What you need to know about Gov. Gavin Newsom’s latest state budget

from Yue Stella YuCalMatters

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Gov. Gavin Newsom painted a rosy picture of California’s fiscal future in his state address Thursday. Flashing numbers, the Democratic governor touted billions more dollars in revenue, proposed new investments in education and pledged more to the state’s reserves and pension debt.

But it was a one-sided story.

It’s unclear whether Newsom will project a budget deficit for the 2026-27 fiscal year, how big it will be, and whether closing the gap will require painful spending cuts to essential services like child care, food assistance and Medi-Cal, the state’s health coverage for low-income residents, especially as federal funding shrinks.

Still, Newsom won’t be absent from Friday’s presentation of his final annual budget proposal, when details of his spending plan will be revealed, leaving Treasury Department Director Joe Stevenshaw and Principal Deputy Budget Director Erica Li to answer those questions.

Newsom’s forecast is likely to be much sunnier than the gloomy outlook from the nonpartisan Legislative Analyst’s Office, which in November projected a deficit of $18 billion despite higher-than-expected tax revenue thanks to a booming AI industry. A shortfall of that size would require long-term adjustments, although government leaders have relied on band-aids such as accounting maneuvers, domestic borrowing and withdrawals from government reserves to balance the books in recent years.

But according to Newsom, California will have a general fund of $248.3 billion next year — $13 billion more than his office predicted in June.

Newsom also touted Thursday that the state will have $42.3 billion more in revenue than last year’s projections. But that figure is for a three-year period, state Treasury Department spokesman HD Palmer told CalMatters.

The omission of the cumulative nature of the $42 billion makes Newsom’s speech “alarming,” a senator said. Roger Nielloa Roseville Republican and vice chairman of the Senate Budget Committee.

“That would be a deliberate misrepresentation of fact,” he said.

Nonetheless, Newsom has teased a slew of 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 in 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 to housing and homelessness.

The governor briefly nodded to “long-term structural challenges” by proposing a $7.3 billion deposit into the reserve fund, roughly the amount the state drew down last year, which would bring the rainy day fund balance to roughly $21 billion. He also proposed spending $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 left by the federal government,” said Senate President-elect Pro Tem Monique LemonDemocrat from Santa Barbara. “We have to step back and look (at) what’s possible.”

“How big is the balloon?”

Senate Budget Committee Chairman John Laird, D-Santa Cruz

Sen. John LairdSanta Cruz Democrat and the new chairman of the Senate Budget Committee, warned that the high revenue forecast indicated a bubble. Laird, who was elected to the state Assembly in 2002 after the dot-com bubble burst in 2000, said he was concerned that the AI-driven boom might not last.

“I think everybody agrees that this level of revenue is unsustainable, but how big is the bubble? That’s probably the question,” he told CalMatters.

The Legislature should start reducing the long-term structural deficit this year instead of forcing the problem, he said.

“We’re going to have to do some of that,” he said. “We can’t go into next year with a deficit of $30 billion or $37 billion because the amount of reserves is nowhere near that.”

The fight for homeless funding continues

Newsom has been at loggerheads with counties over homeless funding for years, as political pressure to solve the state’s homelessness crisis continues to grow. Newsom blamed the districts for not achieving 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 combat homelessness.

On Thursday, Newsom again criticized 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 redirecting “$1 billion in annual mental health funding to housing and treatment for people living on the streets” under Statement 1a voter-approved bond primarily for mental health beds and supportive housing.

“No more excuses – it’s time to get people off the streets, out of camps, into housing, into treatment. Counties need to do their job!” Newsom said, drawing applause from lawmakers.

It was unclear how he planned to distribute those dollars. He did not mention any funding for the Homeless Housing, Assistance and Prevention Program, the state’s main source of homeless funding.

The California State Association of Counties, which represents all 58 counties and lobbies for an annual appropriation of $1 billion in HHAP funding, was unhappy.

“Playing a make-believe game with existing funds is no substitute for the most successful program to address homelessness at the local level,” said association executive director Graham Knauss. “Why on earth would the state abdicate its responsibility and allow homelessness to grow again?”

Newsom’s plan also alarmed county behavioral health providers who rely on Prop. $1 for services.

“While these one-time investments are promising, $1 billion in ongoing housing subsidy funding under Proposition 1 comes at the expense of redirected mental health treatment and prevention programs,” said Michelle Doty Cabrera, executive director of the Association of County Behavioral Health Directors.

No mention of Medi-Cal

Newsom also gave little detail on the outlook for Medi-Cal, the state’s most expensive program with A budget of $200 trillion and therefore an attractive target for potential layoffs. He didn’t even name the program in his speech.

The governor criticized Trump for passing a federal budget that could throw 1.8 million Californians off their insurance and raise premiums for another 2 million. The state will have to spend at least $1.3 billion more than expected next year just to enforce the federal law, LAO pre-assessed.

deputy Oh my godan Oakland Democrat who chairs the Assembly’s health care committee said the state should “use the bully pulpit” to fight the federal government, find ways to cut costs or even revive indigent care, a form of last resort that has largely been rendered obsolete by Medi-Cal.

“Because the alternative is people dying in the streets,” Bonta said.

Bonta said the Legislature should explore new sources of funding, such as two proposed wealth tax ballot measures to fund health care and education that Newsom opposes.

“We need to think about ways we can increase our sources of revenue … (with) openness in looking at our tax structure,” she said, adding that there are ways “to make sure everyone brings their fair share.”

This article was originally published on CalMatters and is republished under Creative Commons Attribution-NonCommercial-No Derivatives license.