to Various Activities. In its 2026-27 GGRF expenditure plan, the administration proposes to allocate a total of over $1.6 billion to discretionary activities, including: (1) $1.25 billion to backfill California Department of Forestry and Fire Protection (CalFire) costs that otherwise would be paid by the General Fund, (2) $250 million for activities specified in intent language in SB 840, and (3) $115 million to create a new light-duty zero-emission vehicle (ZEV) incentive program. The administration does not anticipate GGRF will have adequate revenues to support the full amounts identified in SB 840 for certain programs. Proposed Activities Generally Reflect Recent Agreements, With Addition of New ZEV Program. We find that the administration’s proposal to support the CalFire backfill and SB 840 intent items is consistent with recent legislative guidance. Notably, however, the administration chooses not to support any of the programs that were anticipated to receive out-year monies in the 2024-25 GGRF expenditure plan, including some funds that the state has already awarded to local transit agencies. Failing to provide these transit funds could have negative implications, such as on agencies’ financial positions and ability to draw down federal grant funds. Instead, the Governor prioritizes providing GGRF to support the creation of an entirely new ZEV program. Given General Fund Condition, Recommend Directing GGRF to Highest Priorities Across Budget. In a typical year, trying to maintain existing funding commitments makes sense. However, in light of the state’s alarming multiyear budget deficits, we recommend the Legislature use GGRF as an important tool to help it fund its highest funding priorities across the entire state budget. This will necessitate reexamining existing GGRF commitments—both discretionary and statutory—to make sure they continue to reflect the Legislature’s highest priorities, and making modifications accordingly. This could include consideration of whether to fund at least some portion of previous transit commitments, given the potential implications of not providing that support. We also recommend the Legislature apply a very high bar to its review of new spending proposals, whether from the General Fund or GGRF. Consistent with this guidance, we recommend rejecting the Governor’s proposal to fund a new ZEV incentive program. Consider Whether Proposed Statutory Changes Are Consistent With Legislative Intent. The administration proposes budget trailer legislation to codify its view that the SB 840 allocation methodology is only intended to apply to auction revenues (not interest income or any entering fund balance). The choice of which funds to include in the SB 840 methodology has important implications for the level of support programs receive under this new structure. Accordingly, we recommend the Legislature consider whether the proposed statutory changes conform to its intent. www.lao.ca.gov 1 analysis full 2026-27 BUDGET Background programs—from the fund. Once approved, GGRF funding for state administrative costs generally has Cap-and-Invest Is a Key Program Aimed been included in departments’ base budgets in at Limiting Greenhouse Gas Emissions annual budget acts. (The administration sometimes (GHGs). Since the cap-and-invest program was refers to these as GGRF “state operations” costs.) created through the passage of Chapter 488 of 2006 (AB 32, Núñez), it has served as one The 2024-25 Budget Agreement Included of the state’s core policies intended to help it Out-Year Funding for Various Programs. achieve its ambitious GHG reduction goals. The 2024-25 budget agreement took an atypical In 2017, Chapter 135 (AB 398, Garcia) extended approach to allocating discretionary revenues, the statutory authorization for the program from as it not only appropriated GGRF to discretionary 2020 to 2030. In September 2025, the Legislature programs for that budget year but also included adopted AB 1207 and SB 840, which authorized plans to dedicate a large share of out-year a second extension of the program (from 2030 to discretionary GGRF revenues for specific purposes. 2045) and made some important changes to it. The bulk of the agreed-upon planned GGRF (We discuss these changes in our December 2025 spending was slated to backfill reductions to publication, Overview of New Updates to the expenditures that were previously planned to be Cap-and-Invest Program.) made from the General Fund for a wide variety of activities. Some of the planned spending was Cap-and-Invest Revenues Are Deposited also related to fulfilling statutory agreements. For Into GGRF. Under the cap-and-invest program, example, the 2024-25 GGRF expenditure plan the California Air Resources Board (CARB) included funding to support: (1) public transit, issues a limited number of allowances each year. consistent with Chapter 54 of 2023 (SB 125, (An allowance is essentially a permit to emit one Committee on Budget and Fiscal Review) and ton of carbon dioxide equivalent.) Under current (2) the Clean Energy Reliability Investment Plan regulations, the state gives away about half of (CERIP), consistent with Chapter 239 of 2022 these allowances for