1127 11TH STREET, SUITE 300, SACRAMENTO, CA 95814 • 916.974.9270 • PUBLICPOLICYGROUP.COM PAGE 1 Date: January 13, 2026
To: Christian Clegg, City Manager
City of Bakersfield
From: Sharon Gonsalves
Managing Director
California Public Policy Group
Re: CPPG Summary of Governor Newsom’s Fiscal Year 2026-27 Proposed Budget
OVERVIEW
Memo Outline
The following is a topline summary of Governor Gavin Newsom’s proposed fiscal year 2026-27 (FY 26-27) state budget, with a focus on key areas of interest to the City of Bakersfield . If there are additional areas or line items of interest, please do not hesitate to contact our team with questions or to request further information. Please note that discussion of budget areas directly impacting local agencies begins on page 2. Below this section, we provide an overview of the timeline and next steps for the 2026-27 budget.
Background
On January 9, the day after Governor Newsom’s State of the State address, Joe Stephenshaw, Director of the Department of Finance, held a press conference to outline the Governor’s proposed 2026-27 budget. He characterized it as a “workload” budget that maintains existing programs and advances prior investments while addressing a $2.9 billion deficit. He also noted that the proposal includes few new spending initiatives, with major policy and funding decisions deferred until the May Revision. This framing is also reflected in the Governor’s budget cover letter, which concludes: “This January budget is not the final word. It is a beginning—a statement of purpose. In the months ahead, we will work together to refine a final budget that looks beyond a single year, mindful of the obligations to the people we serve.”
There is also reason for optimism. State revenues, fueled by stock market gains, continue to rise, with the Governor’s budget projecting a $42.3 billion increase over a three -year period (FY 2024-25 through FY 2026 -27). This unexpected growth has allowed t he Governor to propose a budget that repays prior deferrals, maintains funding for education, childcare, universal transitional kindergarten, climate initiatives, safety-net programs, and other “transformative investments,” and restores reserves.
The Governor’s proposal, however, stands in sharp contrast to the sobering assessment presented by the Legislative Analyst’s Office (LAO) —the Legislature’s nonpartisan research and advisory division—in its November Fiscal Outlook. The LAO warned that stock market gains driven by “AI - fueled exuberance” were unsustainable, projected an $18 billion budget deficit in the current fiscal year, and forecast $35 billion in ongoing structural deficits in the out years—shortfalls that would be significantly exacerbated by an economic downturn.
1127 11TH STREET, SUITE 300, SACRAMENTO, CA 95814 • 916.974.9270 • PUBLICPOLICYGROUP.COM PAGE 2 In his presentation, Mr. Stephenshaw acknowledged the state’s historic revenue volatility, uncertainties stemming from federal policy changes, and rising costs across certain state programs.
He explained that expenditure growth is largely driven by constitutional requirements and baseline cost increases, and that although the Administration assumes only modest future revenue growth, the resulting projected shortfall is significantly smaller than the LAO’s initial estimate. He added that the Administration i ntends to “wait and monitor changes in revenue and spending over the next couple of months,” with the goal of presenting a balanced and sustainable fiscal plan at the May Revision that covers both the budget year and the subsequent year.
LAO Budget Commentary
The Legislative Analyst’s Office (LAO) released its initial response to the Governor’s budget on January 12. While the LAO acknowledged the revenue growth cited by the Governor, it continued to express concern that a budget overly dependent on stock market gains would place the state on a “precarious footing.” The LAO urged the Legislature to take ear ly action rather than waiting for the May Revision, recommending that lawmakers begin considering solutions to address projected multiyear deficits estimated at $20 billion to $35 billion annually. The LAO’s recommendations include basing the budget on its lower revenue forecast, identifying up to $10 billion annually in budget solutions, and further increasing state reserves.
