Table of Contents
- Why We Focus on the State Budget
- Key Takeaways
- Key Facts About California’s State Budget
- The Constitutional Framework
- What do the Governor and the Legislature Do?
- What Happens When?
- State Budget Resources
Why We Focus on the State Budget
Every year, California’s governor and Legislature adopt a state budget that provides a framework and funding for critical public services and systems — from child care and health care to housing and transportation to colleges and K-12 schools.
But the state budget is about more than dollars and cents. The budget expresses our values as well as our priorities for Californians and as a state. At its best, the budget should reflect our collective efforts to expand economic opportunities, promote well-being, and improve the lives of Californians who are denied the chance to share in our state’s wealth and who deserve the dignity and support to lead thriving lives.
State budget choices have an impact on all Californians. These decisions affect the quality of our schools and health care, the cost of a college education, families’ access to affordable child care and housing, the availability of services and financial support to help older adults age in place, and so much more.
Because the state budget touches so many services and our everyday lives, it is critical for Californians to understand and participate in the annual budget process to ensure that state leaders are making the strategic choices needed to allow every Californian — from different races, backgrounds, and places — to thrive and share in our state’s economic and social life.
This report sheds light on the state budget and the budget process with the goal of giving Californians the tools they need to effectively engage decision makers and advocate for fair and just policy choices.
Key Takeaways
The Bottom Line
- The state spending plan is about more than dollars and cents.
- Crafting the budget provides an opportunity for Californians to express our values and priorities as a state.
- The state Constitution establishes the rules of the budget process.
- Among other things, these rules allow lawmakers to approve spending with a simple majority vote, but require a two-thirds vote to increase taxes. Voters periodically revise the budget process by approving constitutional amendments.
- The governor has the lead role in the budget process.
- Proposing a state budget for the upcoming fiscal year gives the governor the first word in each year’s budget deliberations.
- The May Revision gives the governor another opportunity to set the budget and policy agenda for the state.
- Veto power generally gives the governor the last word.
- The Legislature reviews and revises the governor’s proposals.
- Lawmakers can alter the governor’s proposals and advance their own initiatives as they craft their version of the budget prior to negotiating an agreement with the governor.
- Budget decisions are made throughout the year.
- The public has various opportunities for input during the budget process.
- This includes writing letters of support or opposition, testifying at legislative hearings, and meeting with officials from the governor’s administration as well as with legislators and members of their staff.
- In short, Californians have ample opportunity to stay engaged and involved in the budget process year-round.
Key Facts About California’s State Budget
The State Budget = State Funds + Federal Funds
Three Kinds of State Funds
Three kinds of state funds account for over two-thirds (68.4%) of California’s $454.7 billion budget for 2023-24, the fiscal year that began on July 1, 2023. Specifically:
- General Fund — The state General Fund accounts for revenues that are not designated for a specific purpose. Most state support for education, health and human services, and state prisons comes from the General Fund.
- Special Funds — Over 500 state special funds account for taxes, fees, and licenses that are designated for a specific purpose.
- Bond Funds — State bond funds account for the receipt and disbursem*nt of general obligation (GO) bond proceeds.
Federal funds comprise the rest (31.6%) of the state’s 2023-24 budget.
The State Budget is a Local Budget
Dollars spent through the state budget go to individuals, communities, and institutions across California. Under the enacted 2023-24 state budget:
- More than three-quarters of total spending (78.7%) flows as “local assistance” to K-12 public schools, community colleges, families enrolled in the CalWORKs welfare-to-work program, and other essential state services and systems that are operated locally.
- Nearly one-fifth of total spending (19.6%) goes to 23 California State University campuses, 10 University of California campuses, over 30 state prisons, and other recipients of “state operations” dollars.
- Less than 2% of total spending flows as “capital outlay” dollars, supporting infrastructure projects across California. (Local assistance and state operations dollars also fund infrastructure.)
State Funds Primarily Support Health and Human Services or Education
Under the enacted 2023-24 state budget:
- 7 in 10 General Fund and special fund dollars support three categories of spending: health and human services (37.2%), K-12 education (25.4%), and higher education (7.4%).
- 6% of General Fund and special fund dollars support corrections, primarily the state prison system.
- The balance of these dollars supports other essential services (such as transportation and environmental protection) and institutions (such as the state’s court system).
Federal Funds Primarily Support Health and Human Services
Under the enacted 2023-24 state budget:
- Three-quarters of federal dollars (74.6%) support health and human services programs.
- 6% of federal dollars go to transportation programs.
- The balance of federal dollars supports other essential services, including labor and workforce development, K-12 education, and higher education.
