1127 11TH STREET, SUITE 300, SACRAMENTO, CA 95814 • 916.974.9270 • PUBLICPOLICYGROUP.COM PAGE 1 Date: May 18, 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 Revised Budget for Fiscal Year 2026-27
OVERVIEW
Background
The following provides a topline summary of Governor Gavin Newsom ’s revised state Budget proposal for fiscal year 2026-27 (FY 26-27), with an emphasis on issues and programs of particular interest to the City of Bakersfield. In addition to the summary below, you will also see occasional line items that have a “CPPG Note.” These notes highlight specific Budget items identified through both our internal “Deep Dive” review process and ongoing discussions with agency staff. The notes are intended to identify potential fiscal or policy opportunities for the City of Bakersfield that may align with the Administration’s proposal. If you have questions regarding other Budget areas or line items not specifically discussed below, please feel free to contact our team for additional information or further analysis. An overview of Budget areas that directly impact local agencies begins here.
The Governor’s Budget can be found here.
May Revision by the Numbers
• $349.4 billion total Budget (~8.0% increase in total state spending compared with FY 25-26) o $246.6 billion General Fund
o $95.5 billion in special funds
o $7.3 billion in bond funds
• $29.9 billion in total reserves
o $4.5 billion in the Special Fund for Economic Uncertainties o $10.3 billion in the Public School System Stabilization Account o $15.1 billion in the Budget Stabilization Account
Budget Summary
In a press release on May 14, Governor Newsom announced that the revised Budget includes a $1.8 billion reduction in General Fund spending and projects a balanced Budget with no deficit in the current fiscal year or the next fiscal year. It also projects no structural deficit through July 2028. The press release further stated that, “The revised Budget does not propose significant new ongoing General Fund spending commitments. Instead, the Governor’s plan prioritizes fiscal restraint, long- term sustainability, and protecting the state against future economic volatility.”
1127 11TH STREET, SUITE 300, SACRAMENTO, CA 95814 • 916.974.9270 • PUBLICPOLICYGROUP.COM PAGE 2 Governor Newsom ’s presentation of his final May Revise focused heavily on framing a narrative, seemingly geared for a national audience, highlighting the accomplishments of his Administration and urging California’s critics to “update their talking points.”
“California dominates !” he proclaimed, touting examples of how the state leads in Fortune 500 companies, research and development, agriculture, manufacturing, new business creation and other fields, while contrasting this against other states and nations. Sharp criticisms were levied by the Governor against President Trump and his Administration.
When focusing on the details of his proposed May Revise, the Governor announced that revenue projections increased $16.5 billion over January’s estimates. Instead of proposing new spending, he is seeking approval of a two -year balanced Budget, that he maintains would reduce the state ’s structural deficit (estimated by the Legislative analyst to range between $20 -$30 billion) to zero by July of 2028, with additional out-year structural deficits cut in half.
In order to accomplish this the Governor is proposing to:
• Set aside $9.74 billion in a state surplus holding account to use for the FY 2027-28 Budget. • Approve three separate tax increases:
o Renewing the Managed Care Organization Tax, yielding between $2.3 and $1.7 billion annually
o Establishing a cap on corporate tax credits of $5 million, or 50 percent of tax liability, yielding $1.7 billion annually when fully implemented.
o Expanding the sales tax to apply to (non -streaming) digital prewritten software purchases. This proposal would yield $900 million annually for the state, and $1.1 billion for local governments when fully implemented.
• Reduce state costs of Medi-Cal by:
o Increasing the monthly premium for adults with unsatisfactory immigration status from $30 to $50, which will yield $427 million in state savings in FY 2027 -28, and reduced amounts in out years.
o Reinstating prior Medi -Cal asset tests for senior and disabled recipients , yielding nearly $500 million annually in savings.
However, significant new funding for housing and homelessness programs remains limited. There are no new funding proposals, nor did the Governor mention the potential of an affordable housing bond. Aside for a $100 million proposal to assist LA fire victims rebuild their homes, t he Governor focused on the familiar theme of local governments. On housing, he proposes to exempt state funded affordable housing projects from paying local impact fees, which he says will save about $10,000 per unit. On homelessness, he wants local governments to have HCD ’ Prohousing designations and offer matching funds to be eligible for state allocations. As in past years, the effort to boost affordable housing and homeless funding will need to come from legislators negotiating amendments to the Governor’s Budget.
