California is cutting billions from education, Medi-Cal, climate programs, higher education, corrections, and the state workforce to close a projected shortfall of roughly $18 billion to $21 billion for the 2026-27 fiscal year. These California budget cuts are not optional: the state constitution bars the Legislature from appropriating more General Fund money than the state expects to collect, so when revenue falls short of prior spending commitments, something has to give. Where the reductions land, and how deep they go, depends on which programs have constitutional protection, which rely on federal matching dollars, and how much of the gap the state’s reserves can absorb.
Why Revenue Keeps Falling Short
California’s General Fund leans heavily on personal income tax, which brings in more than two-thirds of revenue before transfers. The top 1% of earners alone covered nearly 39% of all personal income tax collections in 2022, down from 50% the year before.1California Department of Finance. 2025-26 Governor’s Budget Summary – Revenue Estimates When stock options, capital gains, or tech IPOs have a weak year, the state loses billions almost overnight.
That volatility was amplified during the pandemic recovery. Following severe winter storms in 2022-23, federal disaster declarations pushed IRS filing deadlines for most California taxpayers all the way to November 2023.2Internal Revenue Service. For California Storm Victims, IRS Postpones Tax Filing and Tax Payment Deadlines State budget writers had already locked in spending based on optimistic surplus-era revenue assumptions. By the time the delayed returns arrived and revealed a steep drop in high-income payments, California had authorized billions more than it could collect. Later budgets have been working through the aftermath ever since. The 2024-25 budget alone had to close a $46.8 billion gap.3California State Budget. California State Budget 2024-25
The Rule That Forces the Cuts
Unlike the federal government, California cannot run an open-ended deficit. Article IV, Section 12 of the state constitution requires the Governor to submit a budget to the Legislature within the first 10 days of each calendar year, and bars lawmakers from sending back a budget bill that appropriates more from the General Fund than estimated General Fund revenue for the year.4Justia. California Constitution Article IV Section 12 – Legislative When tax collections drop, the state has three options and only three: cut spending, raise revenue, or draw down reserves.
The reserve option helps but does not solve the problem. California’s Rainy Day Fund, formally the Budget Stabilization Account created under Proposition 2, holds a projected balance of roughly $15.1 billion heading into 2026-27.5Legislative Analyst’s Office. Proposition 2 Withdrawals are capped at the amount needed for the declared budget emergency and generally cannot exceed half the fund in a single year, which leaves lawmakers to find the rest through actual cuts and fiscal maneuvers.
Where the Cuts Are Landing
K-12 Schools and Community Colleges
School funding adjusts automatically through Proposition 98, a constitutional formula that sets the minimum funding level for K-12 schools and community colleges based on General Fund revenue, per-capita personal income, and attendance.6Legislative Analyst’s Office. The 2026-27 Budget: Proposition 98 Guarantee and K-12 Spending Plan When revenue drops, the guarantee itself shrinks. Districts don’t receive a “cut” notice; the floor just moves. For 2026-27, the Proposition 98 minimum stands at roughly $125.5 billion. The 2025-26 budget directed $80.5 billion in General Fund money to TK-12 programs, supplemented by local property taxes and other sources.7California State Budget. California State Budget 2025-26 Districts that expanded staff and programs during the surplus now face the harder work of scaling back.
UC and CSU
The University of California and California State University are not shielded by Proposition 98, which makes them easier targets for deferrals. The Governor’s 2026-27 budget pushes UC’s fourth-year compact payment of $240.8 million into 2027-28, along with $31 million tied to nonresident enrollment reductions and a one-time 3% base decrease of $129.7 million. CSU faces a nearly matching package: a $252.3 million compact deferral and a $143.8 million base decrease, both shifted to 2027-28.8California Department of Finance. 2026-27 Governor’s Budget Summary – Higher Education To cover cash flow while they wait for repayment, both systems have been authorized to take out loans.
Medi-Cal and Health Services
Medi-Cal covers roughly a third of Californians, so any multi-billion-dollar shortfall almost inevitably reaches it. The 2026-27 May Revision includes $278.3 million from restoring asset limits for eligibility, $68 million from tightening utilization management for behavioral health and transportation services, $41.4 million from refining enhanced care management eligibility, and $33.7 million from capping reimbursement rates in the Program of All-Inclusive Care for the Elderly.9California Department of Finance. May Revision – California Budget 2026-27 The state also proposed eliminating the optional adult acupuncture benefit and restricting adult oral health coverage to emergency dental services. Another $70 million was reclaimed by reverting the Adult Protective Services expansion, raising the age of eligibility from 60 back to 65.
In-Home Supportive Services came through the 2025-26 cycle largely intact. The Legislature rejected proposals to eliminate benefits for undocumented adults and cap provider overtime, and IHSS received a net General Fund increase of $1.2 billion. Lawmakers did partially restore asset limits to $130,000 for individuals and $195,000 for couples to generate some savings.10Legislative Analyst’s Office. The 2025-26 California Spending Plan: Human Services The outcome is a useful reminder that the Governor proposes and the Legislature disposes; the final budget rarely matches either blueprint.
