The final budget agreement is almost final. Here’s how it impacts cities

By Cal Cities Staff

After months of negotiations, the Legislature has sent Gov. Gavin Newsom an agreed-upon $297.9 billion state budget. Although the final budget includes some painful cuts for cities - more on that below - it mostly mirrors a palatable placeholder budget pushed by lawmakers. This includes a $1 billion restoration to the state's flagship homelessness program, along with some modest restorations to other key programs.

Cal Cities Executive Director and CEO Carolyn Coleman noted in a statement that the budget "recognizes and supports the real progress cities are making to support unhoused Californians."

However, meaningful progress requires ongoing funding aimed at long-term solutions. "The more than $1 billion in cuts to various affordable housing programs and the lack of ongoing funding to reduce homelessness only prolongs the crisis and jeopardizes the health and safety of the Californians who need our help the most," Coleman said.

The final budget deal also includes an agreement to reform the state's revenue system, which is prone to wild swings. Keep reading for an analysis of major funding cuts, allocations, and policy proposals.

Revenue and Taxation

In early January, the Governor unveiled a budget proposal that addressed a nearly $38 billion deficit via reductions, borrowing, delays, deferrals, shifts, and reserve spending. That deficit projection was at odds with a $73 billion shortfall predicted by the nonpartisan Legislative Analyst's Office.

The Governor and Legislature struck a partial budget agreement early on that addressed nearly $17 billion of the deficit. Their goal was to address a sizeable piece of the deficit immediately, thus giving negotiators more time to focus on closing the remaining gap.

On May 10, the Governor released an updated budget proposal that addressed a budget shortfall that had increased by roughly $7 billion after the early action budget agreement. He said the increase was due to California's volatile tax system, with revenues coming in below forecasts. The May Revision also anticipated a nearly $30 billion deficit for fiscal year 2025-26.

The Legislature responded a few weeks later with its own updated framework. Like the May Revision, the Legislature's proposed budget relied on reductions, revenues, delays and deferrals, shifts, and reserves to reduce the deficit.

Then in June, Gov. Newsom, Senate Pro Tem McGuire, and Speaker Rivas announced an agreed-upon $297.9 billion budget, of which $211.5 billion is from the state's General Fund. The budget plan addresses the remaining $28 billion budget deficit primarily through $16 billion in program reductions and $13.6 billion in revenues.

Policymakers agreed to address the rest of the deficit via a combination of reserve spending, fund shifts, delays, and deferrals. Notably, the budget maintains the Rainy Day Fund at $22 billion. The budget is also balanced through the 2025-26 fiscal year.

The budget agreement also includes some notable policy announcements and backfills, detailed below.

Responsible Budget Reforms (Details still under discussion)

• Increase the size of the Rainy Day Fund from 10% of the state budget to 20%.
• Exclude deposits into the Rainy Day Fund from the Gann Limit.
• Create a "Projected Surplus Temporary Holding Account," where a portion of any projected surplus will be deposited and held under a future year once it is clear whether the projected surplus actually materializes.

Educational Revenue Augmentation Fund (ERAF)

• The budget plan includes a $73.5 million backfill to certain counties, and the cities therein, for insufficient ERAF amounts.
• The budget rejects the Governor's request for statutory changes to clarify that charter schools are eligible to receive ERAF distribution. Currently, charter schools are not explicitly addressed within existing ERAF distribution statutes.

- Ben Triffo, legislative affairs lobbyist

Public Safety

As promised in the January budget, the Governor and legislative leaders maintained key investments aimed at reducing fentanyl trafficking and retail theft in the final budget. This includes funding for California Highway Patrol retail theft operations and partnerships with the National Guard to stop fentanyl at the border.

Below is a breakdown of the major changes to the 2024-25 State Budget for public safety.

