California Education Budget Breakdown: Proposition 98, TK, and Deficits

California’s 2026-27 education budget puts the Proposition 98 minimum funding guarantee for K-12 schools and community colleges at a record $127.1 billion, up from $125.1 billion the year before. Governor Gavin Newsom is holding back $3.9 billion of that total as a hedge against a possible reversal in the artificial intelligence–driven tax revenue that produced the surge. The Legislature passed its version on June 15, 2026, and the governor and legislative leaders announced a three-party framework agreement on June 26.

What Proposition 98 Actually Guarantees

Proposition 98, approved by voters in 1988, sets a constitutional floor for funding K-12 schools, community colleges, county offices of education, and certain other programs. Each year the guarantee is calculated using one of three formulas, or “tests,” based on General Fund revenue, per capita personal income, and student attendance. Test 1 ties school funding to roughly 40 percent of General Fund revenue; Tests 2 and 3 build on the prior year and adjust for enrollment and inflation.1California Budget & Policy Center. Proposition 98 Primer

It’s a floor, not a ceiling. The Legislature decides how to allocate the money within the total and can suspend the guarantee with a two-thirds vote of each chamber. Because the calculation depends on revenue estimates that aren’t finalized until after the fiscal year ends, the state recalculates the obligation regularly. If final revenue comes in higher than budgeted, the state owes a “settle-up” payment; if it comes in lower, the budget can be adjusted down.2Legislative Analyst’s Office. Overview of the Proposition 98 Minimum Guarantee3California Budget & Policy Center. What Is Proposition 98 That volatility is central to the current fight over the budget.

Where the 2026-27 Money Goes

Most Proposition 98 dollars flow to K-12 districts through the Local Control Funding Formula, the state’s primary mechanism for general-purpose operating money. The LCFF, enacted in 2013 and fully implemented in 2018-19, pays a per-student base grant that varies by grade level, adds a 20 percent supplemental grant for each student who is low-income, an English learner, homeless, or in foster care, and adds concentration grants for districts serving large shares of those students.4Ed-Data. Understanding the Local Control Funding Formula The May revision raised the statutory cost-of-living adjustment for the LCFF from 2.87 percent to 4.31 percent, bringing formula operating expenses to $4 billion.5EdSource. Newsoms Revised State Budget for Schools

Beyond the formula, the Legislature’s passed version funds a set of targeted programs:

Proposition 28, approved in 2022, sits alongside the LCFF and requires the state to provide an amount equal to 1 percent of the prior year’s K-12 Proposition 98 guarantee for arts and music education, with at least 80 percent of the funds going to arts instructors.9California Department of Education. Proposition 28 Arts and Music in Schools Funding The state has also committed $8 billion to school-based mental health services, including community school grants and wellness centers, though researchers note that a 75 percent rise in district mental health staffing between 2018-19 and 2023-24 was fueled largely by pandemic-era funds that have now expired.10Public Policy Institute of California. How California Is Investing in School-Based Mental Health Services for Teens

Community Colleges

Community colleges get their own share of Proposition 98 dollars. The 2026-27 budget allocates $19.8 billion in total support across the 116 campuses, a 7.1 percent increase over the prior year, with $14.2 billion of that from Proposition 98. Per-student funding rises 8.4 percent to $12,930. The budget includes $241 million in ongoing funding for a 2.41 percent COLA on apportionments, $32 million for enrollment growth, and $38 million in ongoing funding for Calbright College, the state’s online community college.11Legislative Analyst’s Office. The 2026-27 Budget – Community Colleges

Transitional Kindergarten

Universal transitional kindergarten, created by a 2021 law, reached full implementation in 2025-26 and now serves over 400,000 children, up 300,000 from 2021-22. TK is backed by $1.9 billion in ongoing General Fund support outside of Proposition 98.12California Department of Finance. TK-12 Education Budget Summary Enrollment grew 20.1 percent this year alone.13EdSource. Declining School Enrollment in California A UC Berkeley report found a net loss of about 1,100 nonprofit preschool programs between 2019 and 2025 as families shifted to the free public option.14EdSource. TK Expansion Impacts Preschool Providers

The $3.9 Billion the Schools Won’t See Yet

The most contested piece of the budget is the money Newsom is withholding. He first proposed holding back $5.6 billion in January, then reduced the figure in his May revision after revenue came in stronger than expected. Of the difference, $1.7 billion goes toward the guarantee now; $3.9 billion stays in reserve, to be reassessed in early 2027 by his successor.5EdSource. Newsoms Revised State Budget for Schools

Newsom called the move an “accounting maneuver” to guard against faulty revenue projections.8CalMatters. Gavin Newsoms Final Budget Plan He pointed to 2023, when the state over-appropriated the Prop. 98 guarantee by $8 billion because storm-related tax deadline extensions distorted revenue forecasts.15EdSource. California School Funding Dispute The release of the withheld funds is tied to whether AI-related tax receipts hold up.