January Proposal by the Numbers
Total budget: $348.9 billion
Total Deficit: $2.9 billion
• $248.3 billion General Fund
• $14.3 in the Budget Stabilization
Account/Rainy Day Fund
• $4.1 billion in the Public School
System Stabilization Account
• $4.5 billion in the Special Fund for
Economic Uncertainties
Additional resources, including a link to the full budget and related supporting documents, are provided at the end of this analysis.
BUDGET AREAS OF INTEREST TO LOCAL GOVERNMENT
CPPG has identified eight areas of interest in the budget proposal that are relevant to the City of Bakersfield. Proposals of interest to many local governments include:
• $2.1 billion in proposed Climate Bond allocations for a wide range of categories. • A proposal to extend California Competes tax credits for an additional five years. • A changed state housing policy focus which includes limiting corporate ownership of single- family homes, encouraging more efficient residential construction methods, and improving coordination among state housing finance programs.
As budget deliberations progress, we will continue to monitor new information and provide updates on both funding opportunities and restrictions.
Climate Bond Allocations: Most Opportunity for Local Agency Funding The Governor’s budget continues to invest in a clean and resilient future for the state, including providing additional funding from the state’s Cap-and-Invest program and Proposition 4 (2024). The
1127 11TH STREET, SUITE 300, SACRAMENTO, CA 95814 • 916.974.9270 • PUBLICPOLICYGROUP.COM PAGE 3 budget allocates $2.1 billion in the second year of a multi-year investment plan. Funding categories in the Climate Bond with additional funding include:
• Water Storage: The budget includes $792 million in the second year of the Climate Bond to continue investments that improve water storage, replenish groundwater, improve conditions in streams and rivers, and complete various water resilience and water -related infrastructure projects:
o Flood Control: $232 million for flood control projects to evaluate, repair, rehabilitate, reconstruct, expand, or replace levees, weirs, bypasses, and facilities of the State Plan of Flood Control, Projects in the Sacramento -San Joaquin Delta, and projects funded through the Flood Control Subventions Program.
o Drinking Water: $173 million for drinking water projects serving small or disadvantaged communities or tribes and that address failing water systems and water systems at risk of failing, as well as failing private wells. Funding also supports wastewater projects serving small or disadvantaged communities that address a violation or connect unsewered homes to a centralized wastewater system. o Regional Conveyance Projects and Repairs to Existing Facilities: $68.8 million to support repairs to existing or new water conveyance projects. • Wildfire and Forest Response: The budget proposes $314 million to continue investments in various wildfire and forest resilience projects and programs, including:
o Local Fire Prevention Grants: $58 million to fund wildfire prevention and hazardous fuels projects and activities in and near wildfire threatened communities, with a focus on increasing the protection of people, structures, and communities. o Fire Resilience: $19.6 million for technical and financial assistance to help homeowners in wildfire-vulnerable areas to implement defensible space mitigations, including the creation of an ember -resistant zone within five feet of a home or structure (Zone 0) to reduce the potential for structure ignition during a wildfire. o Wildfire Risk Reduction Related to Electricity Transmission: $15.2 million for grants, in coordination with the Office of Energy Infrastructure Safety, to support cooperation in advancing fuel reduction around wildfire -vulnerable communities to reduce wildfire ignitions.
• Extreme Heat Mitigation: $241 million to continue investments that support implementation of the state’s Extreme Heat Action Plan and build resilience to extreme heat across California, with a focus on those most vulnerable to its impacts, including:
o Transformative Climate Communities Program: $137.4 million to fund community - led development and infrastructure projects that achieve major environmental, health and economic benefits in California’s most disadvantaged communities. o Community Resilience Centers: $55.3 million to fund new construction and upgrades of neighborhood -level resilience centers to provide shelter and resources during climate and other emergencies. The program will also fund year -round services and ongoing programming that builds overall community resilience. o Urban Forestry Program: $22.8 million for CalFire’s Urban and Community Forestry Grant Program, which aims to increase the long-term benefits trees provide, improve the public’s understanding and appreciation of urban trees, and advance urban forest management and tree care.
