Newsom and lawmakers enter budget talks split over $3.9 billion in education funding

California lawmakers passed a roughly $356 billion state budget on Monday, June 15, meeting their constitutional deadline and opening about two weeks of final negotiations with Gov. Gavin Newsom before the new fiscal year begins July 1. Tucked inside it is a record $127.1 billion for public schools and community colleges under Proposition 98—alongside a maneuver that withholds $3.9 billion of what the state's own formula says it owes them.

That $3.9 billion is now one of the largest unresolved items as the Legislature and the governor begin merging their competing budgets. Newsom released his revised spending plan, the May Revision, on May 14; the Assembly and Senate passed their own version on June 15; the two sides have until July 1 to reconcile them.

The entire 2026-27 budget is being drafted against the backdrop of federal cuts under the tax-and-spending law known as H.R. 1, which lawmakers say threatens billions in health and safety-net funding—pressure that has made every dollar, including the money owed to schools, harder to find.

What a Proposition 98 "Settle-Up" Is, and How It Defers $3.9 Billion in School Funding

Proposition 98, approved by voters in 1988, sets a minimum funding level for schools each year, tied to state revenues. When California funds below that minimum, the obligation does not disappear; it converts into a deferred payment the state owes later, known as a "settle-up." For the 2025-26 fiscal year, Newsom's budget funds schools roughly $3.9 billion under the calculated guarantee.

That figure has already moved once. In January, Newsom proposed withholding $5.6 billion. By the May 14 revision he trimmed it to $3.9 billion, steering the difference into a higher cost-of-living adjustment, a deposit to the rainy day fund, and additional special-education money.

Why Newsom's $3.9 Billion Repayment Depends on AI-Driven Revenue and Carries No Deadline

Newsom frames the hold as prudence: avoid committing dollars that may not materialize, then reconcile the books once actual revenues are known. Under state law, if 2025-26 revenues hold up when they are recalculated in spring 2027, the state is required to repay schools.

Two catches drive the dispute. First, much of the revenue everyone is waiting on comes from capital-gains taxes on a stock market lifted heavily by the artificial-intelligence boom—a volatile base for a multibillion-dollar promise. Second, state law requires the repayment but does not fix a deadline; the money could return in a single year or be stretched across several.

A third wrinkle makes the promise feel especially abstract. Newsom is termed out, with his time in office ending in January 2027. The spring-2027 reconciliation that decides whether the IOU comes due will land on his successor's desk, not his.

Why the California Teachers Association Is Threatening to Sue Over Proposition 98

The California Teachers Association and the California School Boards Association have signaled they may sue, arguing that Proposition 98 is a voter-approved constitutional floor, not a line of credit the state can draw against to balance its books. Erika Jones, CTA's secretary-treasurer, has called Prop. 98 "a minimum guarantee" and argued that the world's fourth-largest economy should not dip into that floor to paper over a shortfall.

What the Legislature's June 15 Budget Restores for Schools, and What It Leaves Unresolved

Here is where coverage routinely oversimplifies. The budget lawmakers passed June 15 has been cast as restoring the money, or siding with schools against the governor. That is not what happened.

Lawmakers did not erase the $3.9 billion hold. They did two separate things. First, their plan assumes roughly $5 billion more in revenue than Newsom projected in May, which reporting on the legislative plan puts at about $2 billion more for schools in 2026-27, paired with roughly $800 million less deposited into the rainy day fund, freeing that money for spending. Those moves soften the blow rather than reverse it. Second, and separately, the Legislature is pressing for a firm, reliable schedule to repay the deferred $3.9 billion instead of accepting the governor's open-ended timeline.

So the additional school money lawmakers are promoting—roughly $2.7 billion more across 2025-26 and 2026-27—is largely new spending: a $2.4 billion ongoing increase for special education, $1 billion to expand community schools, $300 million in one-time career and technical education funding, and money to upgrade school kitchens. It is not repayment of the settle-up. Conflating the two makes it look as though the Legislature resolved the dispute. It did not; it narrowed the gap and hardened its position on the payback terms.

The Legislative Analyst's Office Case That Newsom's $3.9 Billion Hold Is Defensible

The schools' argument is sympathetic, but it is not the whole picture. The Legislative Analyst's Office has noted that California's revenue estimates historically land within about 4 percent of eventual actuals, and a $3.9 billion hold on a $127 billion guarantee sits inside that margin. Newsom's stated rationale—guarding against appropriating money the state may not ultimately have—is not baseless. The real disagreement is over how much risk to carry, and who absorbs it if the AI-fueled revenue surge cools.

What's Next: Three-Party Budget Negotiations Before California's July 1 Deadline

The budget lawmakers passed Monday is an opening position, not the final word. It begins roughly two weeks of three-party negotiations among the Assembly, the Senate, and the governor before the new fiscal year starts July 1. The $3.9 billion—paid sooner, scheduled out, or left contingent—is among the largest unresolved items on the table. Whatever the three sides settle in the coming days will tell California's schools whether the state's constitutional funding floor means dollars in classrooms now, or a promise to be honored later.