Legislature Passes Preliminary Budget and Begins Final Negotiations with Governor

Monday, June 15 was the constitutional deadline for the California Legislature to pass a balanced budget for FY 2026-27. On Thursday, June 11, the Assembly and Senate announced they had reached an agreement on the “Legislature’s Version” of the budget, signaling a two-party deal. On Monday, June 15, they both voted to pass budget bill AB 109, which contained this agreement. Passage of the Legislature’s Version sets up conditions for final negotiations between the Legislature and the Governor, as they work toward a “three-party agreement.”

The Legislature’s Version includes $355.9 billion in total expenditures in FY 2026-27, including $253 billion General Fund. The Legislature’s Version adopts a balanced budget for FY 2026-27 and FY 2027-28, and it aims to reduce the structural budget deficit to less than $10 billion in the out years, in alignment with the Governor’s plan. It assumes that revenues will be about $5 billion higher in FY 2025-26 than the Governor’s estimates. The Legislature’s Version includes a total of $29.1 billion in reserves, which is close to the total reserves in the Governor’s May Revision. This includes $9.5 billion for the Proposition 98 reserve, which is lower than the Governor’s May Revision proposal of $10.3 billion. It also deposits $7.4 billion in the Projected Surplus Holding Account in 2026-27, for use in 2027-28. This is less than the Governor’s proposal to transfer $9.7 billion into the account, which is a new tool intended to protect against “overcommitting projected resources until revenues are realized and expenditures are finalized,” per the Governor.

The Legislature’s Version approves the Governor’s May Revision proposal for $5 billion in ongoing new revenues. This includes a cap on business tax credits (details still being negotiated), a sales tax on pre-written software products, and changes to the Managed Care Organization tax on health care plans. Additionally, the Legislature’s Version would require the Administration to explore options for “holding big corporations accountable for their employees’ health care costs by April 1, 2027.”

The Legislature’s Version rejects, delays, and reduces some of the Governor’s proposed cuts to safety net programs. It also anticipates that the Legislature will pass bills to place a housing bond and a constitutional change to the rainy-day fund on the November ballot.

Proposition 98

The Legislature’s Version provides $2.7 billion more than the Governor’s May Revision for schools and community colleges, while approving the Governor’s proposed $3.9 billion settle-up proposal and committing to work out a reliable schedule for payment. A settle-up is a mechanism used to borrow from schools to fund other state priorities, with repayment promised in future years. Proposition 98 funding would be $124.9 billion in 2024-25, $127 billion in 2025-26, and $127.9 billion in the 2026-27 Budget Year. Additionally, beginning in FY 2026-27, the costs for Transitional Kindergarten would be included as a TK-12 cost after the Proposition 98 TK-12/CCC split is calculated, correcting a structural deficit for community colleges worth $241 million.

Community College Capital Outlay

The Legislature’s Version adopts the Governor’s budget proposal to provide $736.9 million (one-time Proposition 2 bond funds) to support 10 new and 29 continuing community college facilities projects. This includes:

• $27.8 million for the design phase (Preliminary Plans and Working Drawings) for 10 new projects worth $399 million in State funding through construction.
• $709 million for construction of 29 continuing projects.

Click here for a list of the projects proposed for funding.

Deferred Maintenance

The Legislature’s Version includes the Governor’s proposal to provide $120.7 million (Proposition 98 General Fund) for deferred maintenance needs. The Senate had previously proposed to increase that investment to $288.4 million, but the final two-party agreement aligns with the Governor’s proposal.

Other Community College Provisions

The Legislature’s Version includes the following:

• COLA – $438.3 million (ongoing Proposition 98 General Fund) for a 4.31% cost-of-living adjustment for Student Centered Funding Formula apportionments. This “super COLA” goes beyond the statutory requirement of 2.87%. The Legislature’s Version also provides $30.6 million (ongoing Proposition 98 General Fund) to support a 2.87% COLA for select categorical programs, including adult education.
• Enrollment Growth – $213.7 million (ongoing Proposition 98 General Fund) to support enrollment growth of 1.0% in 2025-26 and 2.5% in 2026-27, allowing districts to be funded at the higher of actual enrollment or the three-year average enrollment.
• Student Support Block Grant – An increase of $117.4 million (one-time Proposition 98), for a total of $275 million.
• Calbright College – $38.1 million (Proposition 98 General Fund) increase to base operations of Calbright College, with a trailer bill to establish oversight and enrollment reporting.
• Cloud Data Platform – $41 million (Proposition 98 General Fund, of which $5 million is ongoing) for scaling of a common cloud data platform across the system.
• Credit for Prior Learning – $37 million (Proposition 98 General Fund) to support the initiative.
• Dual Enrollment – $100 million to TK-12 schools (Proposition 98 General Fund) to increase career pathways for high school students, including expanding dual enrollment at community colleges.

Additionally, the Legislature’s Version adopts the May Revision proposal to require schools and community colleges to provide all employees with up to 14 weeks of paid pregnancy disability leave beginning in 2026-27.

Next Steps

The work to pass California’s FY 2026-27 budget is not complete. The Legislature indicates that they plan to negotiate with the Governor toward a final plan over the next “one or two weeks,” with the Governor expected to sign, veto, or line-item veto AB 109 on or before June 29. Trailer bills to implement policy changes in the budget will be forthcoming in the days and weeks ahead. Stay tuned for additional information from CCFC on changes to the provisions highlighted above in the final FY 2026-27 budget.

Rebekah Kalleen
CCFC Executive Director