• Combatting Fentanyl. An increase of $30 million to the California Military Department's existing drug interdiction efforts to prevent drug trafficking by transnational criminal organizations, with a focus on helping federal, state, local, and tribal law enforcement agencies stem the flow of fentanyl.
• California Department of Corrections and Rehabilitation Reductions (CDCR). The final budget includes $750 million in reductions to CDCR, including the deactivation of 46 housing units for a total of $81.9 million in ongoing savings.
• Crime Victim Funding. The state budget provides $103 million to backfill lost federal funds for the Victims of Crime Act program and restores all funding for the Flexible Assistance for Survivors of Crime grant program.
• Board of State and Community Corrections (BSCC) Grant Programs. The state budget restores all funding to BSCC grant programs, including the Public Defender Pilot Program and the Adult Reentry Grant program.
• Home Hardening. Extends the liquidation period for the California Wildfire Mitigation Program funds from June 30, 2025, to June 30, 2029, to complete wildfire home hardening activities.

- Jolena Voorhis, legislative affairs lobbyist

Community Services

Budget negotiations were turbulent this year, with the Legislature and the Governor at odds over key programs - including the state's flagship homelessness program. Ultimately, the budget includes $1 billion for the Homeless Housing, Assistance, and Prevention Grant Program, coupled with new accountability requirements. While these investments are sorely needed, the lack of ongoing funding will only exacerbate the state's growing housing and homelessness crisis.

Below is a breakdown of the major changes to the 2024-25 State Budget.

• Homelessness. $1 billion for the sixth round of the Homeless Housing, Assistance, and Prevention (HHAP) Grant Program. This comes with new accountability requirements, including a new enforcement unit, more frequent reporting requirements, and a greater emphasis on permanent housing solutions.
  • The budget also includes $250 million ($150 million in 2024-25 and $100 million in 2025-26) for the Encampment Resolution Grant Program.
• Behavioral Health. Eliminates $450.7 million in one-time funds from the last round of the Behavioral Health Continuum Infrastructure Program. Additional rounds will be supported by Proposition 1 bond funding.
  • The budget largely preserves funding across multiple programs that expand behavioral health treatment and infrastructure capacity for services to children and youth ($7.1 billion total).
• Children and youth programs. Increases funding for the Youth Job Corps program by $15 million for a total of $83.1 million.
• Outdoor access. Reverts $50 million for outdoor environmental education and access programs administered through the Outdoor Equity Grants Program.

- Caroline Grinder, legislative affairs lobbyist

Housing, Community, and Economic Development

In his May Revision, the Governor announced further cuts to affordable housing programs. Then in June - after pushback from Cal Cities, other local government groups, and affordable housing advocates - the Legislature proposed increasing one-time funding to several affordable housing programs.

The restored and new funding allocations provide cities with more resources to address housing issues, along with targeted economic development programs that support job creation and workforce development. Although the agreement is largely positive for cities, lawmakers did agree to cut over $1 billion in affordable housing programs for this year's budget.

Below is a breakdown of the major changes to the 2024-25 State Budget.

• Multifamily Housing Program. In May, the Governor proposed cutting an additional $75 million to the Multifamily Housing Program, totaling $325 million in proposed cuts to a vital program used by cities to increase affordable housing in their communities. The final budget restores $315 million in one-time funding for this important program.
• Regional Early Action Program. The final budget agreement restored $260 million in one-time funding to the REAP 2.0 Program, reducing the cut to $40 million out of the original $600 million allocation. REAP 2.0 helps local governments plan and implement housing projects that meet state-mandated requirements.
• Low-Income Housing Tax Credit. As requested in the May Revision, the final budget includes an increase of $500 million for the low-income housing tax credit, which supports affordable housing projects.
• California Jobs First Program. The budget agreement also increases the 2024-2025 appropriation for the California Jobs First Program from $41.7 million to $50 million. This reflects a restoration of $150 million in General Fund support for the program over the next three fiscal years. This program encourages businesses to invest in California, creating employment opportunities and boosting local economies.