free to industrial facilities, (SB 846, Dodd). (For more details on the 2024-25 electric utilities, and natural gas suppliers. CARB budget agreement’s multiyear spending plan, sells the remaining half of allowances at quarterly please see our September 2024 publication, auctions and the revenues are deposited into The 2024-25 California Spending Plan: Natural GGRF. Historically, GGRF revenues have been Resources and Environmental Protection.) used to support a wide range of programs, many of which are aimed at reducing GHG emissions. The 2025-26 Budget Package Directed Most However, from a legal perspective, GGRF funds are Discretionary GGRF Spending to Support considered akin to tax revenues, so they can be General Fund and Motor Vehicle Account used for any purpose. (MVA). The 2025-26 budget agreement allocated all the GGRF that the administration projected to GGRF Monies Typically Allocated by Statute be available as of the budget act, thus leaving no and Annual Budget Process. The Legislature has projected fund balance. The agreement included approached appropriating GGRF revenues through funding for the statutorily required expenditures, as two main methods. First, the Legislature has set well as $1.7 billion in discretionary spending. Most aside a portion of ongoing GGRF funding each of the latter allocation—$1 billion—was provided year for certain programs or projects articulated for a CalFire fund shift, replacing a like amount in legislation (often referred to as “statutory of General Fund support for the department to allocations”). Second, the Legislature has allocated help address a budget shortfall. Additionally, to other available revenues through the annual budget help make up for a projected deficit in the MVA act, typically for one year at a time (often referred to in 2025-26, the budget included $81 million from as “discretionary” allocations). In addition to these GGRF to pay for costs that otherwise would have two main allocation methods, the state has also to be paid by that account. Other discretionary funded some ongoing state administrative costs— allocations represented some, but not all, of such as related to implementing GGRF-funded 2 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET the funding that was originally planned for In Figure 1, we summarize the GGRF allocations 2025-26 as part of the 2024-25 multiyear GGRF under SB 840. expenditure plan discussed above. (Please see Recent Legislation Expressed Intent for Use our October 2025 publication, The 2025-26 of Funds in 2026-27. In addition to the statutory California Spending Plan: Natural Resources and allocations shown in the figure, the Legislature Environmental Protection, for a summary of which enacted statutory language expressing its intent programs received GGRF in 2025-26.) to use discretionary GGRF monies to support Starting in 2026-27, Allocation of Revenues certain other activities in 2026-27 and future years. Is Guided by New Legislation. Senate Bill 840 not Specifically, SB 840 expressed the Legislature’s only made changes to the cap-and-invest program intent to provide a total of $250 million to fund itself, but also made various modifications to the the following specific activities from the $1 billion allocation of GGRF revenues starting in 2026-27. discretionary GGRF set aside in 2026-27: For example, SB 840 changed some statutory • $125 million for transit passes. allocations from being set percentages of annual • $85 million for climate-focused GGRF revenues to fixed dollar amounts. Senate technological innovation. Bill 840 also modified the order in which certain • $25 million for seed funding for a University of allocations are made, including setting aside California Climate Research Center. $1 billion for discretionary allocations earlier in the prioritization process. (We discuss SB 840’s • $15 million to rebuild Topanga Park (which changes to the statutory allocations of GGRF in sustained damage in the Palisades fire). greater detail in our recent report, Overview of New Updates to the Cap-and-Invest Program.) Figure 1 Statutorily Required GGRF Appropriations Pursuant to SB 840 Program Department Annual Amounts Tier 1: Starting in 2026-27, auction revenues will be allocated first to the following programs: Manufacturing tax exemption N/A • Roughly $160 million State operationsa Various • Roughly $120 million State Responsibility Area fee backfill CalFire • Roughly $90 million Legislative Counsel Climate Bureau Legislative Counsel • $3 million Tier 2: Then second to the following programs: High-speed rail project HSRA • $1 billion Unspecified programs subject to appropriationb Various • $1 billion Tier 3: Then third, if funding is available, to the following programsc: Affordable Housing and Sustainable Communities Programd SGC • $800 million TIRCP CalSTA • $400 million Community Air Protection Program—AB 617 CARB • $250 million Low Carbon Transit Operations Program Caltrans • $200 million Wildfire and forest resilience—SB 901 CalFire • $200 million Safe and Affordable Drinking Water Program SWRCB • $130 million Tier 4: Then fourth, remaining funding is subject to legislative appropriation for discretionary