The 2025-26 Budget

Governor’s Office of Business and Economic Development

The Governor’s budget includes several proposals under the Governor’s Office of Business and Economic Development (GO-Biz). In this post we evaluate and provide recommendations for three of these proposals:

California Competes Grants. This proposal would provide an additional $60 million for a fourth round of California Competes grants. Funding another round of California Competes grants could create jobs at a time when private sector job growth has been sluggish. However, we suggest weighing the expansion of these economic development efforts against other budget priorities. If the Legislature approves this proposal, we recommend adding explicit requirements to assess a grant applicant’s inability to use tax credits.

California Regional Initiative for Social Enterprises Grant Program. This proposal would provide $17 million for grants to Employment Social Enterprises (ESEs) under the California Regional Initiative for Social Enterprises Grant Program (CA RISE). Given the lack of rigorous evidence in support of long-term benefits from programs like CA RISE, we suggest the Legislature consider rejecting this proposal. If, however, the Legislature wishes to move forward with the proposal, we suggest several improvements.

CHIPS. The proposal would provide $25 million for GO-Biz to support capital expenditures incurred during the development of a semiconductor design and collaboration facility in Sunnyvale. Given the proposal’s dependence on uncertain federal funds, the state’s precarious budget position, and the availability of more promising economic development opportunities, we recommend that the Legislature reject the proposal.

California Competes Grants

Background

California Competes Provides Incentives to Attract Business Investment. California Competes is an incentive program ran by GO-Biz. It provides nonrefundable tax credits to companies in exchange for a commitment to increase employment and investment in the state over several years. GO-Biz selects applicants via a competitive application process and negotiates individual agreements with each successful applicant, including year-by-year milestones and corresponding credit allocations. Credits may be used to offset either personal income or corporation taxes and can be carried forward for up to six years.

Grant Program Added as Alternative to Tax Credits. Since the tax credit is nonrefundable, businesses without a significant California tax liability cannot utilize the credit. To address this, the 2021, 2022, and 2023 Budget Acts each provided one-time funding of $120 million for a grant program to supplement the tax credit. The process for evaluating applications and negotiating agreements is similar to the tax credit program, but awards are paid directly to successful applicants upon meeting the agreed milestones. In addition, each applicant must propose to do one of the following: (1) create 500 new full-time jobs, (2) make an investment of at least $10 million, or (3) create jobs or make an investment in a high-poverty or
high-unemployment area.

Majority of Previously-Available Grants Were Allocated. Across the three previous iterations of the grant, roughly $330 million in grants (92 percent) were allocated as part of agreements between GO-Biz and 23 businesses. Since these agreements were finalized in 2022 and 2023, and grant milestones are spread out among the five subsequent years, it is still unknown at this point what fraction will ultimately be claimed. As a point of comparison, more than 50 percent of tax credits awarded are either never claimed or later recaptured, so we expect a nontrivial fraction of grant awards will not be claimed.

Governor’s Proposal

$60 Million for California Competes Grants. The Governor’s budget provides $60 million in one-time funding for a fourth round of California Competes grants. Additionally, the administration proposes removing a rule that prohibits awarding more than 30 percent of total grants to a single applicant.

Analysis

Grants Address Limitation of Current Tax Credit. California Competes grants address a valid limitation of the tax credit, namely that some competitive investments in the state may be lost due to an applicant’s lack of tax liability. Businesses that cannot utilize nonrefundable tax credits, but are candidates for a grant, typically fall into one of two categories. First, some firms lack tax liability in California due to ongoing and substantial use of other tax deductions and credits, most commonly the Research & Development Tax Credit and the Net Operating Loss deduction. Second, startup firms often generate negative profits for many years before turning a profit (if at all), potentially over the timeframe that tax credits can be carried forward.

Evidence Points to Effectiveness of Tax Credit for Job Creation. Recent evidence from academic research has found that the California Competes tax credit is fairly effective at increasing employment and providing an economic benefit to the state, especially relative to other tax expenditure programs in California and elsewhere. There are two features of the program that may contribute to this result. First, a strong mechanism exists for recapturing credits from firms that do not meet their investment and employment milestones. Second, the evaluation process includes a quantitative component that rewards providing more jobs and investment per dollar of credit and a qualitative component where GO-Biz staff can potentially identify proposals that would not occur in California, absent the credit, and filter out those that would occur independent of a credit award. Because the grant program is relatively new, these studies did not include grants in their analysis and we cannot be certain the results will translate directly to the grant. However, the grant program has the same evaluation structure as the credit, which suggests it could be similarly effective at identifying the best applications.

