California lawmakers and the governor will need to prepare for an $18 billion budget deficit next year, state Legislative Analyst Gabe Petek said Wednesday. Petek leads the office of budget and policy watchers that guide the state Legislature in its financial decision-making, known as the Legislative Analyst’s Office. Wednesday’s update is part of the budget outlook report the office releases at this time every year. In a matter of months, state lawmakers and Gov. Gavin Newsom will begin discussing how to use taxpayer dollars for the 2026-2027 budget year, a plan that needs to be in place by July 2026. The governor will present his first draft in January. In the report, the office stated the $18 billion budget deficit for the 2026-2027 budget year is about $5 billion more than state officials were anticipating. The report noted the state is spending more money than it’s bringing in and pointed to programs that are costing about $6 billion more than expected overall. Petek stated the federal government’s policies around tariffs and healthcare spending are having an impact on the spending plan. While the office was unable to put a dollar amount on the impacts of tariffs, it noted the federal government’s healthcare spending bill will result in a $1.3 billion hit to the state’s general fund. Petek noted the stock market is doing well with enthusiasm around artificial intelligence. Despite the strong personal income tax revenues that’s bringing into the state, Petek appeared unconvinced that the situation would be sustainable enough to fix the state’s overall structural budget problem. The LAO said in its report said the state faces budget shortfalls of about $35 billion a year in the years to come. California currently has $14 billion left in its reserves. The update signals California will face the fourth straight year grappling with a budget deficit. In previous years, lawmakers and the governor have been hesitant to make major spending changes and have largely relied on borrowing, delaying, or shifting costs. Petek said those strategies will soon expire and the debt will be owed. Petek’s office advised lawmakers and the governor to fix the problem by either cutting spending or finding ways to bring in more revenue. The report states the action is “critical” because the state faces significant structural deficits in the years to come, the issue could be exacerbated by a recession, and because the state has used a lot of its rainy-day resource to address the last three years’ worth of budget shortfalls. Petek and the LAO stopped short of making specific recommendations around specific budget cuts and proposed taxes. This is a developing story, check back for updates. See more coverage of top California stories here | Download our app | Subscribe to our morning newsletter | Find us on YouTube here and subscribe to our channel
SACRAMENTO, Calif. —
California lawmakers and the governor will need to prepare for an $18 billion budget deficit next year, state Legislative Analyst Gabe Petek said Wednesday.
Petek leads the office of budget and policy watchers that guide the state Legislature in its financial decision-making, known as the Legislative Analyst’s Office. Wednesday’s update is part of the budget outlook report the office releases at this time every year.
In a matter of months, state lawmakers and Gov. Gavin Newsom will begin discussing how to use taxpayer dollars for the 2026-2027 budget year, a plan that needs to be in place by July 2026. The governor will present his first draft in January.
In the report, the office stated the $18 billion budget deficit for the 2026-2027 budget year is about $5 billion more than state officials were anticipating. The report noted the state is spending more money than it’s bringing in and pointed to programs that are costing about $6 billion more than expected overall. Petek stated the federal government’s policies around tariffs and healthcare spending are having an impact on the spending plan. While the office was unable to put a dollar amount on the impacts of tariffs, it noted the federal government’s healthcare spending bill will result in a $1.3 billion hit to the state’s general fund.
Petek noted the stock market is doing well with enthusiasm around artificial intelligence. Despite the strong personal income tax revenues that’s bringing into the state, Petek appeared unconvinced that the situation would be sustainable enough to fix the state’s overall structural budget problem.
The LAO said in its report said the state faces budget shortfalls of about $35 billion a year in the years to come. California currently has $14 billion left in its reserves.
The update signals California will face the fourth straight year grappling with a budget deficit. In previous years, lawmakers and the governor have been hesitant to make major spending changes and have largely relied on borrowing, delaying, or shifting costs. Petek said those strategies will soon expire and the debt will be owed.
Petek’s office advised lawmakers and the governor to fix the problem by either cutting spending or finding ways to bring in more revenue. The report states the action is “critical” because the state faces significant structural deficits in the years to come, the issue could be exacerbated by a recession, and because the state has used a lot of its rainy-day resource to address the last three years’ worth of budget shortfalls.
Petek and the LAO stopped short of making specific recommendations around specific budget cuts and proposed taxes.
This is a developing story, check back for updates.
See more coverage of top California stories here | Download our app | Subscribe to our morning newsletter | Find us on YouTube here and subscribe to our channel