purposes. a SB 840 does not explicitly mention state operations as part of Tier 1, but references funding them prior to allocating Tier 3. The administration proposes budget trailer legislation to clarify that they are considered part of Tier 1. b SB 840 included intent language for spending some of this funding in 2026-27. c SB 840 requires the Department of Finance to proportionately reduce the amounts for these programs if funding is insufficient to fully support them. d The Governor proposes budget trailer legislation to divide the Affordable Housing and Sustainable Communities funding into two separate programs. GGRF = Greenhouse Gas Reduction Fund; SB 840 = Chapter 121 of 2025 (SB 840, Limón); CalFire = California Department of Forestry and Fire Protection; HSRA = High Speed Rail Authority; SGC = Strategic Growth Council; TIRCP = Transit and Intercity Rail Capital Program; CalSTA = California State Transportation Agency; AB 617 = Chapter 136 of 2017 (AB 617, C. Garcia); CARB = California Air Rescources Board; Caltrans = California Department of Transportation; SB 901 = Chapter 626 of 2018 (SB 901, Dodd); and SWRCB = State Water Resources Control Board. www.lao.ca.gov 3 analysis full 2026-27 BUDGET Additionally, Chapter 5 of 2025 (AB 102, Gabriel) two portions of wildfire resilience funding, and expressed the Legislature’s intent to provide GGRF (3) expanding the eligible uses for the High-Speed in 2026-27 and potentially future years to support Rail Authority’s GGRF allocation to include its some CalFire activities that otherwise would be administrative and state operations costs. (We funded from the General Fund. Specifically, if the plan to discuss the AHSC portion of the budget General Fund continued to experience deficits in trailer legislation in greater detail in a forthcoming 2026-27, AB 102 expressed the Legislature’s intent publication, The 2026-27 Budget: Streamlining that GGRF cover $1.25 billion of CalFire’s costs in California’s Affordable Housing Funding System.) 2026-27, $500 million in 2027-28, and $500 million Allocates $3.8 Billion in Projected in 2028-29. (If the General Fund was not projected GGRF Auction Revenues Through SB 840 to be in a deficit in 2026-27, GGRF would only cover Methodology. The Department of Finance (DOF) $500 million for CalFire in that year.) forecasts cap-and-invest auction proceeds of Allowance Prices Have Been Relatively Stable $3.8 billion in 2026-27. As shown in Figure 2, Since Passage of New Legislation. The passage DOF applies its interpretation of the new SB 840 of AB 1207 and SB 840 provided additional clarity methodology to these auction proceeds. Notably, regarding the future of the cap-and-invest program. the Governor proposes to allocate the $1 billion As such, some expected that their passage could discretionary set aside within Tier 2 for two put upward pressure on allowance prices and purposes: (1) $250 million for the legislative intent potentially result in higher GGRF auction revenues items identified in SB 840 and (2) $750 million compared to recent trends. As of the preparation of to partially support the planned CalFire General this report, only one auction—in November 2025— Fund backfill. has been conducted since the passage of the two Funds New State Operations Expenditures bills. However, the resulting revenues were roughly Within Tier 1. The Governor proposes to support equivalent to the amount the state received from the a few new activities from the state operations August 2025 auction, as both allowance prices and portion of GGRF, which it would fund in Tier 1, as the number of allowances sold were similar across mentioned above. These consist of: the two auctions. In both August and November, • Climate Change Assessment. Proposes allowances sold for roughly $28 each, which is $9.9 million over five years (including much closer to the program’s price floor ($26) $355,000 in 2026-27) for various departments than its price ceiling ($95). (We discuss the recent to support the development of the state’s auction results in greater detail in our December Sixth California Climate Change Assessment 2025 publication, Cap-and-Invest: November 2025 and associated research. Auction Update and 2026-27 Budget Context.) • AB 1207 and SB 840 Implementation. Governor’s Proposal Proposes $2.1 million ongoing and seven positions for the California Public Utilities Proposes SB 840-Related Budget Trailer Commission (CPUC) and $871,000 ongoing Legislation. The administration proposes budget (as well as additional funding from the trailer legislation to make various changes to Cost of Implementation Account) and SB 840. Some of the main proposed changes ten positions for CARB to undertake new would memorialize its interpretation of the intent of activities associated with implementing SB 840 by clarifying that: (1) the SB 840 allocation AB 1207 and SB 840 requirements. Such methodology applies to auction revenues, not activities include implementing changes to interest earnings or the entering fund balance, and the “California Climate Credit” rebates funded (2) state operations costs should be considered by free allowances provided to utilities and as part of Tier 1. Other