Grant Eligibility Rests on Subjective Assessments. The rationale for offering a supplemental grant program depends on the inability of firms to utilize the more established tax credit program. There is no explicit requirement in the grant program relating to this inability. The program only requires that the applicant has not received a California Competes tax credit for the same jobs or investment for which the grant is sought. The determination of suitability for the grant is done alongside a more general evaluation of the application by the California Competes staff. The lack of explicit eligibility criteria makes it difficult to evaluate if grant applicants cannot utilize a tax credit.

Removing 30 Percent Cap on Individual Awards Reasonable. Current rules stipulate that an applicant may not receive more than 30 percent of the grant funding available in a fiscal year. Since the Governor’s proposal would provide $60 million for grants, compared to $120 million in prior iterations, the cap on individual awards would be $18 million, down from $36 million. There have been several grant awards made previously in excess of this amount. Removing the cap allows GO-Biz to award grants to the applications that it determines provide the best return to the state’s economy.

Recommendations

Expansion of Economic Development Programs Should Be Weighed Against Other Budget Priorities. Funding another round of California Competes grants could create jobs at a time when private sector job growth has been sluggish. However, we recommend viewing grants as a supplement to the California Competes tax credit rather than a core part of the program. Given the state’s current and projected future budget condition, we recommend the Legislature consider the priority of enhancing a seemingly well-functioning program relative to other budget items.

If Approving Grants, Expand Evaluation Criteria. To increase transparency, we recommend the Legislature add explicit requirements to assess a grant applicant’s inability to use tax credits. These requirements could include factors like the age of the business for startups or documentation of a lack of tax liability in previous years for more established firms.

CA RISE

Background

State and Federal Funds Support Subsidized Employment Programs. Subsidized employment programs (often known as transitional employment) aim to increase employment among target populations by simultaneously (1) providing training and job search services to workers and (2) prioritizing jobs for participants or lowering costs through employer subsidies. Many state and federal programs have subsidized employment components. For example, the California Work Opportunity and Responsibility to Kids (CalWORKs) program, the state-federal cash assistance program for low-income households, fully or partially subsidizes the wages of selected CalWORKs recipients for six months to a year in some counties. The federal government has also supported various “demonstration projects” placing participants in subsidized jobs at partner organizations, including in Los Angeles and San Francisco. Program models vary widely.

CA RISE Provides Grants to Organizations Who Employ Individuals With “Barriers to Employment.” Grants from CA RISE support organizations, known as ESEs, which have an explicit mission to provide training and employment to individuals with a barrier to employment. ESEs are commonly nonprofits (such as Goodwill Industries) but may also be for-profit businesses or public sector employers. To receive state funding, ESEs provide training and paid employment to qualified individuals, including homeless individuals, formerly incarcerated individuals, and youth who are neither working nor in school. The exact employment models of each ESE vary. The 2022-23 budget provided $25 million one-time General Fund for the program within the California Office of the Small Business Advocate (CalOSBA) to be spent in 2022-23 and 2023-24.

Grant Applications Were Evaluated by Contractor REDF. To select and provide support to grantees in executing the CA RISE grants, CalOSBA contracted with REDF, a nonprofit organization with prior experience working with ESEs and administering government grants including for LA:RISE, a Los Angeles County program on which CA RISE was modeled. During the first round of CA RISE grants, REDF rated the 161 ESEs that applied based on the legally required criteria: strength of the business model, employment program model, leadership, and financial stability. Based on these ratings, REDF and CalOSBA selected 61 grantees to receive funds and determined that the 100 rejected ESE applicants were less qualified based on the factors noted above.

Little Information Shared on Outcomes From First Grant Round. The first grant round for CA RISE began in 2023 and grantees receive technical assistance programming until September 2025. CalOSBA has released a list of grantees but no information on program outcomes.

Proposal

$17 Million General Fund for New Round of CA RISE Grants. In this proposal, CalOSBA requests $17 million General Fund to implement a new round of grants to ESEs. Of the total funding amount, they propose $15.2 million for grants up to $500,000 per organization, $1.5 million for program and economic outcome reporting, and $300,000 for administrative fees related to implementation.

