In a high-stakes conclusion to the 2025-26 budget cycle, Governor Gavin Newsom and legislative leaders approved a $321 billion spending plan that closes a $12 billion deficit, maintains core investments, and advances a contentious housing reform package.

The deal—hammered out through late-night negotiations and now part of a standardized strategy of linking spending to policy reforms—underscores the budget’s evolving role as a vehicle for broader legislative change.

Tactical policy moves over sweeping tax reform. The final package avoids broad tax hikes but includes targeted revenue measures, such as a shift to single sales-factor taxation for financial firms projected to generate $330 million.

“With these bills we are taking a sledgehammer to California’s unacceptable and self-inflicted housing shortage and affordability crisis, a crisis that is hurting millions of residents and holding us back economically.”

— Bay Area Council President & CEO Jim Wunderman

Budget Leverage and the CEQA Tradeoff

A hardball move that worked. Governor Newsom tied budget approval to the passage of two housing trailer bills: SB 131 and AB 130, using the fiscal deadline to advance sweeping policy changes. The budget included a clause nullifying the entire plan if the housing bills weren’t signed by June 30.

Power Plays:

• SB 131 is the most significant rollback of CEQA since 1970, streamlining environmental review for state-funded infrastructure projects including water system upgrades, broadband, healthcare, housing, wildfire fuel breaks and advanced manufacturing facilities like semiconductor and EV plants.
• New rules impose court deadlines and narrow the scope of CEQA lawsuits to reduce legal delays.
• Supporters say the reforms are critical to accelerate climate-resilient projects and tackle housing shortages; critics warn of weakened environmental safeguards and labor standards.

Building the Balance

Balancing union labor protections with housing construction needs shaped much of the debate.

Key Provisions:

• Prevailing wage rules remain for large or affordable projects but are relaxed for smaller developments.
• $100 million to support Prop 36, focusing on treatment over incarceration.
• $45 million to stabilize Sonoma State University.

Heat-Proofing California

Climate resilience remains a top priority, with targeted investments in wildfire prevention, grid reliability and clean energy expansion.

Budget Actions:

• Over $1.7 billion in cap-and-trade and General Fund dollars to support wildfire prevention, forest health and CalFire operations.
• Streamlined permitting under SB 131 and related trailer bills aim to accelerate renewable energy, transmission lines and climate-resilient infrastructure.

Education in Focus

K–14 education is protected under Prop 98, reinforcing the state’s long-term investment in equity and workforce development.

Funding Commitments:

• California Community Colleges funding increase includes a 2.43% COLA, enrollment growth and support for justice-involved programs.
• $114.6 billion allocated to universal pre-K, literacy and school nutrition.
• University of California and California State University base increases are delayed but not cut.
• Tax incentives remain for military retirees.

Golden State Spotlight

Despite economic pressure, California continues to invest in sectors tied to growth and global visibility.

Budget Boosts:

• $750 million in Film and Television Tax Credits to retain productions.
• $10 million to improve infrastructure and safety for the 2026 FIFA World Cup in Santa Clara and Inglewood.

Homelessness Funding: The Missing Piece

The budget avoids cuts to core programs but omits new funding for homelessness—despite worsening conditions.

Looming Impacts:

• Local governments warn of shelter closures and reduced services.
• Without new funding, the state faces criticism for inaction on one of its most visible crises.

From Deal to Delivery

Now that the budget and housing trailer bills are law, lawmakers must translate the fine print into functional policy.

Governor Newsom called the package “the most significant housing and infrastructure reforms in decades.” Labor leaders voiced strong opposition, with California Labor Federation leader Lorena Gonzalez warning that “anyone who thinks this abundance movement is how we’re going to get our groove back just hasn’t talked to real people.” Republicans like Senator Roger Niello criticized the closed-door process as “the worst experience… in terms of transparency.” And Senator Tony Strickland added, “this budget also does nothing about affordability in California.”

With the legislation now signed into law, the challenge shifts from policymaking to implementation. The success of these sweeping reforms will ultimately hinge on how well they are translated into real, measurable change at the local level.