On Friday, Governor Gavin Newsom announced a forecasted “modest shortfall” of $2.9 billion for the upcoming fiscal year. This prediction marks a significant reduction from earlier estimates, set against a backdrop of a nearly $349 billion budget proposal that heavily relies on anticipated windfalls from the booming tech and AI stock markets. While Newsom's budget proposal for 2026-27 projects an additional $9 billion in revenue due to expectations of a sustained AI-driven economy, the nonpartisan Legislative Analyst’s Office painted a much grimmer picture in November, projecting an $18 billion deficit.
State Department of Finance Director Joe Stephenshaw highlighted that “a downturn in the market is one of the top risks” facing the state’s financial future. Newsom’s spending proposal, which is nearly $30 billion more than the current year’s budget, includes $248.3 billion allocated to the general fund, the primary account for state operations. This increase is partly driven by necessary adjustments to comply with federal cuts to the Medi-Cal program, as well as constitutional mandates to allocate portions of higher-than-expected revenues to education and state reserves.
The proposed budget aims to increase funding for the University of California by $350 million and the California State University system by $365 million. This funding is primarily intended to honor Governor Newsom’s commitment made in 2022 to increase university spending by 5% annually over five years. Notably, the budget does not propose any cuts to K-12 schools and maintains funding for initiatives related to school meals, community schools, after-school programs, and transitional kindergarten. Per-pupil spending is expected to rise slightly to $27,400.
In addition to the K-12 education funding, Governor Newsom’s budget includes a $509 million increase in special education funding and a 2.41% cost-of-living increase for educational staff. This proposal marks the beginning of extensive budget negotiations set to commence in June. However, as the projected deficit is anticipated to swell to $22 billion in the fiscal year 2027-28, Newsom is expected to address these concerns in an updated fiscal forecast in May.
Despite the overall increase in spending, other state departments will see reduced funding under Newsom’s plan. Notably, the budget proposes a $1.3 billion cut in housing and homelessness allocations, reducing the department’s budget by more than half. Stephenshaw explained that the state is not renewing some one-time funding for housing and homelessness initiatives that have now expired. This reduction in funding could hinder the state’s efforts to address ongoing homelessness challenges.
In recognition of the "long-term structural challenges," Newsom proposed depositing $3 billion into the state’s Budget Stabilization Account, along with $8.6 billion into other reserve accounts. Additionally, he suggested spending $11.8 billion over the next four years, including $3 billion in the upcoming year, to pay down state pension liabilities. “There are encouraging signs in the California economy,” Newsom stated, urging caution as historical trends indicate rapid changes in economic prosperity.
The budget allocates $2 billion more for Medi-Cal this year and an additional $2.4 billion next year to address federal funding cuts. Governor Newsom criticized the previous federal administration for policies that threaten to cut insurance coverage for millions of Californians. Assemblymember Mia Bonta emphasized the need for the Legislature to explore new funding sources and strategies to maintain essential health services, as failing to do so could have dire consequences for vulnerable populations.
As Governor Gavin Newsom unveils this budget proposal, it is clear that California faces significant fiscal challenges that require careful navigation. With the projected budget shortfall and potential future deficits looming, the state must balance immediate needs with long-term financial stability. Lawmakers will need to engage in substantial negotiations to ensure that California’s future is financially secure while addressing pressing issues like housing, homelessness, and healthcare.