![\"California](\"https:\/\/www.newsbeep.com\/us-ca\/wp-content\/uploads\/2025\/11\/1763748310_162_051425_Newsom-May-Budget_FG_CM_08.jpg\")
Gov. Gavin Newsom addresses the media during a press conference unveiling his revised 2025-26 budget proposal at the Capitol Annex Swing Space in Sacramento on May 14, 2025. Photo by Fred Greaves for CalMatters<\/p>\n\t\t\t\tBy Yue Stella YuGov. Gavin Newsom addresses the media during a press conference unveiling his revised 2025-26 budget proposal at the Capitol Annex Swing Space in Sacramento on May 14, 2025. Photo by Fred Greaves for CalMatters<\/p>\n
California will face a nearly $18 billion budget deficit in the new fiscal year due to higher than expected spending, despite an economic boon largely driven by AI enthusiasm and strong revenue, the nonpartisan Legislative Analyst\u2019s Office said Wednesday.<\/p>\n
To make things worse, the $17.7 billion shortfall could balloon to an annual $35 billion by fiscal year 2027-28, as spending continues to grow and debts come due, the office warned in its annual fiscal outlook<\/a>.<\/p>\n The gloomy forecast is a refreshed look at California\u2019s financial future since June, when the state Department of Finance projected a $17.4 billion deficit<\/a> for the upcoming fiscal year. The widened budget gap could undercut the legacy of Gov. Gavin Newsom, as he will likely be forced\u00a0 to make tough budget choices in his last year as governor.<\/p>\n It also means that for the fourth year in a row in his tenure, California is projected to have a deficit despite revenue growth<\/a>.<\/p>\n \u201cToday\u2019s fiscal outlook underscores the challenging decisions ahead,\u201d said Assembly Budget chair Jesse Gabriel<\/a> of Encino. He said the committee \u201cremains committed to crafting a responsible budget that prioritizes essential services, uplifts working families and protects our most vulnerable communities.\u201d<\/p>\n But state Sen. Roger Niello<\/a> of Roseville, the Republican vice chair of the Senate Budget Committee, attributed the structural deficit to Democrats\u2019 \u201cunstoppable spending problems.\u201d<\/p>\n \u201cThe state must assess the effectiveness and sustainability of the programs that were created during the surplus and make necessary corrections,\u201d he said in a statement.<\/p>\n Since June, the state has witnessed stronger-than-expected tax revenues, raking in $6 billion<\/a> more than projected between July and October. But the revenue gains in the new fiscal year will \u201calmost entirely\u201d go toward K-12 schools, community colleges and state reserves by constitutional requirements, the office projected.<\/p>\n Additionally, the fiscal challenges California faces have also persisted, if not deepened, due to steep federal cuts to health care<\/a> and housing and homelessness services<\/a>, as well as growing stock market uncertainties<\/a> driven in part by Trump\u2019s drastic tariff shifts. It raises a major question as to if, and how, the state can absorb the costs of those federal cuts.<\/p>\n Spending outpacing revenues<\/p>\n The state is projected to spend $6 billion more than previously anticipated next year, including $1.3 billion implementing Trump\u2019s budget bill, which is expected to kick millions of Californians off Medi-Cal, hike health care premiums and shift much of the cost for programs such as food stamps onto the state, the LAO said. The increase is largely because the state must now shoulder a larger share of the cost to continue to provide benefits, said Carolyn Chu, chief deputy analyst with LAO.<\/p>\n The added cost of the federal cuts to health care will grow to $5 billion annually by fiscal year 2029-30, the office projected.<\/p>\n California also stands to lose hundreds of millions of dollars in funding for permanent housing under new policies the Trump administration rolled out last week, just as some counties are starting to see drops in their homeless population<\/a>. Homelessness agencies warn that thousands of Californians could be kicked out of their subsidized housing and back on the streets.<\/p>\n The loss of federal funding could put more pressure on the state to step in with financial assistance \u2014 at a time when Newsom has expressed no interest in releasing more homelessness dollars to cities and counties.