Table of Contents
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.
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 their staffs.
- In short, Californians have ample opportunity to stay engaged and involved in the budget process year-round.
Federal funds comprise the rest (42.4%) of the state’s 2021-22 budget.
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 half (57.6%) of California’s $455.6 billion budget for 2021-22, the fiscal year that began on July 1, 2021. 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 disbursement of general obligation (GO) bond proceeds.
Federal funds comprise the rest (42.4%) of the state’s 2021-22 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 2021-22 state budget:
- More than three-quarters of total spending flows as “local assistance” to K-12 public schools, community colleges, families enrolled in the CalWORKs welfareto-work program, and others.
- More than one-fifth of total spending goes to 23 California State University campuses, 10 University of California campuses, 35 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 2021-2022 budget:
- Nearly two-thirds of General Fund and special fund dollars support three categories of spending: health and human services (32.7%), K-12 education (25.1%), and higher education (8.3%).
- Less than 7% of General Fund and special fund dollars support corrections, primarily the state prison system.
- The balance of these dollars support 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 2021-22 state budget:
- Over half of federal dollars (53.7%) support health and human services programs.
- More than 1 in 6 federal dollars (17.9%) go to labor and workforce development, primarily to fund unemployment insurance benefits for jobless workers.
- Over 7% of federal dollars support K-12 education.
- The balance of federal dollars supports other essential services, including higher education and transportation.
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 “budget-related bills” or “trailer bills.”
Terms & Definitions
- Assembly Budget Committee and Senate Budget & Fiscal Review Committee
- 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
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)
Proposition 25: Simple Majority Vote for Budget Bill and Most Budget-Related 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, the budget bill as well as certain budget-related bills (“trailer bills”) that may take effect as soon as the governor signs them. Typically, the budget package consists entirely or primarily of such majority-vote bills.
- To qualify as a budget-related bill under Prop. 25, a bill must (1) be listed in the budget bill and (2) contain an appropriation of any amount.
- The budget package may include bills that require a two-thirds vote of each house, such as bills to raise taxes or to place constitutional amendments or general obligation bonds before the voters.
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 reimbursement 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
- Appropriate money from the General Fund, except for appropriations that are for public schools or that are included in the budget bill or in budget-related bills that meet the requirements of Prop. 25.
- Pass bills that take effect immediately (urgency statutes), except for the budget bill and Prop. 25 budget-related 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 circumstances 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 often called 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 2018-19 (but did not do so in the prior year).
State Mandates: Pay for Them or Suspend Them
The state is required to pay for or suspend mandates that it imposes on local
- 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?
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, which is 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.
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 the budget bill and Prop. 25 budget-related 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.
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).