notable proposed changes updating the rules governing the eligibility and include (1) dividing the Affordable Housing and quantification of offsets under the program. Sustainable Communities (AHSC) Program into two allocations, (2) enhancing flexibility across 4 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET • CARB Consolidated Figure 2 Administration. Proposes Governor’s Cap-and-Invest Expenditure Plan $82,000 ongoing (as well as for 2026-27 additional funding from other (In Millions) sources) and six positions to support various human SB 840 Formula resources and information Estimated Auction Proceeds $3,770 technology-related functions Tier 1 at CARB. Manufacturing tax exemption $159 State operations 120 Under DOF’s Projections, State Responsibility Area fee backfill 88 Revenues Would Not be Legislative Counsel Climate Bureau 3 Sufficient to Fully Fund Tier 3 Subtotal Tier 1 ($370) Programs in 2026-27 and Tier 2 Out-Years. Based on its auction High-speed rail project $1,000 CalFire General Fund backfill 750 projections and interpretation of SB 840 intent language items 250 SB 840, DOF does not anticipate Subtotal Tier 2 ($2,000) GGRF will have adequate revenues Tier 3a in 2026-27 to support the full Affordable housingb $396 amounts identified for the Tier 3 Transit and Intercity Rail Capital Program 283 programs in SB 840. Instead, DOF Community Air Protection Program—AB 617 177 Sustainable communities and agricultural land conservationb 170 projects that the Tier 3 programs Low Carbon Transit Operations Program 141 will be subject to proportional Wildfire and forest resilience—SB 901 141 reductions in 2026-27 pursuant Safe and Affordable Drinking Water Program 92 to the statutory methodology, Subtotal Tier 3 ($1,401) Remaining Balance Available for Priority 4 Discretionary Activities — receiving roughly 70 percent of Total Projected Expenditures $3,770 the amounts specified in statute. Outside of SB 840 Formula The projected allocations are Estimated Non-SB 840 Funding $750 displayed in Figure 2. Notably, DOF Entering fund balancec $250 also projects that Tier 3 programs Interest earnings 500 may be subject to proportional Proposed Non-SB 840 Expenditures $615 reductions in the out-years as CalFire General Fund backfill $500 well, as shown in Figure 3 on the Zero-emission vehicle incentive program 115 next page. Projected Remaining Fund Balance and End of 2026-27 $135 a Tier 3 amounts reflect proportional reductions to statutorily-defined amounts based on projected Allocates $615 Million revenues, pursuant to the SB 840 methodology. Outside SB 840 Spending b The Governor proposes budget trailer legislation to divide the Affordable Housing and Sustainable Framework for Rest of CalFire Communities funding into two separate programs. c A portion of the anticipated entering fund balance results from the administration’s proposal to undo Backfill and ZEV Incentive the $81 million transfer to the Motor Vehicle Account that was approved in the 2025-26 budget. Program. The administration CalFire = California Department of Forestry and Fire Protection; SB 840 = Chapter 121 of 2025 assumes about $750 million in (SB 840, Limón); AB 617 = Chapter 136 of 2017 (AB 617, C. Garcia); and SB 901 = Chapter 626 of 2018 (SB 901, Dodd). GGRF monies will be available in 2026-27 that are not from • AB 617 Implementation. Proposes budget-year auction revenues and $1.6 million ongoing and 5.2 positions for thus not subject to the SB 840 allocation process CARB to implement Chapter 118 of 2025 under its statutory interpretation. This includes (SB 352, Reyes) related to the Community an expected entering fund balance ($250 million), Air Protection Program established by as well as projected GGRF interest income Chapter 136 of 2017 (AB 617, C. Garcia). ($500 million). The estimated GGRF entering www.lao.ca.gov 5 analysis full 2026-27 BUDGET Figure 3 Administration’s Greenhouse Gas Reduction Fund Revenue and SB 840 Expenditure Projections (In Millions) 2026-27 2027-28 2028-29 2029-30 DOF GGRF Revenue Estimatesa $3,770 $3,915 $4,066 $4,221 Tier 1 Manufacturing tax exemption $159 $163 $168 $174 State operations 120 124 127 131 State Responsibility Area fee backfill 88 88 88 88 Legislative Counsel Climate Bureau 3 3 3 3 Subtotal Tier 1 ($370) ($378) ($386) ($396) Tier 2 High-speed rail project $1,000 $1,000 $1,000 $1,000 CalFire General Fund backfill 750 500 500 — SB 840 intent items 250 — — — Remaining discretionary set aside — 500 500 1,000 Subtotal Tier 2 ($2,000) ($2,000) ($2,000) ($2,000) Tier 3b Affordable housingc $396 $435 475 $516 Transit and Intercity Rail Capital Program 283 311 339 369 Community Air Protection Program—AB 617 177 194 212 231 Sustainable communities and agricultural land conservationc 170 186 204 221 Low Carbon Transit Operations Program 141 155 170 184 Wildfire and forest resilience—SB 901 141 155 170 184 Safe and Affordable Drinking Water Program 92 101 110 120 Subtotal Tier 3 ($1,401) ($1,537) ($1,680) ($1,825) Projected SB 840 Expenditures $3,770 $3,915 $4,066 $4,221 a Revenue estimates assume allowances will sell at the same average premium above the price floor as has been the case for the last four