A million new jobs have been created in the state since 2010, Brown said, and the state has budget surpluses in the billions for the foreseeable future, thanks to a surging economy and voter-approved tax increases.
"This year, Californians have a lot to be proud of," Brown said.
During the approximately 15-minute speech, Brown set the tone for the year ahead.
"We are not out of the woods, and we're certainly not out of the drought. Life is uncertainty. The climate is changing, not for the better," Brown said.
The severe drought gripping California is already forcing water cutbacks among farms and cities and could eventually exact a financial toll on the state's improving finances. Reservoirs are near historic lows, and there is no rain in sight.
"We need everyone in every part of the state to conserve water," Brown said. "Water recycling, expanded storage and serious groundwater management must all be part of the mix. So too must be investments in safe drinking water, particularly in disadvantaged communities."
One of the biggest issues remains the states overcrowded prisons. Federal judges have ordered the governor to reduce the population. The solution has been to transfer nonviolent offenders to county jails -- a plan the governor insists is working.
"This realignment is bold and far reaching, but it's also necessary under the circumstances," Brown said. "Local law enforcement has risen to the occasion."
The governor only briefly mentioned the $68 billion high-speed rail project, saying "We're building the nation's only high-speed rail." The project has lost much of its public support and is under scrutiny.
"Overcoming these challenges will test our vision, our discipline and our ability to persevere," Brown said. "But overcome them we will, and as we do, we will build for the future, not steal from it."
Many Republican lawmakers have embraced Brown's message of frugality.
"I agree with the governor on the need for fiscal restraint, as we should not be spending temporary tax dollars on never-ending programs that taxpayers cannot afford," said Assemblyman Travis Allen, R-Huntington Beach, in a statement. "
But other Republicans questioned whether Democrats will go along with the call for fiscal discipline.
"I remain skeptical that a majority of Democrats in the Legislature share this vision," said Assemblyman Donald Wagner, R-Irvine, in a statement. "Governor Brown has work to do to convince them, and I will help in in whatever way I can."
The Associated Press contributed to this report.