AREAS OF INTEREST TO LOCAL GOVERNMENT
CPPG has identified several items in the Budget revision that may be of interest to the Client. As Budget negotiations continue, we will closely monitor developments and provide updates regarding potential funding opportunities, policy changes, and any proposed restrictions that could affect the Client.
1127 11TH STREET, SUITE 300, SACRAMENTO, CA 95814 • 916.974.9270 • PUBLICPOLICYGROUP.COM PAGE 3
• Sales Tax Expansion to Digital Software
• Housing and Homelessness
• Natural Resources and Environment
• Economic Development
• Transportation
• Public Safety
• General Government
Sales Tax Expansion to Digital Software
It is not often that a Governor ’s May Revise includes a proposal that would boost local government discretionary revenues by $1.1 billion annually. Unlike the income tax or other state revenue sources, a proposed expansion of the applicability of the sales tax also benefits local governments.
In his press conference, the Governor stated that the proposal to expand the sales tax to downloads of prewritten digital software (non-streaming) also includes Software as Service (SaaS). The Governor stated the proposal promotes equity between the way that brick and mortar vs online purchases are treated, mirrors the practices of 35 other states, and mostly applies to business-to- business transactions.
Housing and Homelessness
In his presentation of the Budget, the Governor emphasized that the state has made significant progress towards meeting its housing goals with the help of local governments across the state, but that considerable work still must be done to solve the housing crisis. While several new investments are proposed, the Budget does not include significant new ongoing expenditures.
Specifically, the May Revision proposes the following:
• Prohibit Application & Encourage Waivers of Local Fees:
o Prohibit local impact fee imposition on state-funded projects: As a condition of receiving state funding, local governments serving as lead - or co-applicants would be prohibited from imposing development impact fees on projects receiving state funding. o Encourage local fee waivers by allowing development fee waivers granted by local governments to count as a “local contribution” in state affordable housing programs.
CPPG Note: The document is explicit that this does not require local jurisdictions to change their underlying fee structures overall; it applies only when a local government is a participant in a state -funded program. The stated goal is to “direct state investments toward building affordable housing rather than offsetting locally imposed costs.” The draft language of this Budget trailer bill can be viewed HERE. • Improve State Agency Coordination: In furtherance of the Governor ’s goal to improve coordination between state housing agencies, the May Revision proposes transferring positions, including communications capacity for the California Housing and Homeless Agency (CHHA), information technology and administrative support for the Department of Housing and Community Development, leadership for the Housing Development and Finance Committee.
• Assist Disaster Recovery: To expedite rebuilding in the wake of emergency declarations, the Governor proposes the creation of a $100 million Disaster Rebuilding Fund to expand access
1127 11TH STREET, SUITE 300, SACRAMENTO, CA 95814 • 916.974.9270 • PUBLICPOLICYGROUP.COM PAGE 4 to construction and renovation financing for disaster -impacted homeowners. This investment will be used to reduce borrowing costs and facilitate access to private financing through a combination of a loan loss guarantee program and an interest rate buydown program, facilitated by philanthropic contributions, non -profits, and lenders who have committed to participate in the fund.
• Maintain Existing HHAP Funding: The Governor ’s proposal maintains the allocation of $1 billion for Round 6 to the Homelessness Housing, Assistance and Prevention (HHAP) funding, and up to $500 million for Round 7 contingent upon enhanced accountability and performance requirements. The Governor announced that future eligibility for HHAP funding will be conditioned upon housing element compliance, encampment management, Prohousing policy adoption, and matching local funds (which could be satisfied by granting fee waivers under the proposed policy).
CPPG Note: The City would need to obtain a Prohousing designation in order to receiving HHAP funds.
• State Highway Cleanup : The Governor is proposing to continue efforts to clean up encampments along state highways with an addition al $40 million allocated to the Clean California program, and $6.2 million for a two -year to sustain efforts addressing homelessness and encampments on the state highway right-of-way.
