California Gov. Gavin Newsom’s office said Friday that the state is projecting a $2.9 billion budget deficit this year, far less than the $18 billion legislative budget analysts projected two months ago but still big enough to put the brakes on some ambitious new programs during his final year.
Department of Finance officials unveiled the outgoing Democratic governor’s proposed $348 billion spending plan for the upcoming fiscal year, which starts July 1, 2026. His proposed budget includes $248 billion in general fund spending, about $11 billion more than the current year. His office cited a revenue rebound, elevated stock prices, and a more favorable outlook.
Every state budget is built on forecasts of economic conditions, both at the federal and state levels, that affect tax revenues. California relies heavily on income tax from the top 1% of its residents, whose money is often tied to the stock market, which has been on a wild ride since Trump’s second term began. As a result, California is left in a vulnerable position, and last year’s market swings led analysts to predict a multibillion-dollar deficit.
Joe Stephenshaw, the finance director at the nonpartisan Legislative Analyst’s Office, said Newsom’s numbers diverge from theirs because they do not assume a stock market downturn, unlike the risk built into the LAO’s estimate.
“That is a top risk, not built in — but historically we have never built in downturns,” Stephenshaw told reporters on Friday.
Newsom’s budget relies on reserve funds and forecasts a $22 billion deficit for the 2027 to 2028 fiscal year.
Unlike in previous years, when Newsom has detailed a wide range of new spending proposals or cuts, Friday’s budget proposal mostly maintains current state spending.
“It really is a workload budget and taking a very conservative approach to wait and see how things change for the purpose of the May revision,” Stephenshaw said.
Newsom will present an updated budget plan in May that accounts for more up-to-date revenue and spending projections based on tax collections through April. Stephenshaw said issues, such as how much the state can or should backfill federal cuts to healthcare and food aid, will be addressed at that time.
“California will not be able to fill the holes that have been left by the federal government,” Democratic California state Sen. leader Monique Limon told the San Francisco Chronicle at the state Capitol on Thursday. “Absolutely this legislature is going to look at what we can do and how we can do it, with an understanding that we will not be able to fill that hole.”
Republicans accused Newsom, who is termed out of office and is thought to have his sights on a 2028 White House run, of leaving future governors to deal with the financial headaches headed California’s way.
“This is more of the same from a lame-duck governor content on leaving the rest of us to pick up the financial pieces when he leaves office,” California state Sen. Minority Leader Brian Jones said in a statement.
Earlier in the week, he recalled first arriving in the state legislature 16 years ago.
NEWSOM BLASTS TRUMP IN FINAL STATE ADDRESS BUT GLOSSES OVER CALIFORNIA’S SHORTCOMINGS
“I was shocked by what I found in the annual state budget,” Jones said. “A bloated and reckless spending plan stuffed with pork, misguided priorities, and overspending on feel-good social programs at a time when a strong cinching of the belt was in order to preserve essential services.
“That was 2010, and Democrats spent what I called an ‘absurd” $129 billion that year,” he said. “Fast forward, and California’s budget has exploded to an unprecedented $321 billion despite repeated warnings from experts that the money is running — and has now run — dry. And what have we gotten for this prodigious spending? Are we better off today than we were then?”