• Biodiversity and Nature Based Solutions: $199 million to continue investments that help meet the state’s climate and biodiversity goals including funding to enhance and protect nature and the Salton Sea.
1127 11TH STREET, SUITE 300, SACRAMENTO, CA 95814 • 916.974.9270 • PUBLICPOLICYGROUP.COM PAGE 4 • Climate Smart Agriculture: $89 million to continue investments in various climate smart agriculture projects and programs.
• Outdoor Agriculture: $35 million to continue investments that expand and enhance parks and outdoor access.
Economic Development: Mixed Messages on the Economy
While high -income earners and the stock market may be keeping California’s state finances temporarily afloat, the Economic Outlook portion of the Governor’s budget reveals many troubling warning signs, including:
• In 2025, state projected monthly job growth declined from 6,100 to 1,700. • Most state job growth is in low wage positions.
• Higher wage jobs decreased by 10,500 per month between April and September. • Nearly no payroll job growth is forecast in the budget in 2026.
These trends do not bode well for the state’s broader economy. Population growth has essentially stalled, and demographic shifts further constrain growth prospects as the senior population rises while the share of school-age children declines. At the same time, immigrants—who are vital to the state’s workforce—are impacted by increased deportations and reduced international immigration, and the state faces a projected net domestic outflow of 70,000 residents per year.
Extension of California Competes Tax Credit : While the current CalCompetes program does not sunset until FY 2027-28, the Governor is proposing to extend this program at $180 million annually for an additional five years, through FY 2032-33.
Housing: Shift in Tone, But no New Funding on the Table The budget does not include any proposed new funding for affordable housing, nor does it mention a possible housing bond, but local governments will notice a major change in tone. Unlike past years where the Governor’s housing comments were primarily critical of local government, the focus is now refreshingly elsewhere. After years of hammering local planning and approvals, there appears to be a recognition that market factors dominate . The Economic Outlook section reads: “The residential construction sector in California continues to be hampered by higher labor and financing costs. Total permit growth fell 9.2 percent year -over-year to just under 100,000 total units in 2024 and continued to decline in 2025.”
The Governor’s housing policy focus has now shifted to other areas: corporate ownership of single- family homes, modernizing residential construction methods, improving coordination among state affordable housing financing programs, helping preserve existing housing, and addressing financing gaps for victims of the LA fires:
Governor’s Housing Policy Proposals: During his State of the State address, the Governor mentioned three housing policy proposals:
• Limiting Corporate Ownership of Single-Family Homes: The Governor declared his intent to propose a law that limits future corporate purchases of single-family homes, a concept that was also recently proposed by President Trump. This proposal is not detailed in the budget document. Legislators have previously proposed bills to address this issue, but they stalled. “Over the next few weeks, we will work with the Legislature to combat this monopolistic
1127 11TH STREET, SUITE 300, SACRAMENTO, CA 95814 • 916.974.9270 • PUBLICPOLICYGROUP.COM PAGE 5 behavior, strengthen accountability, and level the playing field for working families. That means more oversight and enforcement and potentially changing the state tax code to make this work.”
• Using More Factory -Built Housing: The Governor stated his desire to work with the Legislature to “ reduce the cost of construction, utilizing new building methods and technology—worker-centered reforms that bring our brothers and sisters in labor along with us.” This proposal was mentioned by the Governor but not discussed in the budget. • Assisting LA Recovery: The Governor noted that one of the challenges faced by many victims of the LA fires was the need for financial assistance to cover the gap between insurance recovery and costs of new construction. The Administration is working on a proposal to address this in the May Revise.