The State Budget is a Different Kind of Bill
Bills change state law, such as by creating programs, modifying eligibility for services, or raising or lowering taxes.
- Most legislation moves through the Legislature’s policy bill process, which includes review by policy and appropriations committees.
The state budget is a bill. But unlike other bills, the “budget bill”:
- Provides authority to spend money across an array of public services and systems for a single year.
- Moves through the Legislature’s budget committees on its own timeline.
- Moves with other bills that are needed to implement the policies assumed in the budget. These bills are known as “trailer bills.”
Terms & Definitions
- Budget Act
- Budget Bill Jr.
- Budget-Related Bills (“Trailer Bills”)
- Department of Finance (DOF)
- Governor’s Budget Summary
- Governor’s Proposed Budget
- Legislative Analyst’s Office (LAO)
- Line-Item Veto
- May Revision
Assembly Budget Committee and Senate Budget & Fiscal Review Committee
Review the governor’s budget proposals and develop each house’s version of the state budget. Most budget committee work is done through subcommittees that focus on specific policy areas.
Budget Act
The initial budget bill passed by the Legislature and signed into law by the governor, after any line-item vetoes. The Budget Act can be referred to by the year in which it becomes law (“Budget Act of 2023”) or by the fiscal year to which it applies (“2023-24 Budget Act”).
Budget Bill Jr.
The informal term to describe any budget bill that amends the Budget Act. Budget Bill Jrs. may be numbered sequentially using Roman numerals (e.g., Budget Bill Jr. I, Budget Bill Jr. II, etc.).
Budget-Related Bills (“Trailer Bills”)
Generally make changes to state law related to the Budget Act. These bills are formally known as “bills … related to the budget bill,” but are more commonly called “trailer bills.” Trailer bills are listed in the Budget Act and move through the Assembly and Senate budget committees. Trailer bills are organized by issue area, such as “health,” “housing,” “higher education,” and “public safety.”
From time to time, bills that move independently of the Budget Act — and therefore are not trailer bills — may be considered part of the overall state budget framework. This could include, for example, legislation to increase taxes or to place constitutional amendments before the voters.
Department of Finance (DOF)
Leads the development of the governor’s budget proposals, prepares the governor’s budget documents, testifies on behalf of the governor at legislative budget hearings, develops the governor’s economic forecasts, and performs several other functions. The DOF’s director is the governor’s chief fiscal adviser.
Governor’s Budget Summary
Provides the governor’s economic and revenue outlook, highlights major policy initiatives in the governor’s proposed budget, and summarizes proposed state expenditures. The budget summary is released on or before January 10.
Governor’s Proposed Budget
Provides a detailed overview of the governor’s proposed expenditures for the upcoming fiscal year, estimated expenditures for the current fiscal year, and actual expenditures for the prior fiscal year. The proposed budget is released on or before January 10.
Legislative Analyst’s Office (LAO)
An independent, nonpartisan office that conducts research and analysis on state budget issues, analyzes statewide ballot measures, and provides fiscal and policy advice to the Legislature. The LAO is overseen by the Legislature’s bipartisan Joint Legislative Budget Committee.
Line-Item Veto
The governor’s power to reduce or eliminate specific items of appropriation while approving other portions of a bill. This power applies to any bill that contains an appropriation, including budget bills and budget-related bills. The Legislature may override a line-item veto with a two-thirds vote of each house.
May Revision
Released on or before May 14, the May Revision updates the governor’s economic and revenue outlook; adjusts the governor’s proposed expenditures to reflect revised estimates and assumptions; revises, supplements, or withdraws policy initiatives that were included in the governor’s proposed budget in January; and outlines adjustments to the Proposition 98 minimum funding guarantee for K-14 education.
The Constitutional Framework
The State Constitution Establishes the Rules of the Budget Process
The governor and legislators craft the state’s annual spending plan according to rules outlined in the state Constitution.
California voters periodically revise these rules by approving constitutional amendments that appear on the statewide ballot.
- Proposals to amend the state Constitution can be placed on the ballot through a citizens’ initiative or by the Legislature.
- A constitutional amendment takes effect if approved by a simple majority of voters.
Three Key Budget Deadlines
Two in the State Constitution (January 10 and June 15), One in State Law (May 14)
The governor must propose a budget for the upcoming fiscal year on or before January 10. The budget must be balanced: Estimated revenues (as determined by the governor) must meet or exceed the governor’s proposed spending.
The governor must release the May Revision on or before May 14.
The Legislature must pass a budget bill for the upcoming fiscal year by midnight on June 15. The budget bill must be balanced: Estimated General Fund revenues (as set Ωforth in the budget bill passed by the Legislature) must meet or exceed General Fund spending.