Consider Previously Rejected Applications. The proposal states that ESEs whose applications were rejected in the first grant round would be considered alongside any new applications. Previous grantees would not be eligible for the new round of grants.

Hire Limited-Term Associate Governmental Program Analyst (AGPA) to Replace Fiscal Agent. CalOSBA proposes hiring one limited-term AGPA position from administrative funds to administer the grants. This replaces the role of the third-party fiscal agent in the previous grant round.

Analysis

Target Populations Have Real but Varying Needs. While characteristics of CA RISE participants are not available, data from LA:RISE show that likely participants have difficulty maintaining stable employment. Prior to program participation, about one-third of LA:RISE participants had no job in the past five years, one-third were CalFresh recipients, under one-third had stable housing, and over half had been previously arrested. As CA RISE is open to a broader but overlapping target population as LA:RISE and works with many of the same ESEs, CA RISE participants likely had similar characteristics prior to CA RISE participation.

Some Subsidized Employment Programs Can Be Effective for Some Populations… While there are a variety of program models for subsidized employment, some have stronger evidence of success than others. Overall, most programs increase employment and earnings among participants while receiving a subsidy. However, the ultimate goal is to improve long-term employment prospects of these workers. Research suggests that it is less common that programs lead to higher employment or earnings after the subsidy ends. Subsidized employment programs appear more likely to result in long-term benefits when: (1) employers have a business model that makes it realistic for them to hire participants full time after the program ends and (2) the target population is women or long-term unemployed workers.

…But CA RISE Was Modeled on Los Angeles County Program That Did Not Improve Long-Term Employment. LA:RISE provided transitional employment services to similar target populations as CA RISE. In LA:RISE, similar to CA RISE, ESEs provided temporary jobs and training to participants while other providers, including local state job centers, provided general employment services. From 2015-2018, according to a rigorous third-party evaluation, LA:RISE participants had higher earnings and employment while working at an ESE but did not see long-term benefits after the transitional job ended. This experience mirrors other subsidized employment programs that do not place participants in transitional jobs that are intended to become permanent.

Recommendations

Consider Rejecting or Improving Program Requirements. Given the lack of rigorous evidence in support of long-term benefits from programs like CA RISE, we suggest the Legislature consider rejecting this proposal. If, however, the Legislature wishes to move forward with the proposal, we suggest it also:

• Request Additional Information on First Grant Round. If the Legislature wishes to prioritize funds for the CA RISE program, we recommend seeking additional information on the grantees, program participants, and outcomes from the first grant round. Using this information, they can assess whether the program is targeting the intended populations and how to prioritize future investments.

• Direct CalOSBA to Provide Funding to Most Qualified ESEs. CalOSBA proposes to consider applications from the 100 grantees who were rejected during the first round and suggest that a new round of grants would allow them to expand the grant to these organizations. These applications were rejected because they were judged to be less qualified than selected grantees based on the legally required selection criteria. While it could be reasonable to reconsider these in a new round of funding, CalOSBA should not prioritize these grantees unless they believe they are more qualified than new applicants or first round grantees.

• Require a Rigorous Evaluation of Future Grants. As noted above, the effectiveness of subsidized employment programs depends on the model and target population. Therefore, if the Legislature wishes to continue this program, we recommend requiring CalOSBA to contract for a rigorous third-party evaluation of grantee programs supported by CA RISE funds. To understand program impacts and to prioritize future investments, employment opportunities can be randomly offered to eligible participants when there are more candidates than jobs available. Using program and state administrative data, third-party evaluators can then follow both participants and randomly rejected candidates to determine whether the program improves outcomes. In future grant rounds, CalOSBA can direct investments toward effective programs.

CHIPS

Background

Federal Law Supports Semiconductors. In 2022, the federal government enacted the CHIPS and Science Act. This law aims to support and expand the U.S. semiconductor industry. Among many other provisions, the law established the National Semiconductor Technology Center (NSTC) and Natcast. The NSTC is a cooperative public-private effort to advance semiconductor research and development (R&D). Natcast is the nonprofit organization in charge of the NSTC.