quarters with fully subscribed auctions. DOF notes that this scenario is presented as an example and should not be considered as a market price forecast. b Tier 3 amounts reflect proportional reductions to statutorily-defined amounts based on projected revenues, pursuant to the SB 840 methodology. c The Governor proposes budget trailer legislation to divide the Affordable Housing and Sustainable Communities funding into two separate programs. GGRF = Greenhouse Gas Reduction Fund; DOF = Department of Finance; CalFire = California Department of Forestry and Fire Protection; SB 840 = Chapter 121 of 2025 (SB 840, Limón); AB 617 = Chapter 136 of 2017 (AB 617, C. Garcia); and SB 901 = Chapter 626 of 2018 (SB 901, Dodd). fund balance is higher than previously anticipated • ZEV Incentive Program. Proposes for a couple of reasons, including (1) a new proposal $115 million to create a new light-duty ZEV to undo the $81 million MVA transfer that was incentive program. (The Governor also approved in the 2025-26 budget agreement, proposes providing $85 million from the Air as the administration projects that account will Pollution Control Fund—similarly freed up from not need it to remain solvent through 2026-27, undoing the previously-approved MVA fund and (2) lower-than-budgeted expenditures on transfer—to support this new ZEV program, for some activities. As displayed in Figure 2, the a total of $200 million.) administration proposes to use $615 million of the $750 million in additional revenues to support the Assessment following activities, thus leaving a projected GGRF Administration’s Revenue Estimates Appear fund balance of $135 million at the end of 2026-27: Reasonable, but GGRF Revenues Remain • CalFire Backfill. Proposes $500 million Difficult to Predict. Based on currently available to support the remainder of the planned information, DOF’s 2026-27 GGRF revenue forecast $1.25 billion CalFire backfill. appears reasonable. However, GGRF revenues are inherently somewhat unpredictable. Moreover, while 6 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET one key near-term source of program uncertainty to be provided in previous years but then were was resolved with its statutory extension, some delayed due to the state budget condition, some remaining factors could potentially still create a local transit agencies already have committed heightened level of revenue unpredictability in the portions of this funding to specific local projects. next couple of years. For example, CARB recently For example, the Metropolitan Transportation released draft regulations that propose to make Commission in the Bay Area indicates that, various changes to the program—including to consistent with the SB 125 plan it submitted to the the total number of allowances issued and the Legislature, it programmed about $250 million of allocation of those allowances across various the anticipated funds which the Legislature has not purposes (such as GGRF and free allowances to yet appropriated for two Bay Area Rapid Transit utilities and industry)—that could affect GGRF expansion capital projects in order to help leverage revenues. Additionally, CARB still is considering billions of dollars in forthcoming federal support linking California’s cap-and-invest program with from the Capital Investment Grant Program. the program in Washington state. Such a linkage It states that failure to receive the anticipated funds could affect allowance prices in both states as they could jeopardize local transit agencies’ ability to come into alignment. Moreover, the current federal draw down significant federal funding, and that administration has been critical of California’s agencies have entered into construction contracts cap-and-invest program, including in a April 2025 based on state commitments. Accordingly, executive order. Should the federal government not providing this funding could be disruptive threaten action against the state’s program, to affected local agencies. Additionally, some allowance prices could be affected. transit agencies planned to use some of this Proposal Generally Reflects Recent funding to offset operational funding shortfalls. Agreements, with Addition of New ZEV The Legislature may want to learn more about Program. The administration’s proposal to provide potential consequences that could ensue from the $1.25 billion for a CalFire backfill and $250 million administration’s proposal to not fund these planned for SB 840 intent items is consistent with the amounts and consider them as it develops its final guidance included in recent legislation. Notably, GGRF spending package. however, the administration does not propose to Given General Fund Condition, Directing fund any of the programs that were anticipated GGRF to Support Core State Priorities Is an to receive out-year monies in the 2024-25 GGRF Important Budget Tool. In our view, it typically expenditure plan, such as CERIP or transit, in either makes sense to try to maintain existing funding 2026-27 or future years. Instead of funding the commitments. However, as we discuss in our programs envisioned in the 2024-25 GGRF plan, the January 2026 publication, The 2026-27 Budget: Governor