Proposition 25: Simple Majority Vote for Budget Bills and Trailer Bills
The budget package generally may be passed by a simple majority vote of each house of the Legislature.
- Prop. 25 of 2010 allows lawmakers to pass, by a simple majority vote, budget bills as well as trailer bills that may take effect as soon as the governor signs them.
- Under the rules of Prop. 25, trailer bills must (1) be listed in the budget bill and (2) contain an appropriation of any amount.
- Even with Prop. 25, some types of trailer bills that could be included in a budget package will require a supermajority — generally two-thirds — vote of each house. This includes, for example, bills that would raise taxes or amend a state law that was approved by voters via a ballot initiative. However, most trailer bills in the budget package will need only a simple majority vote to pass.
Proposition 25: Penalties for a Late Budget
Lawmakers face penalties if they fail to pass the budget bill on or before June 15.
- Prop. 25 requires lawmakers to permanently forfeit both their pay and their reimbursem*nt for travel and living expenses for each day after June 15 that the budget bill is not passed and sent to the governor.
- These penalties do not apply to budget-related bills, which do not have to be passed on or before June 15.
Proposition 26: Supermajority Vote for Tax Increases
Any tax increase requires a two-thirds vote of each house of the Legislature.
- Under the state Constitution, “any change in state statute which results in any taxpayer paying a higher tax” requires a two-thirds vote of each house.
- This standard was imposed by Prop. 26 of 2010. This measure expanded the definition of a tax increase and thus the scope of the two-thirds vote requirement, which was originally imposed by Prop. 13 of 1978.
- Prior to Prop. 26, only bills changing state taxes “for the purpose of increasing revenues” required a two-thirds vote. Bills that increased some taxes but reduced others by an equal or larger amount could be passed by a simple majority vote of each house.
Proposition 26: Supermajority Vote for Tax Increases
Prop. 26 of 2010 also expanded the definition of a tax to include some fees.
- Prior to Prop. 26, lawmakers could create or increase fees by a simple majority vote. These majority-vote fees included regulatory fees intended to address health, environmental, or other problems caused by various products, such as alcohol, oil, or hazardous materials.
- Prop. 26 reclassified regulatory and certain other fees as taxes. As a result, a two-thirds vote of each house of the Legislature is now required for many charges that previously were considered fees and could be passed by a simple majority vote.
Additional Supermajority Vote Requirements
The state Constitution requires a two-thirds vote of each house of the Legislature in
order to:
- Appropriate money from the General Fund, except for appropriations that are for public schools or that are included in the budget bill or in trailer bills.
- Pass bills that take effect immediately (urgency statutes), except for the budget bill and trailer bills.
- Place constitutional amendments or general obligation bond measures before the voters.
- Override the governor’s veto of a bill or an item of appropriation.
A Bill Must Be Published for at Least 72 Hours Before the Legislature Can Act On It
Proposition 54 of 2016 requires bills to be distributed to legislators and published on the Internet, in their final form, at least 72 hours before being passed by the Legislature.
This rule applies to all bills, including the budget bill and other legislation included in the budget package.
This mandatory review period can be waived for a bill if:
- The governor declares an emergency in response to a disaster or extreme peril, and
- Two-thirds of legislators in the house considering the bill vote to waive the review period.
Proposition 98: A Funding Guarantee for K-12 Schools and Community Colleges
Prop. 98 of 1988 guarantees a minimum annual level of funding for K-14 education.
- The amount of the guarantee is calculated each year based on one of three tests that apply under varying fiscal and economic conditions. Two of these tests include adjustments for changes in statewide K-12 attendance. Prop. 98 funding comes from the state General Fund and local property tax revenues.
- The Legislature can suspend the guarantee for a single year by a two-thirds vote of each house and provide less funding. Following a suspension, the state must increase Prop. 98 funding over time to the level that it would have reached absent the suspension.
- While the Legislature can provide more funding than Prop. 98 requires, the guarantee has generally served as a maximum funding level.
Proposition 2: Saving for a Rainy Day, Paying down Debt
Prop. 2 of 2014 revised the rules that apply to the Budget Stabilization Account (BSA) — the state’s constitutional rainy day fund — and also established a new requirement to pay down state budgetary debt.
- The state is required to set aside 1.5% of General Fund revenues each year, plus additional dollars in years when tax revenues from capital gains are particularly strong.
- Until 2029-30, half of the revenues go into the BSA and the other half must be used to pay down state budgetary debt, which includes unfunded pension liabilities. Starting in 2030-31, the entire annual transfer goes into the BSA.