Improving Coordination Among State Agencies: The budget document outlines additional measures to continue state efforts to integrate the state’s housing finance system to accelerate project delivery and reduce costs. Building upon last year’s reorganization to create the California Housing and Homelessness Agency (CHHA) and the Housing Development and Finance Committee (HDFC), two related proposals are highlighted:
• Shifted Authority: Modernize the Affordable Housing and Sustainable Communities Program, by distributing up to $560 million in annual Cap-and-Invest auction proceeds through the Housing Development and Finance Committee. The Strategic Growth Council will continue to administer up to $240 million dedicated to sustainable communities and agricultural land components, which will be updated to support more flexible, catalytic infrastructure investments aligned with regional priorities.
• Improved Coordination: Improve coordination of state housing resources, through proposed statutory changes, to produce a single, coordinated application and award process.
Changes will improve coordination with Low -Income Housing Tax Credits and require a dedicated share of private activity bonds to be directly allocated by HDFC for its funded projects to support timely deployment of housing funds.
Housing Preservation: To support ongoing efforts to keep Californians in their homes, the budget document states that the Administration will advance efforts to leverage preservation opportunities within the Low -Income Housing Tax Credit program, and support sponsors in access ing and redeploying resources within HCD’s existing portfolio to strengthen long -term sustainability and housing stability.
Homelessness: Same Message of “Accountability” for Local Agencies No new funds are proposed in the budget for local agencies to address the challenges of homelessness. The budget document, however, recounts a long listing of prior state investments to respond to homelessness and mental health during the Governor’s term including: Homekey, Roomkey, Care Court, Prop 1, of 2024, and encampment removal.
In his State of the State address, the Governor stated that unsheltered homelessness in California has declined by 9 percent because of the state’s efforts, with even larger reductions reported in certain cities. He contrasted this with an 18 percent increase in unsheltered homelessness nationwide. Hours after his speech, however, the accuracy of these figures was challenged in a Sacramento Bee editorial.
1127 11TH STREET, SUITE 300, SACRAMENTO, CA 95814 • 916.974.9270 • PUBLICPOLICYGROUP.COM PAGE 6 The Governor’s critique of local governments on homelessness nevertheless continued. He stated that beginning July 1, the state will redirect more than $1 billion in annual mental health funding toward housing and treatment for people living on the streets . The Governor declared this was :
“providing counties what they’ve been asking for: the predictable funding for housing and substance abuse treatment. No more excuses —it’s time to bring people off the streets, out of encampments, into housing, into treatment. Counties need to do their job!”
Homeless Housing, Assistance, and Prevention Program
The budget document states that state continues to deploy a sixth round of HHAP totaling $1 billion, and a seventh-round totaling $500 million, contingent on enhanced accountability and performance requirements.
Proposition 1
The budget reveals the state has allocated $636 million for 1,818 units through Proposition 1, with $1.6 billion expected to be made available over the coming year to support housing and services for people experiencing homelessness.
Natural Resources: Funding Increases and Opportunities
Natural Resources includes various policies and programs related to climate change, parks and recreation, disaster preparedness, and the natural environment. Following last year’s successful reauthorization of the state’s Cap-and-Invest program, the Governor’s budget proposes policy and budget adjustments including:
Affordable Housing and Sustainable Communities Program
The budget Proposal includes statutory adjustments to clarify and modernize the Affordable Housing and Sustainable Communities program by separating the affordable housing components from the sustainable communities program and agricultural land conservation components. The budget also includes funding adjustments including:
• Affordable Housing: Up to $560 million annually from Cap -and-Invest auction proceeds for affordable housing administered by the Housing Development and Finance Committee as part of the Administration’s modernization of the Affordable Housing and Sustainable Communities Program.
• Sustainable Communities and Agriculture Land Conversion: Up to $240 million annually from the Cap-and-Invest auction proceeds for the sustainable communities and agricultural land conservation components of the Affordable Housing and Sustainable Communities Program will be available to support more flexible, ca talytic infrastructure investments aligned with regional priorities.