Education groups have pushed back hard. The California Teachers Association, the California School Boards Association, the California Federation of Teachers, and the Association of California School Administrators held a joint press event in May 2026 to demand full Prop. 98 funding, warning that withholding over $900 per student would force “difficult cuts in classrooms and communities.”16California School Boards Association. California School News CTA President David Goldberg said the proposal “clearly ignores the will of voters by proposing to withhold $3.9 billion from California’s constitutionally guaranteed Prop. 98 funding minimum.”17EdSource. California Education Leaders React to Newsoms Revised Budget The California School Boards Association has sued the state over similar deferrals from the prior year.18Politico Pro. Newsom Proposes Deferring $5.6 Billion in School Funding

This is the third consecutive year the administration has proposed adjusting the Prop. 98 guarantee in some form, following a $1.9 billion deferral the prior year.19California State PTA. Prop 98 Withholding The Legislature agreed to the $3.9 billion withholding in principle but sought a “clear repayment timetable” as part of the final deal.6EdSource. California Legislature Passes Budget

Why the Governor Is Nervous About the Revenue

The record guarantee sits on a narrow revenue base. Stock-option withholding from California’s largest technology companies accounted for roughly 10 percent of all state income tax withholding in 2025, up from about 6 percent three years earlier. The Legislative Analyst’s Office analysis covered Apple, Google, Nvidia, Broadcom, and Meta.20CalMatters. California Tech Tax Revenue Capital gains realizations, many tied to AI-sector stock appreciation, are projected to bring in $22 billion to $23 billion annually from 2025 through 2027.21California Department of Finance. Revenue Estimates

The governor’s own budget summary warned that the stock market is “vulnerable to a significant downturn if returns on investment in artificial intelligence fall short of lofty expectations.” Under a scenario where the market drops more than 20 percent in 2026 and stays down through year-end, state revenue could come in $25 billion to $30 billion below forecast even without a broader recession.21California Department of Finance. Revenue Estimates The LAO has projected structural annual deficits of $25 billion to $30 billion over the next several years, citing rising Medi-Cal costs and state employee compensation.22EdSource. Newsom LAO Budget Dispute

To buffer against a downturn, the May revision proposed raising the Public School System Stabilization Account, the Proposition 98 reserve voters created in 2014, to $10.3 billion. That balance reflects $8.7 billion in mandatory deposits across the three-year budget window, driven by elevated capital gains revenue, plus a $1.6 billion discretionary deposit.23CABE. Governors 2026-27 May Revision Summary The LAO had earlier recommended building the reserve to at least $9.7 billion, arguing that a balance of that size would protect school programs from the initial effects of a significant economic downturn.24Legislative Analyst’s Office. The 2026-27 Budget – Proposition 98 Reserve

Record State Funding, Local District Deficits

Statewide totals hit records while individual districts are cutting. California’s public K-12 enrollment stood at 5.7 million students in 2025-26, after a 1.3 percent drop of about 75,000 students in a single year.13EdSource. Declining School Enrollment in California That was the eighth consecutive year of decline. State demographers project a further loss of 586,500 students over the next decade, with enrollment falling to about 5.2 million by 2034-35 and Los Angeles County alone losing 230,400 students.25California Department of Finance. Public K-12 Graded Enrollment Projections

The drivers are lower birth rates, outmigration, and families choosing private schools, charter schools, or homeschooling. Because California funds schools based on average daily attendance, fewer students means less revenue, even as fixed costs for facilities and staff remain largely unchanged.13EdSource. Declining School Enrollment in California “Hold harmless” provisions fund districts at the greater of their current year, prior year, or prior three-year average attendance, which delays rather than eliminates the reckoning.26Public Policy Institute of California. Factors and Future Projections for K-12 Declining Enrollment

Several large Southern California districts show the scale. Santa Ana Unified faces a $180 million deficit after losing 7,552 students since 2019-20. Los Angeles Unified projects a $94.5 million shortfall, has shed 59,249 students, and issued 3,200 layoff notices in February 2026. Long Beach Unified expects a $54 million gap after losing 7,746 students.27Reason Foundation. Southern California School Districts Are Serving Fewer Students and Facing Massive Budget Deficits The deficits are compounded by the expiration of one-time federal pandemic dollars and by salary increases negotiated during flush years. LAUSD, for example, approved a 21 percent teacher pay raise in 2023.

Facilities Are Funded Separately

The Proposition 98 budget is essentially an operating budget. School construction and repair are funded through voter-approved bonds. In November 2024, voters passed Proposition 2, a $10 billion facilities bond, with $8.5 billion for K-12 and $1.5 billion for community colleges. The money supports renovation, repair, and new construction, with set-asides for removing lead from water, creating transitional kindergarten classrooms, and building career and technical education facilities. Funds go out as matching grants, with the state covering a larger share for districts serving higher proportions of English learners, foster youth, and low-income students.28CalMatters. Prop 2 School Bond

How California Compares Nationally

In 2022-23, the most recent year with nationally comparable data, California spent $20,496 per student on current operations in 2025 dollars, roughly $2,800 above the national average and 16th among states including Washington, D.C. Adjusted for differences in labor costs across states, that ranking falls to 31st.29Public Policy Institute of California. Financing Californias Public Schools Under the 2026-27 budget, funding per student is projected to reach a record $28,282 when all state, federal, and other sources are counted.5EdSource. Newsoms Revised State Budget for Schools Between 2019-20 and 2024-25, state funding rose nearly 50 percent in nominal terms, or 22 percent after adjusting for inflation. About 80 percent of school spending goes to staffing, and rising pension contributions consumed roughly 25 percent of the spending increase between 2013-14 and 2019-20. California’s education spending typically falls more than other states during recessions and rises more quickly in recoveries, which is exactly the pattern the current withholding fight is designed to smooth.