California’s state budget works on a fixed annual cycle written into the state constitution: the Governor proposes a spending plan each January, the Legislature revises and passes it by June 15, and the signed Budget Act takes effect on July 1.1California Department of Finance. California’s Budget Process The 2026-27 proposal comes in at roughly $248 billion in General Fund spending, which makes it one of the largest sub-national government budgets in the world.2Legislative Analyst’s Office. The 2026-27 Budget: Overview of the Governor’s Budget Most of that money comes from three taxes, and most of it goes to schools and health care. The rest of the process is about who gets to move the numbers around, and when.
The Annual Timeline
Everything starts in January. The California Constitution requires the Governor to submit a proposed budget to the Legislature within the first ten days of the calendar year.3Justia. California Constitution Article IV Section 12 – Legislative To build that proposal, the Department of Finance forecasts state revenue and reviews spending requests from every agency. Departments that want new funding or a change to an existing program submit a Budget Change Proposal, and Finance weighs those against the Governor’s priorities and existing legal obligations before compiling the multi-volume Governor’s Budget.4California Department of Finance. Budget Details
Once the proposal is public, the nonpartisan Legislative Analyst’s Office reviews it and flags risks or alternatives. Its analyses carry weight because the LAO answers to the Legislature as a whole rather than to either party or the Governor. Legislative budget subcommittees then hold public hearings on each department, questioning agency heads and taking testimony from outside stakeholders. Members of the public can submit written testimony to the Assembly Budget Committee for the record.5California State Assembly. Welcome to Assembly Committee on Budget
By mid-spring, the revenue picture sharpens because April brings the bulk of income tax filings. The Governor uses that updated data to issue the May Revision, which adjusts the January numbers to match actual collections. A revenue surprise in either direction can reshape months of legislative work in a matter of days.1California Department of Finance. California’s Budget Process
The June 15 Deadline and How the Budget Becomes Law
The Constitution requires the Legislature to pass the budget bill by June 15.6California Department of Finance. California’s Budget Process – Section: Budget Enactment Before Proposition 25 passed in 2010, passage required a two-thirds vote in both chambers, and late budgets were routine. Proposition 25 dropped the threshold to a simple majority and added a sharp personal consequence: lawmakers permanently forfeit their salary and expense reimbursements for every day past June 15 that a budget has not been sent to the Governor. Those lost wages cannot be recovered later.7Legislative Analyst’s Office. Proposition 25: Changes Legislative Vote Requirement to Pass a Budget From Two Thirds to a Simple Majority
The main budget bill mostly does one thing. It provides spending authority across departments, with little in the way of policy language. The substantive statutory changes travel in separate bills called trailer bills, which might restructure a Medi-Cal eligibility rule, shift costs between the state and counties, or align state law with new federal requirements. Under Proposition 25, trailer bills also pass by simple majority as long as they contain at least one appropriation and are named in the Budget Act. Unlike the main budget bill, trailer bills have no June 15 deadline and often follow weeks or months later.7Legislative Analyst’s Office. Proposition 25: Changes Legislative Vote Requirement to Pass a Budget From Two Thirds to a Simple Majority
When the budget reaches the Governor’s desk, three options are on the table. Sign it, veto it, or use the line-item veto to reduce or strike specific spending items while approving the rest. Each reduction or elimination has to be explained in a statement, and the Legislature can override those line-item vetoes through the same process used for any vetoed bill.8California Legislative Information. California Constitution Article IV Section 10 Once signed, the Budget Act takes effect on July 1, the first day of the fiscal year.
Where the Money Comes From
California’s General Fund runs on what budget analysts call the Big Three: the personal income tax, the sales and use tax, and the corporation tax. The personal income tax dominates, contributing roughly 68 percent of General Fund revenue in the 2026-27 proposed budget. Insurance taxes on gross premiums and various motor vehicle fees fill in around the edges.
The reason California’s budget swings so hard from year to year is buried inside that income tax. A large share of it comes from a small number of very high earners whose income moves with financial markets. Capital gains realizations, profits from selling stocks, real estate, and other investments, can shift dramatically in a single year. Between 2020 and 2021, California capital gains surged 72 percent, then dropped 55 percent the following year. Capital gains contributed $36 billion to the General Fund in 2021 and just $14 billion two years later. The tax liability of the top one percent of taxpayers fell 40 percent in 2022 alone while the broader California economy stayed essentially flat.9California Department of Finance. Governor’s Budget Summary 2025-26 – Revenue Estimates That is why surpluses and shortfalls in Sacramento can appear almost overnight, and why the Legislature and Governor often disagree about whether a good revenue year is a new baseline or a temporary spike.