CPPG Note: The Clean California Program has been a key source of competitive grant funding for local agencies.
• Infill Infrastructure: $7 million is proposed to be reappropriated to the Infill Infrastructure Grant Program.
Natural Resources and Environment
In the area of natural resources and environment, the May Revision proposes several allocations:
• State Parks:
o $125 million to purchase the 161 -acre Golden Gate Fields property , so it can be converted to a park.
• Recycling: Allocates the following from the Beverage Container Recycling Fund:
o $100 million to the Beverage Container Quality Infrastructure Grant Program to upgrade sorting and processing infrastructure and produce cleaner, higher -quality material streams.
o $50 million to the Rural Recycling Incentive Payments Program to support locally driven solutions that increase participation in underserved areas and promote equitable access to California Redemption Value refunds. • CalEPA: Shifts $9.6 million of various ongoing General Fund appropriations for boards, departments, and offices within the California Environmental Protection Agency to alternative fund sources. These shifts will include emergency response for the Department of Toxic Substances Control, operational costs for the Office of the Secretary for Environmental Protection, and administrative activities at the California Air Resources Board.
Economic Development
The economic development proposals in the Governor ’s January Budget continue, including the proposed five-year extension of the Cal-Competes program. The May Revise builds upon those with several additional proposals that promote economic opportunities:
1127 11TH STREET, SUITE 300, SACRAMENTO, CA 95814 • 916.974.9270 • PUBLICPOLICYGROUP.COM PAGE 5 • Reducing Cost of Establishing a New Business: The Governor proposes to bolster new business formation by cutting in half the state tax that new businesses (limited liability companies, limited partnerships, and limited liability partnerships) formed in 2027, 2028, or 2029 must pay in their first year in operation from $800 to $400. • Remanufacturing of Recycled Products: $75 million from the Beverage Container Recycling Fund is proposed to be allocated over three years to expand in -state remanufacturing for recycling products.
Transportation
In the area of transportation, the May Revision proposes the following allocations:
• Incorporating GenAI : $16.4 million is allocated from the State Highway Account to fund engagement, governance, and implementation of innovative GenAI solutions to enhance safety for vulnerable roadway users and to gain traffic mobility insights on the state highway system.
Public Safety
In the area of public safety, the May Revision includes the following:
• Department of Corrections and Rehabilitation: The May Revise reports total funding allocated to CDCR will be approximately $14.6 billion. The state prison population, which is getting increasingly older, is estimated at 87,611 in FY 2026 -27, and projected to decline to 85,210 by 2030. Prop. 36 is expected to contribute 1,547 to this population upon full implementation. The May Revise proposes numerous additional expenditures for CDCR ranging from increased compensation for incarcerated firefighter pay, food costs, medical, staffing and other expenses.
• Board of State and Community Corrections:
o Combatting Human Trafficking: $10 million is allocated to the BSCC to administer a competitive Vertical Prosecution grant program aimed at preventing human trafficking.
• Emergency Response:
o Unified 911 System: $141.9 million is allocated to the State Emergency Telephone Number Account to continue the NG 9 -1-1 deployment and transition the architecture from a regional model to a unified statewide system model. • Nonprofit Security: $40 million is allocated to support physical security enhancements to nonprofit organizations that have historically been targets of hate-motivated violence. • Crime Victim Assistance: $25 million is proposed to offset decreasing federal funding supporting a variety of services for victims of crime.
• Legal Services: $10.8 million is proposed to be allocated ongoing to the Legal Services Revolving Fund to maintain current service levels and address increased demand for legal services from client agencies.
• Organized Retail Crime: $2.2 million one-time General Fund is allocated to the Department of Justice to resolve 27 organized retail criminal enterprise existing cases stemming from the original funding provided in 2022-23.
General Government
In the area of general government, the May Revision includes:
1127 11TH STREET, SUITE 300, SACRAMENTO, CA 95814 • 916.974.9270 • PUBLICPOLICYGROUP.COM PAGE 6 • Supporting Media Engagement: $10 million is proposed to be allocated annually to the California Civic Media Program, a public -private partnership, to support the work of California’s newsrooms, increase access to information, and strengthen community engagement statewide.
