Gov. Gavin Newsom painted a rosy picture of California’s fiscal future during his State of the State address Thursday. Flashing top-line numbers, the Democratic governor touted billions of dollars more in revenue, proposed new investments in education and pledged more toward the state’s reserves and pension debt.
But that was a one-sided story.
It’s not clear whether Newsom will forecast a budget deficit for the 2026-27 fiscal year, how big it will be and whether closing the gap would require painful spending cuts to core services like child care, food assistance and Medi-Cal, the state’s health care coverage for low-income residents, especially as federal funding diminishes.
Yet Newsom will be absent from his last annual budget proposal presentation Friday, when details of his spending plan will be unveiled, leaving his Department of Finance Director Joe Stephenshaw and Chief Deputy Director of Budgets Erika Li to field those questions.
Newsom’s forecast will likely be far sunnier than the grim outlook by the nonpartisan Legislative Analyst’s Office, which in November projected an $18 billion deficit despite higher-than-expected tax revenue thanks to a booming AI industry. A shortfall of that size would require long-term fixes, although state leaders had relied on Band-Aids such as accounting maneuvers, internal borrowing and withdrawals from the state’s reserves to balance the books in past years.
But according to Newsom, California will have a $248.3 billion general fund next year — $13 billion higher than his office predicted in June.
Newsom also touted Thursday that the state would have $42.3 billion more in revenue than forecast last year. But that figure is for a three-year span, state Department of Finance spokesperson H.D. Palmer told CalMatters.
The omission of the cumulative nature of the $42 billion makes Newsom’s speech “troubling,” said Sen. Roger Niello, a Roseville Republican and vice chair of the Senate Budget Committee.
“That would be an intentional misrepresentation of the fact,” he said.
Nonetheless, Newsom teased multiple new proposals with unknown price tags or timelines, such as fully funding the state’s universal transitional kindergarten program and providing universal before and after-school programs at elementary schools. He also proposed spending $1 billion to add high-need community schools and redirecting $1 billion in Proposition 1 mental health funds annually for housing and homelessness.
The governor briefly nodded to “long-term structural challenges,” proposing a $7.3 billion deposit to the reserve fund, roughly the amount the state withdrew last year, whichwould bring the rainy day fund balance to roughly $21 billion. He also proposed to spend $11.8 billion over the next few years to pay down the state’s pension debt, including $3 billion in next year’s budget.
Some Democratic lawmakers struck a cautious tone while largely blaming President Donald Trump for withholding funds from Californians in need.
“California will not be able to fill the holes that have been left by the federal government,” said newly elected Senate President Pro Tem Monique Limón, a Santa Barbara Democrat. “We have to go back and look (at) what is feasible.”
How big is the bubble?
— Senate Budget Committee Chair John Laird, a Santa Cruz Democrat
Sen. John Laird, a Santa Cruz Democrat and the new chair of the Senate Budget Committee, warned that the high revenue projection indicates a bubble. Laird, who was elected to the state Assembly in 2002 after the 2000 dot-com bubble burst, said he’s concerned the AI-driven boom may not last.
“I think everybody agrees that this level of revenue can’t be maintained, but how big is the bubble? That’s probably the question,” he told CalMatters.
The Legislature must start chipping away at the long-term structural deficit this year instead of punting the problem, he said.
“We’re gonna have to do a piece of it,” he said. “We can’t go into next year with a $30 or $37 billion shortfall, because the reserves amount doesn’t get anywhere near that.”
Continued fight over homelessness funding
Newsom has tussled with counties over homelessness funding for years as political pressure to resolve the state’s homeless crisis continues to mount. Newsom has blamed counties for failing to deliver results despite his $24 billion investment over the years. Only a portion of the funding goes to county agencies and there is no dedicated annual funding to fight homelessness.
On Thursday, Newsom again bashed counties for the problem while attributing a drop in unsheltered homeless people last year to his statewide programs. In the same breath, he also proposed to redirect “$1 billion in annual mental health funding to housing and treatment for people living on the streets” under Proposition 1, a voter-approved bond primarily for mental health beds and supportive housing.
“No more excuses — it’s time to bring people off the streets, out of encampments, into housing, into treatment. Counties need to do their job!” Newsom said, drawing applause from legislators.
It wasn’t immediately clear how he plans to allocate those dollars. He did not mention any funding for the Homeless Housing, Assistance and Prevention program, the state’s main homelessness funding source.
The California State Association of Counties, which represents all 58 counties and has lobbied for an annual allocation of $1 billion in HHAP funding, was displeased.
“Playing a shell game with existing funds is no substitute for the most successful program addressing homelessness at the local level,” said association CEO Graham Knaus. “Why on Earth would the state abdicate its responsibility and allow homelessness to soar again?”
Newsom’s plan also startled county behavioral health service providers, who rely on Prop. 1 dollars for services.
“While these one-time bricks and mortar investments are promising, the $1 billion in funding for ongoing housing subsidies under Proposition 1 comes at the expense of redirected mental health treatment and prevention programs,” said Michelle Doty Cabrera, executive director of the County Behavioral Health Directors Association.
No mention of Medi-Cal
Newsom also gave next to no detail on the outlook for Medi-Cal — the state’s most expensive program with a $200 billion budget and therefore an attractive target for potential cuts. He didn’t even name the program in his speech.
The governor slammed Trump for passing a federal budget that could kick 1.8 million Californians off their insurance and raise the premiums for another 2 million. The state would have to spend at least $1.3 billion more than previously expected next year just to implement the federal law, the LAO previously estimated.
Assemblymember Mia Bonta, an Oakland Democrat who chairs the Assembly Health Committee, said the state must “use the bully pulpit” to fight the federal government, find ways to lower costs or even revive indigent care, a form of last-resort care that has largely become obsolete due to Medi-Cal.
“Because the alternative is, people are going to be dying on the streets,” Bonta said.
Bonta said the Legislature should explore new funding sources. Some advocates are already pushing for a pair of proposed wealth tax ballot measures to fund health care and education, which Newsom opposes.
“We need to think about ways that we can increase our revenue sources … (with) openness around looking at our tax structure,” Bonta said, adding that there are ways “to make sure that everybody’s carrying their fair share.”
This article was originally published on CalMatters and was republished under the Creative Commons Attribution-NonCommercial-NoDerivatives license.