- Brady Guertin, legislative affairs lobbyist, and Waleed Hojeij, Policy and Legislative Affairs Analyst

Environmental Quality

Climate resiliency programs are usually among the first taken off the table when the budget sours - including this year. Although policymakers have accelerated the state's climate goals, funding for those mandates has fallen short. Those costs are then passed on to local governments and ratepayers.

The Governor's original budget proposal impacted over $5 billion in climate-related programs. He then later proposed shifting $1.7 billion in 2024-25 from the General Fund to the Greenhouse Gas Reduction Fund (GGRF) for various climate programs and $3.6 billion over the next five years from the General Fund to the GGRF - with impacts to transit, clean energy, zero-emission vehicles, and nature-based solutions programs.

The Governor and the Legislature landed on a final shift of $3 billion from the current year and budget year from the General Fund to the GGRF. The reliability of the GGRF is somewhat unknown: How the fund is allocated may be up for debate in the coming years.

Simmering on the back burner is the long-awaited climate bond, which could provide more long-term financing for climate investments. Cal Cities is calling for several changes to the bond so it can move to support the measure. The Legislature has stretched the deadline from June 27 to July 3 to iron out the bond's final amounts and allocations.

Below is a high-level summary of the changes associated with the 2024-25 State Budget.

• Off-shore Wind. Provides $16 million for offshore wind permitting activities at the Ocean Protection Council, Coastal Commission, and State Lands Commission.
• Equitable Building Decarbonization. Restores $25 million to the Equitable Building Decarbonization program at California Energy Commission.
• Outdoor Equity: Reduces approximately $50 million in one-time funding for outdoor environmental education and access programs.
• Habitat Conservation: Pulls back $45 million in one-time funding from the Habitat Conservation Fund.
• Government Reorganization. Approves the Governor's proposal to rename and refocus the Governor's Office of Planning and Research as the Governor's Office of Land Use and Climate Innovation. The agreement also approves his proposal to maintain or expand College Corps, Youth Job Corps, and Climate Action Corps service programs.

- Melissa Sparks-Kranz, legislative affairs analyst

Transportation, Communications, and Public Works

In terms of funding transportation, the final budget primarily aligns with the Governor's May Revise - with a few notable differences. Intense conversations focused on whether limited investments should go to highway or pedestrian projects. The state budget committed $200 million originally cut from the Active Transportation Program, with allocations from the General Fund rather than transportation funding augmented by federal investments.

While the May Revise proposed eliminating $700 million of the committed $750 million from the Loan Loss Revenue account for broadband, the Legislature pushed back and restored all but $125 million. The fund provides credit enhancement for bonds, loans, and letters of credit to help finance local broadband infrastructure development.

Below is a breakdown of the major changes to the 2024-25 State Budget.

• Active Transportation. $100 million in the 2024-2025 fiscal year, with another $100 million promised for 2025-2026. Lawmakers could restore the remaining $400 million in future appropriations if funding is available.
• Broadband. The state budget delays $550 million for last-mile projects, which connects the network to homes, until the 2027 budget year. The budget offers $250 million next year for a program to expand and improve the fiber-optic network under "middle-mile" projects. The state budget also cuts $125 million from the Loan Loss Reserve Fund.
• Energy. Includes $75 million for Demand Side Grid Support or Distributed Electricity Backup Assets at the California Energy Commission (CEC). Shifts $36 million from Greenhouse Gas Reduction Fund to General Fund for Offshore Wind Infrastructure at CEC.

- Damon Conklin, legislative affairs lobbyist

Next steps

The budget dance is nearly over, but that doesn't mean it won't impact the rest of the Legislative session. The Governor is loath to sign any bills that don't have a source of funding, which could imperil many pending measures. To learn what those bills are, sign up for Cal Cities' priority bill briefing on July 8. To learn how you can make your voice heard, contact your regional public affairs manager.

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