BY NIESHA FRITZ

Gov. Gavin Newsom released his May Revision last week, the last of his tenure, kicking off in earnest budget negotiations with the Legislature, where the Senate and Assembly have each staked out their priorities for the coming fiscal year and how the state’s improved fiscal picture should be put to work for Californians.

While his May Revision press conference focused on a key theme – California dominates – financial prudence was the Governor’s bottom line. Even with a more optimistic fiscal picture than January, the $349.4 billion May Revision seeks to protect reserves and critical services amid continued economic uncertainty and major reductions in federal funding.

By the Numbers

The annual spring update to the Governor’s January budget proposal reflects increased revenues of $16.5 billion, largely due to a thriving artificial intelligence sector while also featuring a $1.8 billion reduction in General Fund spending. The revised proposal seeks to balance the next two fiscal years and maintains targeted investments in education, healthcare, infrastructure and other key policy areas.

The May Revision puts a premium on savings with an operating reserve of $4.5 billion in 2026-27 and $2.1 billion in 2027-28. It also avoids major new ongoing commitments and sets aside $9.7 billion for the Surplus Temporary Holding Account to support a positive operating balance in 2027-28.

Key Policy Takeaways

• Healthcare: A $300 million investment to help offset cost increases due to federal funding reductions, paired with further cuts to Medi-Cal and an increase in monthly premiums for undocumented immigrants.
• Education: Significant investments in training and retaining teachers, supporting students with disabilities and expanding literacy and math support.
• LA Wildfires: A $100 million Wildfire Rebuilding Fund and one year of mortgage relief up to $100,000 through CalAssist.
• Small Businesses & Corporations: A 50% tax cut for new small businesses to reduce annual LLC fees and a permanent cap on corporate tax credits up to $5 million or 50% of a company’s tax liability.
• Housing: New reforms to ensure responsible funding for affordable housing projects, including prohibiting local governments from charging impact fees on a project that receives state funding and other fee waivers.

TK-12 gets priority, higher ed funds hold steady

The May Revision places its clearest education emphasis on TK-12 schools, with higher Proposition 98 estimates, additional Local Control Funding Formula (LCFF) support and one-time funds for student support and professional development. It includes a proposed increase of Prop 98 funding to the tune of $6.4 billion more than in January, though most of those funds go to the Prop 98 Rainy Day Fund. The May Revision also offers a 4.31 percent total cost-of-living adjustment (COLA), which includes the statutory COLA and an additional discretionary “super COLA.”

Additionally, the Student Support and Professional Development Discretionary Block Grant increased from $2.8 billion in January to $5 billion. A one-time increase of more than $400 million was added to continue funding for literacy coaches and math support staff at high-need schools. Also included is up to 14 weeks of paid pregnancy leave for all TK-12 and community college employees.

The May Revision proposes $50 billion in total funding proposed for the state’s higher education systems and California Student Aid Commission.

Expanded sales tax proposed on digital software

To help drive revenue, the May Revision incorporates a Digital Prewritten Software Tax that would take effect January 1, 2027 and apply to digital prewritten software whether purchased in person, digitally or accessed remotely through software-as-a-service (SaaS) subscriptions. The tax is projected to raise $450 million in General Fund revenue in 2026-27 and $900 million annually thereafter, plus local sales tax revenue. The new tax would impact products and services from companies including Microsoft, Adobe, Slack and Zoom.

More “skin in the game” for local housing projects

Gov. Newsom’s May Revision calls for additional accountability on cities and counties seeking to expand affordable housing projects in their communities. The revised budget proposes banning cities and counties from imposing impact fees on affordable housing developments that receive state subsidies. It also maintains $500 million in local funding, which Gov. Newsom proposed in January, but adds a new measure to keep locals from accessing Homeless Housing, Assistance and Prevention funds without a funding match.

Senate & Assembly Blueprints Lay Groundwork for Negotiations

The Legislature enters negotiations from a similar fiscal posture: build reserves, avoid major new ongoing commitments and protect core programs where possible. The Senate’s framework emphasizes reserve growth, essential-program funding and a Fair Share Contribution on the state’s largest corporations to help offset Medi-Cal costs. The Assembly’s roadmap stresses safety-net protection, a stronger rainy-day fund, housing reforms and avoiding new ongoing spending.

What’s Next

As final budget negotiations unfold, the focus shifts from whether California can balance the next budget to instead how policymakers will manage a volatile revenue surge. Save it, spend it on one-time priorities or use it to reduce future shortfalls. Attention now turns to finalizing the 2026-27 core spending plan as the Legislature eyes its June 15 constitutional deadline to pass a balanced budget.