California’s budget is bleeding red ink under pressure from Trump’s cuts

from Dan WaltersCalMatters

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Nine months into the 2025-26 fiscal year, state tax revenue is several billion dollars ahead of projections in the budget which Gov. Gavin Newsom signed last June.

This is somewhat good news because the budget had a serious hole between projected general fund revenues and outlays, a continuation of what budget officials call “structural deficit” that plagued recent budgets.

The costs have consistently outpaces revenuethe gap being bridged by a variety of loans, accounting gimmicks and raids on emergency reserves a total of $125 billion so faraccording to Gabe Petek, the legislature’s budget analyst.

of Newsom proposed budget for fiscal year 2026-27 contains a $21 billion general fund shortfall that he would shrink to $3 billion using a set of the same temporary measures.

Newsom has promised that when the budget is revised in May, it will not only plug its last hole, but end a deficit cycle that would otherwise continue indefinitely, according to budget writers Petek and Newsom.

The recent revenue growth cited in a report from Petek’s officeslightly improves the revenue/spending imbalance, but falls short of closing it unless it turns into a big windfall, as Jason Sisney, a budget adviser to legislative leaders, believes it could.

“No one advocates humility on revenue projections more than I do, but I think there is a chance that general fund revenue for the budget window will be somewhere between $15 billion and $40 billion above the governor’s Jan. 9 projections,” Sisney said in a recent email.

The sharp differences in earnings depend on expectations of whether the stock market will continue its mostly positive recent performance, buoyed by artificial intelligence companies, or slow down. California’s budget is highly dependent on taxes on the investment earnings of wealthy taxpayers and is therefore highly sensitive to stock market movements.

As the April 15 tax filing deadline approaches, everyone involved in the budget is anticipating new revenue figures. Meanwhile, the administration and lawmakers have been besieged by requests from those with a stake in the budget seeking more money than Newsom’s proposed budget.

On Wednesday, the mayors of the state’s largest cities warned that Newsom’s budget — which would cut the traditional $1 billion allocation for homelessness programs to $500 million — would “reverse the progress cities have made in reducing homelessness.”

The mayors don’t just want the $1 billion back; they are seeking a multi-year commitment with annual inflation adjustments, the latest chapter in a long-running dispute. Newsom criticized cities for not spending money effectively to reduce the number of homeless people on the streets, while mayors complained that without multiyear aid they could not make long-term program commitments.

Meanwhile, county officials cited $6 billion to $9.5 billion in reduced federal aid in President Donald Trump’s “one big beautiful bill” this week asked Newsom and lawmakers for $6.4 billion over two years to make up for losses “to prevent the collapse of our safety net.”

Filling the financial holes from Trump’s cuts in federal aid is also a high priority for groups representing poor families in California, with the state’s Medi-Cal program a top concern. Not only did they seek to fill a state budget already leaking red ink, but they proposed tax increases for ongoing funding, including a California billionaire wealth tax that could be on the November ballot.

What we have, then, is a budget with chronic multibillion-dollar deficits that is under additional pressure from cuts in federal aid and must be finalized in less than three months by a governor now in his final year of office who is considering a run for the White House.

Should be interesting.

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