- State policymakers may suspend or reduce the BSA deposit and withdraw funds from the reserve, but only under limited circ*mstances that qualify as a “budget emergency.”
Proposition 2: A Budget Reserve for K-12 Education
Prop. 2 of 2014 also created a state budget reserve for K-12 schools and community colleges called the Public School System Stabilization Account (PSSSA).
- Deposits come from state capital gains tax revenues in years when those revenues are particularly strong.
- However, various conditions must be met before these dollars could be transferred to the PSSSA. For example, transfers could occur only in so-called “Test 1” years under Prop. 98, which have been rare.
Proposition 55: Potential New Funding for Medi-Cal from a Tax on the Wealthiest Californians
Prop. 55 of 2016 extends, through 2030, personal income tax rate increases on very high-income Californians and establishes a formula to boost funding for Medi-Cal, which provides health care services to Californians with low incomes.
- Starting in 2018-19, General Fund revenues — including those raised by Prop. 55 — must first be used to fund (1) the annual Prop. 98 guarantee for K-12 schools and community colleges and (2) the cost of other services that were authorized as of January 1, 2016, as adjusted for population changes, federal mandates, and other factors.
- If any Prop. 55 revenues remain after meeting these required expenditures, MediCal would receive 50% of this excess, up to a maximum of $2 billion in any fiscal year.
- Prop. 55 has not yet resulted in any additional funding for Medi-Cal.
State Appropriations Limit (SAL): A Cap on Spending
Appropriations are subject to a limit established by Prop. 4 of 1979, as modified by later initiatives. This spending cap is known as the Gann Limit.
- The SAL limits the amount of state tax proceeds that can be appropriated each year. This limit is adjusted annually for changes in population and per capita personal income.
- Some appropriations from tax proceeds do not count toward the limit, including debt service and spending that is needed to comply with court or federal mandates.
- Revenues that exceed the SAL over a two-year period are divided equally between Prop. 98 spending and taxpayer rebates. The state last exceeded the SAL in 2020-21 (but did not do so in the prior year).
State Mandates: Pay for Them or Suspend Them
The state must pay for or suspend mandates that it imposes on local
governments.
- Prop. 4 of 1979 requires the state to reimburse local governments for costs related to a new program or a higher level of service that is mandated by the state.
- Prop. 1A of 2004 expanded the definition of a mandate to include the transfer of
financial responsibility from the state to local governments. - Prop. 1A also requires the state to suspend a mandate in any year in which local
governments’ costs are not fully reimbursed.
What do the Governor and the Legislature Do?
The Governor
Approves, modifies, or rejects spending proposals prepared by state departments and agencies through an internal process coordinated by the DOF.
Proposes a spending plan for the state each January, introduced as the budget bill in the Legislature.
Updates and revises the proposed budget each May (the “May Revision”).
Signs or vetoes the bills included in the budget package.
Can veto all or part of individual appropriations (line items), but cannot increase any appropriations above the level approved by the Legislature.
The Legislature
Approves, modifies, or rejects the governor’s proposals.
Can add new spending or make other changes that substantially revise the governor’s proposals.
Needs a simple majority vote of each house to pass budget bills and most trailer bills.
Needs a two-thirds vote to pass certain other bills that may be part of the budget package, such as bills that increase taxes or propose constitutional amendments.
Needs a two-thirds vote of each house to override the governor’s veto of a bill or an appropriation.
What Happens When?
The State Budget Timeline
The state budget process is cyclical. Decisions are made throughout the year.
- Summer to Fall
- By January 10
- January to Mid-May
- By May 14
- Mid-May to Early June
- By June 15
- Second half of June
- July and Beyond
Summer to Fall
State departments and agencies develop baseline budgets to maintain existing service levels in the upcoming fiscal year and may prepare “budget change proposals” intended to alter service levels. The DOF reviews these documents.
Following a series of meetings within the governor’s administration, the governor makes final decisions and the DOF prepares the proposed budget for release in January.
Independent of the governor, legislative leaders develop their budget priorities for the upcoming fiscal year.
In November, the Legislative Analyst’s Office (LAO) releases their Fiscal Outlook, which provides the LAO’s assessment of revenues, spending, and the state’s overall budget condition across several fiscal years.
By January 10
The governor releases the proposed budget for the upcoming fiscal year that begins on July 1.
January to Mid-May
A few days after the proposed budget is released: The Legislative Analyst’s Office (LAO) releases their overview and assessment of the governor’s proposals, and later publishes an updated revenue forecast.
Late January: The Assembly Budget Committee and the Senate Budget and Fiscal Review Committee convene overview hearings on the governor’s proposed budget.