• Cap-and-Invest Implementation (AB 1207/SB 840): A total of $5.7 million special funds and 17 positions to support workload at CARB and the California Public Utilities Commission to update and implement statutory changes related to compliance carbon offset protocols and the California Climate Credit.
Zero Emission Vehicle Incentives
The budget maintains California’s commitment to advancing clean transportation by targeted funding to incentivize ZEV adoption including $200 million one -time special funds and proposed statutory language to establish a new light-duty ZEV incentive program.
1127 11TH STREET, SUITE 300, SACRAMENTO, CA 95814 • 916.974.9270 • PUBLICPOLICYGROUP.COM PAGE 7 Advanced Clean Fleets
The budget also includes an additional $1.7 million ongoing Air Pollution Control Fund and 10 positions to implement the state and local government elements of the Advanced Clean Fleets regulation.
Delta Levees Program Mitigation: The Governor’s budget proposes $14 million one -time GF for the Delta Levees Program. Funding will support the mitigation required for implementing levee safety projects in the Delta.
California State Parks Library Pass Program: The budget proposes $6.8 million to support the State Parks Library Pass program. Library card holders can borrow a pass from their local library to access select state parks, beaches and monuments for free under this program.
Energy and Transportation: Meeting the State’s Climate Goals While Addressing Affordability The Governor’s budget continues to encourage a diverse portfolio of existing and emerging clean energy technologies and projects in the State while meeting the State’s climate goals and supporting customer bill affordability. The budget proposes several significant investments, including:
• Public Financing of Clean Energy Transmission Projects: $322 million (climate bond funding) to the California Infrastructure Economic Development Bank (IBank) to support the California Transmission Accelerator Revolving Fund established under SB 254 (Statutes of 2025). • Ongoing Petroleum Market Oversight and Analysis: $1.9 million to support the state’s transition away from petroleum-based fuels while protecting Californians from gasoline price spikes.
• Energy Modernization and Affordability: $5.7 million to support new workload related to utility wildfire mitigation plan review, oversight of transmission development and financing mechanisms.
• Supporting Affordability through Expanded Power Markets (AB 825): $1.9 million and 8 new positions to support oversight of voluntary participation in expanded regional power markets to ensure compliance with statutory requirements and ensure the markets lower energy costs for California customers, support grid reliability and resilience during extreme events. • Data Centers: $668,000 and 3 staff positions to assess and report on the ratepayer impacts of large new electricity loads, including data centers.
Transportation includes transportation infrastructure, transit, road safety projects, and clean energy technologies such as zero -emission vehicles. The 2026 -27 budget proposes the following adjustments to transportation funding:
California Highway Patrol
• $6.9 million is proposed as a one -time augmentation from the Motor Vehicle Account to continue providing protection and security at the State Capitol swing space building.
Department of Motor Vehicles
• $94.1 million Motor Vehicle Account to continue a multi -year technology modernization effort to ensure continuity of operations.
• $56 million from the Motor Vehicle Account to continue implementation of the S2S (State-to- State) Program in compliance with the federal REAL ID Act of 2005.
1127 11TH STREET, SUITE 300, SACRAMENTO, CA 95814 • 916.974.9270 • PUBLICPOLICYGROUP.COM PAGE 8 • $9.8 million from the Motor Vehicle Account to enter into a lease for the San Francisco Field Office while the current state-owned field office is closed and redeveloped for housing.
Motor Vehicle Account
• The 2025 budget Act authorized a total transfer of $166 million ($81 million from the GGRF and $85 million from the APCF) to offset CARB expenditures and support the MVA’s solvency.
The Governor’s budget projects the MVA will be solvent in 2025-26 and 2026-27 even without the transfer, and it proposes canceling this transfer in favor of affordable housing and Sustainable Communities Program investments.
High Speed Rail Authority
• The budget incorporates the new statutory allocations of Cap-and-Invest auction proceeds, with $1 billion annually allocated to the Authority through 2045.