Federal funds add another large layer that never touches state tax collections. Medi-Cal, California’s Medicaid program, is budgeted at about $222.4 billion in total spending for 2026-27, with only $48.8 billion of that coming from the state’s General Fund. Federal matching funds cover the rest.10California Department of Finance. Governor’s Budget Summary 2026-27 – Health and Human Services Because federal reimbursement rates and eligibility rules are set in Washington, shifts in federal policy can open or close multi-billion-dollar gaps in California’s budget that Sacramento has limited power to control.
Where the Money Goes
K-12 and Community College Education
Proposition 98, approved by voters in 1988, sets a constitutional minimum for annual funding of K-12 schools, community colleges, and related programs. The guarantee is calculated through formulas tied to General Fund revenue and student enrollment. For 2026-27, that guarantee works out to roughly $125.5 billion, or close to 40 percent of General Fund revenues.11Legislative Analyst’s Office. The 2026-27 Budget – Proposition 98 Guarantee and K-12 Spending Plan Because the floor is constitutional, education funding is largely locked in before other spending decisions are made. The University of California and California State University systems sit outside Proposition 98 and compete for General Fund dollars alongside every other program.
Health and Human Services
Once federal matching funds are counted, health and human services is the largest category of spending. Medi-Cal covers roughly one in three Californians and pays for everything from routine doctor visits to long-term care. At $222.4 billion in combined state and federal spending, even small changes in enrollment or reimbursement rates create budget effects worth billions.10California Department of Finance. Governor’s Budget Summary 2026-27 – Health and Human Services Social services for children, seniors, and people with disabilities make up much of what remains in this category.
Corrections
The Department of Corrections and Rehabilitation is budgeted at approximately $14.6 billion for 2026-27, with the vast majority drawn from the General Fund.12California Department of Finance. 2026-27 May Revision Budget Summary That covers the state prison system, parole operations, and healthcare for incarcerated people. Spending here is shaped less by legislative preference than by court orders on prison conditions and healthcare standards, mandates that require spending regardless of the state’s fiscal situation.
Transportation
Transportation funding largely runs on its own track, outside the General Fund. The Road Repair and Accountability Act of 2017, better known as Senate Bill 1, directs fuel tax revenue to specific categories: about $1.5 billion per year for local street and road maintenance, $1.9 billion for state highway repairs, $750 million for transit operations, and hundreds of millions more for freight corridors, bicycle and pedestrian infrastructure, and congestion reduction.13California Transportation Commission. Senate Bill 1 Because these allocations are set in statute rather than negotiated annually, transportation funding is more stable than General Fund programs. It also cannot easily be redirected in a fiscal emergency.
Reserves and Spending Caps
Two constitutional rules shape what the Legislature and Governor can do with the money once it arrives.
Proposition 2, passed in 2014, created the Budget Stabilization Account, commonly called the rainy day fund. The state must transfer 1.5 percent of General Fund revenues into the account each year, plus an additional deposit when capital gains tax revenue exceeds 8 percent of total General Fund tax revenue. The account is capped at 10 percent of General Fund revenues, and any excess is directed to infrastructure. Withdrawals are limited: the Governor must first declare a budget emergency, which is defined as either a natural disaster or other condition of extreme peril, or a projected shortfall that would leave General Fund spending below the highest level of the prior three fiscal years (adjusted for population growth and cost of living). The Legislature then has to approve the withdrawal by majority vote. In the first year of an emergency, no more than half the balance can be pulled; only in a second consecutive year of emergency can the full balance be tapped.14California Secretary of State. Proposition 2 – State Budget, Budget Stabilization Account
The State Appropriations Limit, known as the Gann Limit after its original sponsor, works from the other direction. Established by Proposition 4 in 1979 and codified in Article XIII B of the state constitution, it caps how much tax revenue the state can spend in a given year.15Justia. California Constitution Article XIII B Section 8 – Government Spending Limitation The cap grows each year based on population changes and either per-capita personal income growth or the change in cost of living, whichever is lower. When tax revenues exceed the limit over a two-year period, half the excess is returned to taxpayers and half goes to K-14 education on a per-pupil basis. The 2026-27 proposed budget sits roughly $33.8 billion below the limit, so the cap is not currently binding, but during capital gains booms it can force the state to return money even as other programs go unfunded.