Late February to early May: Budget subcommittees in each house hold dozens of hearings to review the governor’s proposals in depth.
By May 14
The governor releases a revised budget (the May Revision) for the upcoming fiscal year that begins on July 1.
Mid-May to Early June
A few days after the May Revision: The Legislative Analyst’s Office (LAO) releases their overview and assessment of the May Revision, and later publishes an updated revenue forecast and multiyear budget outlook.
The week after the May Revision: Assembly and Senate budget subcommittees convene to review the governor’s May Revision proposals.
Roughly 10 days after the May Revision: The Assembly and Senate publish summaries — “subcommittee reports” — of their versions of the budget package.
Roughly two weeks after the May Revision:
- Assembly and Senate leaders reach a deal on a unified legislative version of the budget package and publish summaries of the agreement. For many years, legislative leaders convened a conference committee composed of Democrats and Republicans to resolve differences between the two houses’ spending plans. However, a conference committee has not been convened since 2019.
- A full deal with the governor at this stage is possible, but rare. Nonetheless, the Legislature’s budget package will reflect many points of agreement with the governor based on ongoing, behind-the-scenes negotiations between the governor and legislative leaders.
Somewhat more than two weeks after the May Revision:
- The Legislature begins drafting the initial budget bill, also known as the Budget Act. Finalizing the Budget Act for floor votes can take roughly a dozen days.
By June 15
The Legislature passes the Budget Act by June 15 — the constitutional deadline — and sends it to the governor.
- If the two houses have scheduled floor votes for June 15, the Budget Act must be published on the California Legislative Information website by June 12 to meet the 72-hour bill-in-print requirement.
- If the Legislature schedules floor votes before June 15, the Budget Act must be in print prior to June 12 to comply with the 72-hour rule — for example, by June 10 for floor votes on June 13.
Trailer bills, which are also part of the state budget package, are not required to be — and rarely are — passed by June 15. Trailer bills generally make statutory changes needed to implement the policies assumed in the Budget Act.
Second half of June
The governor and legislative leaders continue negotiating in order to reach a three-party deal on the budget package for the upcoming fiscal year.
Once a deal is reached, the rest of the bills in the budget package are unveiled, consisting of multiple trailer bills along with a “Budget Bill Jr.” The Budget Bill Jr. amends the Budget Act as passed by the Legislature in order to reflect the changes required by the deal with the governor.
The Assembly and Senate publish summaries of the budget package as agreed to with the governor.
The Legislature passes the Budget Bill Jr. and trailer bills.
The governor signs the Budget Act, the Budget Bill Jr., and the trailer bills (some trailer bills might not be signed until early July).
- All bills must be signed within 12 days of being presented to the governor. However, if the 12th day is a Saturday, a Sunday, or a holiday, the period is extended to the next day that is not a Saturday, a Sunday, or a holiday.
- The governor may reduce or eliminate any item of appropriation in any bill (the “line-item veto”).
State departments and agencies focus on the next state budget by beginning to prepare the governor’s proposed budget for release by January 10. This months-long process may begin earlier in June and continues through the summer and into the fall.
July and Beyond
The new state fiscal year begins on July 1.
The governor signs any remaining trailer bills that weren’t signed in June.
The Department of Finance publishes a summary of the June budget package as signed into law by the governor. This summary may be published before the end of June.
The Legislature breaks for a one-month summer recess around July 4.
The Legislature reconvenes in early August for the final few weeks of session, which ends in August in election years and in September in non-election years.
In August, state leaders typically advance changes to the state budget package adopted in June, including at least one Budget Bill Jr. along with additional trailer bills. The changes include budget “clean-up,” such as correcting errors in the Budget Act, as well as substantive — often major — revisions to spending and policy.
The Assembly and Senate publish summaries of the budget revisions as agreed to with the governor.
The full budget committee in each house holds a single hearing on the budget revisions before sending the package to the Assembly and Senate floors for final votes.
The governor signs the budget revisions into law in September — or sometimes October in non-election years — possibly with line-item vetoes.
State Budget Resources
- Department of Finance: The governor’s budget proposals and related documents (www.dof.ca.gov).
- Legislative Analyst’s Office: Budget and policy analyses, budget recommendations, and historical budget data (www.lao.ca.gov).
- Legislative Counsel: Bills and bill analyses, a free bill-tracking service, the state codes, and the state Constitution (www.leginfo.legislature.ca.gov).
- State Assembly and Senate: Committee agendas and other publications, floor session and committee schedules, the annual legislative calendar, and live audio streaming of legislative proceedings (www.assembly.ca.gov and www.senate.ca.gov).