Zero-Emissions Vehicles
• $200 million one-time special funds and statutory language is proposed to establish a new light-duty ZEV incentive program. This funding includes $166 million ($81 million GGRF and $85 million Air Pollution Control Fund) that was included in the 2025 budget as a transfer to the Motor Vehicle Account (MVA) to offset CARB expenditures and support the MVA's solvency.
CPPG Note: The Governor’s proposed budget maintains the transportation package authorized in the 2025 Budget Act, which provides annual funding for discretionary programs including the Active Transportation Program (ATP) and the Transit and Intercity Rail Capacity Program (TIRCP).
Public Safety: Preventing Violence and Drug Tracking
CalVIP
• The budget includes $56.4 million Gun Violence and Prevention and School Safety Fund in 2025-26 and $51.9 million in 2026-27 for CalVIP, which is supported by excise taxes applied to firearms and ammunition sales.
Drug Interdiction Continuation
• The budget includes $30 million General Fund ($15 million in 2026 -27 and $15 million in 2027-28) to further expand the Military Department’s existing drug interdiction efforts to “prevent drug trafficking by transnational criminal organizations throughout the state, with a particular focus on assisting federal, state, local, and tribal law enforcement agencies in combating fentanyl.”
Cannabis Enforcement
• $7.6 million in 2026 -27, and $6 million, ongoing to the Department of Cannabis Control (DCC) to support a dedicated sworn officer presence in Northern California to strengthen enforcement efforts against the illegal cannabis market, and to meet the DCC’s growing legal workload related to licensing, compliance, legislation, and public records.
1127 11TH STREET, SUITE 300, SACRAMENTO, CA 95814 • 916.974.9270 • PUBLICPOLICYGROUP.COM PAGE 9 Miscellaneous
Civil Rights Department
• The 2025 budget included $6 million one-time General Fund support to establish the Bureau for Descendants of American Slaves. The 26 -27 budget includes permanent position authority, $991,000 General Fund in 2028 -29, and $2 million in 2029 -30 and ongoing to maintain funding at existing operational levels.
• The budget includes $900,000 in 2026 -27, $1.8 million in 2027 -28 through 2029 -30, and $900,000 in 2030-31 for the Commission on the State of Hate.
TIMING AND NEXT STEPS
• January/February: Budget committees and subcommittees in each legislative chamber will begin meeting to review and debate specific items within their respective policy areas. Each house will then advance its own version of the state budget, paving the way for final negotiations with the Governor.
• Mid-May: In mid-May, the Governor will issue an updated fiscal forecast—known as the “May Revise”—which may include revisions to the figures cited above. • June 15: To meet the constitutional deadline, the Legislature must approve a balanced budget package—including the main budget bill—and send it to the Governor by June 15. • Budget Deal: Before Democrats held supermajorities in both houses, the Assembly and Senate typically convened a budget conference committee to reconcile differences between their spending plans. Today, it is more common for the Administration and legislative leadership to negotiate an agreement privately.
• June 30: The Governor has until June 30 to sign the balanced budget package and accompanying budget bills and may exercise line -item veto authority over specific appropriations. The new fiscal year begins on July 1. In practice, the Governor typically signs the main budget bill around June 27—the first of the budget acts signed each year—because most legislation must be signed or vetoed within 12 days of passage during the bulk of the legislative session, or it automatically becomes law.
• July/August: After the final budget is adopted, the Legislature and the Administration may pass several “budget trailer bills,” which amend the primary budget as part of continued negotiations.
Related Documents
• A copy of the Governor’s budget proposal here.
• A link to the Governor’s State of the State address here. • A link to Friday’s presentation of the budget by Joe Stephenshaw, Director of Finance: here. • A link to the November Fiscal Outlook by Legislative Analyst’s Office, which estimated an $18 billion deficit, and ongoing budget deficits of $35 billion: here. • A link to the LAO’s response to the Governor’s proposal: here. ###