Natcast Currently Relies on Federal Funding. On January 16, 2025, the U.S. Department of Commerce announced an award of “up to $6.3 billion” to fund Natcast. Eventually, Natcast plans to fund most of its activities through membership fees paid by various entities, such as businesses that make semiconductors.

Natcast Chose Site in Sunnyvale. In July 2024, Natcast and the Department of Commerce officially launched a site selection process for three flagship R&D facilities. Through this process, they discussed prospective sites with economic development organizations, such as the GO-Biz in California. In late 2024 and early 2025, they announced the locations: a design and collaboration facility (DCF) in Sunnyvale; an extreme ultraviolet accelerator in Albany, New York; and an advanced packaging piloting facility in Tempe, Arizona.

Facility Will Expand Operations Over Time. Natcast has entered a lease agreement to turn an existing Google facility into the DCF. When the DCF commences operations later this year, it will house Natcast staff who perform executive and administrative functions. Natcast plans to ramp up the facility’s design and prototyping work over time, once it renovates the facility to enable those types of activities.

Governor’s Proposal

$25 Million for Semiconductor Design Facility. The Governor’s budget proposes a one-time General Fund appropriation of $25 million in 2025-26 for GO-Biz to support capital expenditures incurred during the development of the DCF. After Natcast incurs these expenses, it could submit requests for reimbursement to GO-Biz until July 31, 2027.

Analysis

GO-Biz Plans to Support DCF in Multiple Ways. As we understand it, the administration’s successful bid for the DCF included a few key elements. One was for the Governor to present the budget proposal described above. The administration recognizes, however, that whether these funds are appropriated ultimately is up to the Legislature. The administration’s bid for the DCF included other forms of support as well. For example, GO-Biz and the University of California Office of the President will maintain an ongoing collaborative relationship with Natcast, including convening quarterly meetings at the DCF.

Relying on Federal Funding? The new presidential administration has set out to reduce federal spending broadly, but the details of these cuts are in flux. The federal administration’s options for reducing Natcast’s funding are somewhat limited, since Congress already appropriated the money and Natcast’s workers are not government employees. Notably, however, the federal administration already has tried to cut some spending that meets these criteria. In this environment, this proposal’s heavy dependence on federal funding makes its prospects uncertain.

Industry Support or Other Budget Priorities? We recently assessed the General Fund condition as roughly balanced in 2025-26, with significant annual operating deficits thereafter. Additional risks related to federal funding and fire recovery costs could worsen the budget condition in the coming months. In this fiscal context, we recommend that the Legislature apply a very high bar for new industry support—and, more generally, any new spending outside of the state’s core responsibilities. As we understand it, the main rationale for state support for the semiconductor industry would be the potential economic benefits for the state. As we noted in The 2023-24 Budget: California’s Film Tax Credit, however, spending on the state’s core responsibilities also can have substantial economic benefits.

Natcast Support or Other Programs? On paper, the $25 million proposal is tied to capital investment at the DCF. Over the next decade, however, Natcast estimates that its capital expenditures to develop the DCF will total around $650 million. The $25 million proposal is just a small share of this amount, so it easily could supplant capital investment that otherwise could come from other parts of Natcast’s budget. This means that the proposal could have little to no effect on the ultimate amount of capital investment at the DCF or on the likelihood that Natcast completes the DCF as planned. Consequently, the Legislature should regard the proposal as one-time support for Natcast’s activities—and thus the semiconductor industry—broadly. The nature and magnitude of the resulting benefits are unclear.

If supporting commercial activities is a high priority for the Legislature, a modest one-time augmentation within certain existing programs—such as California Competes—likely would be more effective. Some research provides fairly good evidence that California Competes encourages recipients to make new investments in California. We suspect that this efficacy is related to several features of the program. One such feature is that the program’s support is tied to specific outcomes. Another is that employers in a wide range of industries compete for the program’s selectively awarded support. These features stand in stark contrast to the $25 million that the administration has proposed to support Natcast.

Recommendations

Recommend Rejecting Proposal. In our comments above, we raise three significant concerns with the CHIPs proposal:

• The proposal’s heavy dependence on federal funding makes its prospects uncertain.

• Due to the state’s precarious budget condition, the bar for new spending outside of core responsibilities should be quite high.

• If the Legislature wants to expand support for commercial activities, other programs provide more promising opportunities.

In light of these issues, we recommend that the Legislature reject the proposal.