By Yue Stella Yu, CalMatters
At the start of the year, Governor Gavin Newsom had a hopeful budget forecast. He announced that California would see $17 billion more in revenue than expected, leading to a modest surplus of $363 million for the 2025-26 fiscal year.
But then, disaster struck.
Wildfires in Los Angeles forced unexpected spending on disaster relief and delayed tax filings for residents. Medi-Cal, California’s health insurance for low-income individuals, faced an additional $6 billion in costs. Furthermore, the stock market experienced instability due to President Trump’s fluctuating tariff policies, heavily affecting state tax revenue.
By May, Newsom’s picture had changed from a surplus to a projected $12 billion deficit.
Initially, Newsom proposed significant cuts to Medi-Cal, but after discussions with lawmakers, the final budget relied on internal borrowing and dipped into state reserves. It also froze Medi-Cal enrollment for undocumented immigrants to protect other social services from drastic cuts.
While Democrats pointed fingers at the Trump administration for the budget woes, California’s reliance on high-income earners for tax revenue isn’t new. The state’s tax system is sensitive to the stock market’s ups and downs. For instance, in 2022, California celebrated a $100 billion surplus but now faces a staggering forecast of a $56 billion deficit over the next two years.
Looking Ahead to 2026
Next year, the deficit is expected to swell to nearly $18 billion. Experts from the Legislative Analyst’s Office suggest this is largely due to high spending outpacing strong tax revenues, thanks to growth in artificial intelligence. If these projections hold, this will mark the fourth consecutive year of deficits during Newsom’s leadership, even amid revenue growth.
Moreover, the structural deficit could reach $35 billion annually by the fiscal year 2027-28. Significant spending increases are anticipated next year, including $1.3 billion more for Medi-Cal benefits under Trump’s budget and the potential loss of federal housing and homelessness funding.
What can legislators do? Options are limited. California has already used one-time measures to manage its budget. According to the Legislative Analyst’s Office, addressing this ongoing structural issue will require either new revenue sources or substantial cuts—or a combination of both.
For those interested in understanding the wider impacts of California’s budget, it’s essential to consider how state finances interplay with federal policies and economic changes. Staying informed through reliable sources like the California Legislative Analyst’s Office can provide deeper insights into these complex dynamics.
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California Budget,Gavin Newsom,Medi-Cal,wildfires
