Gov. Gavin Newsom unveils $348.9 billion budget, with $2.9 billion deficit
Gov. Gavin Newsom’s administration is projecting a $2.9 billion state budget deficit, a far cry from the $18 billion shortfall that the Legislative Analyst’s Office projected in November.
On Friday, Department of Finance officials unveiled Newsom’s proposed $348.9 billion spending plan for the upcoming fiscal year, which starts July 1. The proposed budget, which Newsom will revise in May and legislators must pass in final form in June, is $30 billion more than last year, driven by expected increases in program costs after Congress stripped billions of federal funds to states, and constitutional requirements to deposit funds into education reserves.
The state is constitutionally required to maintain a balanced budget. This year’s proposal does not add taxes, and Newsom wants the state to rebuild its reserves after the state withdrew $7 billion from the rainy day fund last year. This year, he suggested that the state deposit $3 billion into the rainy day fund, $4.5 billion into a special emergency fund, and $4.1 billion into an education fund, bringing the state’s total reserve fund to $23 billion.
Finance Director Joe Stephenshaw attributed the governor’s much rosier deficit projection to improved general fund revenues driven by a better-than-anticipated stock market performance and cash receipts. The proposed budget plans for a $248 billion general fund.
Part of that stock market performance is being driven by enthusiasm around the artificial intelligence sector, which has allowed many executives to become billionaires almost overnight and driven firms to claim historic valuations.
At the same time, Stephenshaw said the deficit could grow to as much as $22 billion in fiscal year 2027-28, but still less than the $35 billion the LAO projected. Stephenshaw attributed that to the LAO’s assumption that there could be a future stock market downturn, which the state does not incorporate into its financial forecasts.
The LAO said there’s a possibility of an “AI bubble,” as companies like OpenAI and Microsoft have borrowed huge sums to expand data centers: “History suggests that the stock market is prone to overreact to major technological advances, even if the technology itself turns out to be revolutionary.”
Budget revision in May, final passage in June
Stephenshaw also emphasized that the governor would revisit the deficit in May, when Newsom is expected to deliver a more definitive version of what he wants to see in the final budget.
Newsom portrayed California as a dominant force in the global economy and vanguard of the technology and entertainment sectors during his final State of the State address on Thursday. The governor, who is termed out of office at the end of the year, is considering running for president in 2028. He will surely be dinged on the campaign trail as California’s high cost of living and homelessness crises could be political liabilities.
“This budget reflects both confidence and caution,” Newsom said in a statement. “California’s economy is strong, revenues are outperforming expectations, and our fiscal position is stable because of years of prudent fiscal management — but we remain disciplined and focused on sustaining progress, not overextending it.”
Budget officials also cited uncertainty around the federal tariffs — which are currently in litigation — and reduced immigration, driven by heavy-handed deportation tactics, as ongoing threats to the budget.
Senate President pro Tem Monique Limon, D-Goleta, told reporters on Thursday that the Legislature would not be able to “fill the hole” caused by Congress’ “One Big, Beautiful Bill,” or H.R. 1.
The federal law raises the eligibility threshold for people to claim public benefits, and stripped billions of dollars in federal funds for states, requiring them to take on more of the funding burden for food assistance and health care.
Assembly leaders echo call for ‘caution’
On Friday, Assembly Budget Chair Jesse Gabriel and Speaker Robert Rivas said in a joint statement that the budget called for “caution” as the effects of federal rollbacks bear out.
“Today’s roaring tax revenues may not last, so this moment also should be used to strengthen schools and accelerate much-needed housing construction,” they said. “Building more reserves now is key for the future, along with doubling-down on budget oversight to ensure responsible spending. That is Assembly Democrats’ commitment: affordability, equity, and accountability.”
Stephenshaw said the law could cost the state up to $1.4 billion for Medi-Cal, the state Medicaid program, and the CalFresh food assistance program. This year, Newsom is proposing $2 billion for Medi-Cal, and $2.4 billion next year.
Newsom and the Legislature made do last year by freezing Medi-Cal eligibility for undocumented people, starting in October 2026. Medi-Cal also instituted $30 monthly premiums for the first time on people unable to prove legal residence.
Graham Knaus, the chief executive of the California State Association of Counties, slammed the budget for not including more specifics about the cost burden to local governments.
“This budget proposal does not in any way acknowledge the impact of H.R. 1 on counties and our local communities,” he said in a statement. “If the state doesn’t step up, communities across California will crumble.”
This story was originally published January 9, 2026 at 10:21 AM with the headline "Gov. Gavin Newsom unveils $348.9 billion budget, with $2.9 billion deficit."