prioritizes providing GGRF to support the Overview of the Governor’s Budget, the state creation of an entirely new ZEV incentive program. faces alarming multiyear budget deficits, ranging Neglecting to Provide Planned Transit from $20 billion to $35 billion annually. We expect Funding Could Lead to Disruptions for Local that the Legislature will need to make very difficult Capital Projects. The amounts planned in the decisions to address these deficits. Within this 2024-25 GGRF package that are no longer included context, we think the Legislature should use GGRF in the administration’s multiyear spending plan as an important tool to help it fund its highest (or in SB 840 intent language) include a total of funding priorities across the entire state budget. $710 million that would have supported local This could include helping to support existing core transit agencies across the state. This includes services currently paid for by the General Fund. $20 million for the Transit and Intercity Rail Capital We note that, given the legal flexibility of GGRF, its Program planned for 2026-27, and $230 million in funds could be used not only to support existing 2026-27 and $460 million in 2027-28 for the Zero core environmental-related activities—such as Emission Transit Capital Program. In part because parks and fire protection—but also other activities, some of these funds had originally been scheduled such as in the areas of health and human services. www.lao.ca.gov 7 analysis full 2026-27 BUDGET Since Much of GGRF Is Committed, This interest income and the entering fund balance Approach Would Involve Revisiting Existing outside of the SB 840 allocation process Commitments. As discussed above, the is that more than $1 billion annually will Legislature has already committed large portions be set aside as available for discretionary of GGRF for specific activities in 2026-27 and purposes prior to computing allotments for out-years. Thus, using GGRF as a budget tool will Tier 3 programs. The precise amount of such necessitate reexamining existing commitments— available discretionary funding will vary by both discretionary and statutory—to make sure year depending on the entering fund balance they continue to reflect the Legislature’s highest and interest income. In 2026-27, for example, priorities. If any of these commitments represent under this approach roughly $1.75 billion is lower-priority activities than programs at risk of available for discretionary purposes prior being defunded, reallocating funding so it is instead to funding Tier 3 programs, of which the directed to the highest-priority activities across the administration proposes to spend about budget would make sense. (This could also include $1.6 billion. We note that the language of allocating funding consistent with earlier GGRF SB 840 indicates that the methodology applies plans, such as to public transit.) to “moneys in the fund” and thus does not Very High Bar for Approving New Proposals clearly limit it exclusively to auction revenues. Under Current Budget Conditions. We also However, the administration indicates that the believe the Legislature should apply a very high bar intent of SB 840 was to apply the methodology to its review of new spending proposals, whether only to auction revenues, consistent with from the General Fund or GGRF. This is because, historical practice. in the context of a budget deficit, funding any new • Providing State Operations Costs First proposals will necessitate making commensurate Priority. By including funding for state reductions elsewhere within the budget. As we operations in Tier 1, they are taken “off the discuss in our companion report, The 2026-27 top” before allocations are computed for Budget: Framework for Approaching the Natural nearly all other activities. The main implication Resources, Environmental Protection, and of this approach is that any activities that are Agriculture Budget, we do not think the Governor’s added to this category essentially result in proposal to provide GGRF to establish a new ZEV less funding available to support programs in incentive program meets this threshold. (We also other tiers and a greater likelihood that Tier 3 plan to discuss the ZEV proposal in more depth in programs may not receive their full statutory a forthcoming publication, The 2026-27 Budget: allotments. We note that SB 840 is not Proposed Zero-Emission Vehicle Incentive Program.) explicit about the allocation tier within which Does Administration’s Interpretation of these activities should be covered. Instead, SB 840 Methodology Align With Legislative the statute references setting aside funding Intent? DOF indicates that its proposed budget for them prior to computing allotments for trailer legislation clarifies its interpretation of the Tier 3 funding. intent of SB 840 related to (1) the funds subject Funding Proposals From State Operations to the SB 840 methodology and (2) the treatment Has Implications for Money Left Available of state operations costs. A key question for the for Other Tiers. Under the administration’s Legislature is whether it is comfortable that the interpretation of the SB 840 methodology (which proposed statutory modifications do indeed reflect would be codified in the proposed budget trailer its intent, as they have important implications for legislation), activities that are funded as part which programs receive funding under this new of GGRF state operations are prioritized above structure. Specifically: nearly all other programs and activities. The • Considering Interest Income and Entering administration indicates that because these funds Fund Balance Discretionary and Outside typically support ongoing state staff, ensuring of SB 840. The practical implication of the more certainty that they will be available is administration considering revenues from important so as not to risk staff layoffs if GGRF 8 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET revenues come in below expectations. While priorities across the broader budget, and then this rationale is reasonable, this approach is make modifications accordingly. This could include not without trade-offs. Most notably, because consideration of whether to fund at least some including state operations expenditures as part of portion of previous transit commitments, given the Tier 1 means they receive first priority for available potential implications of not providing that funding. GGRF, adding new activities to this category can Additionally, we recommend the Legislature reject have the effect of gradually “crowding out” other new discretionary GGRF proposals unless they GGRF-funded programs and activities. In light meet an exceptionally high bar, as they both come of this, we think the Legislature should carefully at the expense of previous unmet GGRF planned consider what types of activities it would like to commitments and mean forgoing the ability to use include in this category—and potentially provide that amount of GGRF to help address the General this guidance to the administration in statute, as Fund shortfall. Consistent with this guidance, we appropriate—recognizing that this year’s decisions recommend rejecting the Governor’s proposal to could serve as a precedent going forward. For fund a new ZEV incentive program. example, the administration’s proposal to support Review Proposed SB 840 Implementation the Sixth California Climate Change Assessment Approach and Statutory Changes to Ensure serves as a somewhat nontraditional example Consistency With Legislative Intent. We of a GGRF state operations category activity, recommend the Legislature carefully review in that it is not directly linked to implementing the administration’s proposed approach to cap-and-invest or GGRF-funded programs and implementing SB 840 to ensure that it is consistent would support one-time activities rather than with legislative intent and preferences, and make ongoing state staff. (We provide additional analysis any associated statutory modifications, as relevant. of this proposal in our companion report, The This could include adopting the administration’s 2026-27 Budget: Framework for Approaching the proposed budget trailer legislation clarifying the Natural Resources, Environmental Protection, funds subject to SB 840 and the prioritization of and Agriculture Budget. We also plan to discuss state operations costs, if those changes accurately CPUC’s AB 1207 implementation proposal—also reflect legislative intent. It could also include funded from the GGRF state operations category— memorializing in statute the Legislature’s preferred in a publication, The 2026-27 Budget: California guiding principles for which types of activities Public Utilities Commission’s Implementation of the administration should include as GGRF state AB 1207.) operations proposals going forward, as those activities would receive first priority for funding and Recommendations thus can crowd out other GGRF-funded programs Direct GGRF to Highest Legislative and activities. Priorities, Including for Supporting Core Monitor Auctions and Adopt Spending Levels Activities Traditionally Funded With General That Reflect Evolving Revenue Trends. Given Fund. We recommend the Legislature dedicate the continued uncertainty around cap-and-invest GGRF to its highest budget priorities across the revenues, we recommend the Legislature entire state budget, not just within climate- or closely monitor upcoming quarterly auctions—in environment-related programs. To effectuate this, February and May 2026—to assess how revenues we recommend the Legislature review prior plans are materializing. We recommend the Legislature and commitments for spending GGRF—including be prepared to modify its GGRF expenditure discretionary and statutory allocations, as well plan accordingly, should revenues from these as state operations expenditures—to make sure auctions come in at higher or lower levels than they continue to reflect the Legislature’s highest currently anticipated. www.lao.ca.gov 9 analysis full 2026-27 BUDGET 10 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET www.lao.ca.gov 11 analysis full 2026-27 BUDGET LAO PUBLICATIONS This report was prepared by Helen Kerstein, and reviewed by Rachel Ehlers and Ross Brown. 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. 12 LEGISLATIVE ANALYST’S OFFICE