Climate Programs
Climate funding ballooned during the surplus years and has taken a proportionally large hit since. The 2024-25 budget alone put $6.7 billion in climate-related General Fund solutions on the table: $2.9 billion in outright reductions, $1.9 billion in delayed spending, and $1.8 billion shifted to the Greenhouse Gas Reduction Fund. Electric vehicle incentives, including the Clean Cars 4 All equity project and fueling infrastructure grants, absorbed $600 million in delays that cycle.11California Department of Finance. Governor’s Budget Summary 2024-25 – Climate Change
The 2025-26 budget trimmed another $898 million from prior environmental augmentations and shifted $1 billion from the Greenhouse Gas Reduction Fund to cover CalFire operations previously supported by the General Fund.12Legislative Analyst’s Office. Natural Resources and Environmental Protection On paper that is not a “cut” to climate spending, but it redirects cap-and-trade revenue away from new climate projects toward existing fire prevention. The practical result is fewer new investments in zero-emission vehicles, water infrastructure, and coastal resilience.
Prisons
Corrections offers one of the few places California is saving money by closing facilities rather than reducing services. The California Rehabilitation Center in Riverside County is scheduled to close by fall 2026, with projected annual savings of roughly $150 million in General Fund spending.13California Department of Corrections and Rehabilitation. California Rehabilitation Center to Close by Fall 2026 It follows earlier closures as the incarcerated population has fallen well below its peak. Unlike healthcare or education cuts, prison closures produce recurring savings without directly reducing services, though correctional employees and host communities feel the impact.
Trial Courts
Trial courts lost discretionary operations funding in 2024-25 as part of that year’s deficit solutions. The 2025-26 budget partially walked that back with a $42 million restoration, but funding remains constrained for a court system handling millions of cases annually.14Legislative Analyst’s Office. The 2025-26 Budget: Judicial Branch Courts have less room than most agencies to absorb reductions because caseloads are driven by constitutional rights to timely proceedings, not by discretionary policy choices.
State Workforce
The state eliminated approximately 10,000 vacant positions starting in 2025-26, saving an estimated $762.5 million in the General Fund. No current employees were laid off through that action, but those jobs are permanently gone and hiring across agencies has slowed. Some departments have added their own hiring freezes on top of the statewide vacancy cuts. The 2026-27 May Revision also proposed trimming the child care cost-of-living adjustment by 30%, bringing it to roughly 2% and directly affecting the workforce at state-funded child care centers.9California Department of Finance. May Revision – California Budget 2026-27
How the State Softens the Blow
Outright elimination of programs is rare. California relies on a familiar toolkit that trims current-year costs while keeping the option to restore spending later.
- Spending deferrals. A payment owed in the current year is pushed into the next one. The UC and CSU compact deferrals are the textbook example: the money is not canceled, just late. The catch is that deferrals create obligations down the road, and they compound if revenue does not recover.
- Trigger cuts. The budget authorizes spending with a condition attached. If revenue fails to reach a set target by a specific date, the funds are automatically withdrawn. Triggers let the state plan optimistically with a built-in failsafe, though recipients spend months not knowing whether their money will survive.
- Fund shifts. Dollars are moved from specialized accounts into the General Fund, or General Fund obligations are reassigned to other revenue sources. The $1 billion Greenhouse Gas Reduction Fund shift to CalFire is one example.12Legislative Analyst’s Office. Natural Resources and Environmental Protection
- Reserve withdrawals. The Budget Stabilization Account was designed for downturns, with withdrawal caps that prevent draining it in a single year.5Legislative Analyst’s Office. Proposition 2
- Borrowing. California issues general obligation bonds for voter-approved capital projects and can refinance existing debt at lower rates. Bonds do not close the operating deficit directly, but they free up General Fund dollars that would otherwise fund capital spending.
Every deficit-year budget uses several of these at once. The 2024-25 package combined all five to close its $46.8 billion gap.3California State Budget. California State Budget 2024-25 The risk is that deferrals and fund shifts move the problem forward rather than solving it, and a multi-year revenue slump can turn temporary measures into a permanent structural deficit.
The Federal Wild Card
California’s budget does not sit apart from federal policy. Medi-Cal depends on federal matching funds that require the state to maintain a certain level of its own spending. If federal matching rates drop or new eligibility restrictions arrive from Washington, California faces a hard choice: increase state spending to fill the gap, or cut services for millions who depend on federally supported programs.
The same dynamic runs through transportation, where federal highway and transit grants typically require a state match of 5% to 20%. Cutting the state transportation budget risks leaving federal dollars unmatched and inaccessible. SNAP administrative funding works similarly. A dollar cut from the state side can sometimes cost two dollars or more in lost federal revenue, which makes some apparent savings far more expensive than they look on paper.
When Cuts Become Final
The budget runs on a constitutional calendar. The Governor submits an initial budget by January 10, based on revenue estimates from the prior fall. By May 14, the Governor releases a May Revision incorporating actual spring tax receipts, which are typically much more informative than the January projections.15California Department of Finance. California’s Budget Process The Legislature must pass the budget bill by midnight on June 15.
The budget bill itself authorizes spending, but the legal mechanics of changing eligibility rules, revising provider rates, and restructuring programs happen through trailer bills, separate pieces of legislation that supply the statutory language for whatever the budget requires.16California Department of Finance. Trailer Bill Language If you want to understand exactly how a specific cut will work in practice, the trailer bill is where the actionable details live, not the budget act.