• Cannabis Allocations:
o Dispersing Cannabis Revenue: $414.1 million is estimated to be available for cannabis fund allocations in 2026-27 as follows:
▪ Education, prevention, and treatment of youth substance use disorders and school retention—60 percent ($248.5 million)
▪ Clean-up, remediation, and enforcement of environmental impacts created by illegal cannabis cultivation—20 percent ($82.8 million) ▪ Public safety-related activities—20 percent ($82.8 million) o Industrial Hemp: $8.4 million General Fund is proposed to offset lower than expected fee revenues in recent years for the implementation of the Industrial Hemp Program.
THE LEGISLATIVE ANALYST’S OFFICE WEIGHS IN
On May 18, the LAO released its initial report of the Governor’s revised Budget proposal. The report indicates that the state’s current fiscal condition is highly unusual. Despite strong revenue growth, the budget remains overextended due to a structurally higher spending baseline, reduced reserves, a significant accumulation of debt, and an ongoing operating deficit. At the same time, the state may face future revenue volatility, as its revenue outlook is increasingly dependent on AI-driven equity valuations that are approaching levels last seen during the height of the dot-com bubble.
Recent LAO Budget Update
The LAO’s most recent Budget update finds that California’s General Fund spending has grown by more than $100 billion since 2019-20, rising from $146 billion to a proposed $248 billion in 2026-27.
Spending increased by approximately 70 percent over this period while revenues grew by only 60 percent, producing structural deficits the LAO estimates at $20 billion to $30 billion annually. About 70 percent of the spending growth went to maintaining existing services, driven largely by rising costs in Medi-Cal, Developmental Services, IHSS, K-14 education, and child care.
The LAO further notes that health and human services commitments have expanded faster than revenues can sustain, and that constitutional requirements under Propositions 98 and 2 dedicate roughly half of any new revenue to specific purposes. As a result, closing a $20 -$30 billion gap through new taxes alone would require raising $30 -$60 bill ion, making substantial spending reductions likely unavoidable.
Cap-and-Invest
On May 6, the LAO released a report analyzing CARB’s proposed amendments to California ’s cap- and-invest program and their potential impact on Greenhouse Gas Reduction Fund (GGRF) revenues. Under SB 840 (2025), GGRF revenues flow through a four -tier structure where Tier 3 programs, including affordable housing, transit, wildfire resilience, and clean drinking water, receive funding only after higher tiers are satisfied. These programs have been critical funding sources for local agencies, with combined commitments of nearly $2 billion annually.
CARB’s April 2026 proposal would increase free industry allowances and create a new Manufacturing Decarbonization Incentive program, adding up to 118 million allowances above the
1127 11TH STREET, SUITE 300, SACRAMENTO, CA 95814 • 916.974.9270 • PUBLICPOLICYGROUP.COM PAGE 7 existing cap. The LAO projects this would cut auction revenues to roughly $2 billion annually, about half of recent levels, leaving Tier 3 programs with little or no funding after Tier 2 obligations are met.
TIMING AND NEXT STEPS
• Budget Negotiations: Before Democrats gained supermajorities in both houses, the Assembly and Senate typically convened a Budget conference committee to reconcile differences between their spending plans. In recent years, however, Budget agreements have more commonly been negotiated privately between the Administration and legislative leadership.
• June 15 Deadline: The Legislature must pass and send a Budget bill to the Governor by June 15 in order to comply with the constitutional deadline. • June 25 Deadline: This is the deadline for the Legislature to place items on the November ballot.
CPPG Note: This is a significant date in the effort to reform the real property transfer tax (also known as the documentary transfer tax), as a legislative compromise—likely through the budget process—may be reached. If no agreement is made, the measure will remain on the November ballot.
• June 30 Fiscal Deadline and Federal Uncertainty: The Governor must sign the Budget before July 1, the start of the new fiscal year, and retains authority to line -item veto specific appropriations. Numerous budget trailer bills move alongside the main Budget bill, with others advancing before summer recess or by end of session. Notably, the May Revision does not account for potential federal budget or policy changes that could significantly affect health, welfare, and other state-funded programs. If federal actions materially impact state finances, the Legislature may need to revisit and revise the Budget later in the year through the trailer bill process.