<\/p>\n Blaming local officials for stagnant progress on homelessness, Newsom in January proposed zero dollars for the Homeless Housing, Assistance and Prevention program, the main source of homelessness funding for local governments. The Legislature later successfully negotiated a $500 million investment \u2014 half what it used to be<\/a> \u2014 and delayed the funds until next year with virtually no guarantee they will continue.<\/p>\n Graham Knaus, CEO of the California State Association of Counties, told CalMatters he expects the state to follow through on its funding commitment.<\/p>\n \u201cWe are now facing a federal government that is eviscerating the same funding at the federal level, so we should expect a substantial increase in homelessness,\u201d he said. \u201cAnd our only chance is for the state to stand with us \u2026 and protect those that are the most vulnerable.\u201d<\/p>\n Fourth fiscal year in a row of deficits<\/p>\n The annual forecast by the nonpartisan fiscal adviser is a mere snapshot of California\u2019s fiscal future and can be drastically different from the state finance department\u2019s own projection, which is expected in January. In January 2024, Newsom\u2019s office projected a $38 billion deficit<\/a> for fiscal year 2024-25 \u2014 roughly half the $68 billion budget shortfall the LAO had projected a month before.<\/p>\n Earlier this year, California\u2019s Democratic leaders scrambled to plug a $12 billion budget hole<\/a> in fiscal year 2025-26, relying on internal borrowing, dipping into state reserves and halting new Medi-Cal enrollment for undocumented immigrants to avoid other deep cuts to social services. They largely blamed Trump for the shortfall, arguing the threat of sweeping tariffs and federal funding loss plunged the state into \u201cdeep uncertainty.\u201d<\/a><\/p>\n But even before Trump retook office, California already faced a structural money problem, in part due to the state\u2019s heavy reliance on wealthy earners\u2019 income tax and capital gains<\/a>, which rise and fall with the stock market. The state witnessed a record $97.5 billion surplus<\/a> in 2022 during an economic boom, followed by an estimated $56 billion deficit over the next two fiscal years.<\/p>\n The state for three years used \u201ctemporary fixes,\u201d such as internal borrowing, spending down reserves and suspending tax credits to plug multibillion-dollar budget holes, but now it\u2019s \u201ccritical\u201d for state lawmakers to reduce spending, raise revenues, or both, the legislative analyst warned.<\/p>\n \u201cCalifornia\u2019s budget is undeniably less prepared for downturns,\u201d the analysts noted in their report.<\/p>\n \u201cContinuing to use temporary tools \u2014 like budgetary borrowing \u2014 would only defer the problem and, ultimately, leave the state ill\u00e2\u0080\u0091equipped to respond to a recession or downturn in the stock market.\u201d<\/p>\n How sustainable is the AI-driven economy?<\/p>\n While all signs point to high uncertainty and low consumer confidence in the state economy, tech companies\u2019 investment in AI has propelled the stock market to a \u201crecord high\u201d and boosted tech workers\u2019 income \u2014 the \u201clone bright spot\u201d in the state\u2019s economic outlook, Petek said.<\/p>\n But is it sustainable? Petek is cautious.<\/p>\n The stock market appears to be \u201coverly exuberant,\u201d as some investors are borrowing more to buy high-cost stocks, a sign of a stock market downturn, the report notes. Even if the market holds, lawmakers should treat it as a temporary or unsustainable gain, Petek said.<\/p>\n And there\u2019s no guarantee that revenue gains from the stock market would be enough to fill a deficit of $30 billion to $35 billion, which the state is projected to hit in a few years. Since the state is constitutionally required to spend roughly half of any excess revenue gains on schools and reserves, it would need $60 billion in revenue higher than anticipated to close a budget gap that big, Petek said.<\/p>\n \u201cOur view is that that\u2019s highly unlikely to occur,\u201d he said.<\/p>\n This article was originally published on CalMatters<\/a> and was republished under the Creative Commons Attribution-NonCommercial-NoDerivatives<\/a> license.<\/p>\n \n\tRelated<\/p>\n","protected":false},"excerpt":{"rendered":"By Yue Stella YuGov. 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