Newsom will unveil his latest budget. An $18 billion deficit is expected.

from Yue Stella YuCalMatters

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In 2019, first Governor Gavin Newsom inherited a state’s wealth of cash. With a $21.4 billion budget surplus to play with, ambitious Newsom invested billions in affordable housing, child care and expanding health care while paying down the nation’s debt and building up reserves.

The next governor will not be so lucky.

When Newsom unveils his final spending plan as governor on Friday, he will do so with the specter of a projected $18 trillion deficit — the result of rapidly rising state spending, losses in federal funding and increased economic uncertainty under President Donald Trump’s administration.

The deficit could grow to $35 billion a year over the next few years if state leaders don’t pursue long-term solutions, namely achieving sustainable revenue increases or spending cuts, according to the Legislative Analyst’s Office, a nonpartisan fiscal adviser to lawmakers.

But neither will be an attractive option for Newsom and legislative leaders this year.

They have repeatedly resisted raising taxes on both average Californians and high-income earners — a politically risky proposition in a state with high tax rates and rising revenues. The spending cuts are just as painful to swallow, especially for Democrats running for re-election in November who fought to expand services like Medi-Cal that may now be repealed.

For Newsom, a lame-duck governor with presidential ambitions, there is even less incentive to address the long-term health of the state’s budget through major policy changes, political strategists say.

“It’s not uncommon in California for an outgoing governor to leave a note on the new governor’s desk saying there’s a budget deficit,” said longtime Democratic consultant Gary South.

But how Newsom handles the structural deficit will almost certainly have an impact on his expected run for president. State Republicans, such as Rep David Tangipa of Fresno, already blame the budget problem on Newsom’s mismanagement. “A Newsom presidency would be a fiscal and governance disaster of historic proportions,” Tangipa wrote in a December post.

It’s the fourth straight year of Newsom’s tenure that the state has projected a deficit even as revenues grow. In the past, state Democratic leaders have resorted to temporary fixes such as domestic borrowing, payment deferrals, one-time cuts and withdrawals from California’s disaster fund to avoid disrupting the social safety net.

But that cushion is shrinking: the government’s reserve stands at $14 billion, half of your peak balance, after two years of withdrawal. State leaders have borrowed more than $20 billion from other state funds, debts that will come due in the coming years. Continuing to rely on these options would leave the state “definitely less prepared” for an economic downturn, LAO warned.

“Eventually, you’re going to run out of Band-Aids,” said Steve Maviglio, a Democratic strategist who worked for then-Gov. Gray Davis during a huge budget deficit. “(Newsom) has used every trick in the book and after a certain point there’s nothing left.”

More health care cuts to come?

Newsom has not indicated whether he would consider cuts to Medi-Cal, the state’s main health insurance program for low-income residents. But as the state’s most expensive program, it’s an attractive target. More than half of $200 trillion programFunding comes from the federal government.

Last yearas Newsom and lawmakers struggled to plug a $12 billion budget hole, they froze new Medi-Cal enrollment for undocumented immigrants, charged enrollees a $30 monthly premium and delayed cuts to certain benefits. The cost of Medi-Cal is rising faster than expected, forcing the state legislature to set aside $6.2 billion mid-year to prevent shortages.

The decision was contested, with some health care advocates and Democratic lawmakers criticizing their leaders for creating the “two-tier healthcare system” that deem immigrants less worthy of quality coverage.

“This has been an incredibly disappointing set back,” said Amanda McAllister-Wallner, executive director of Health Access California, which advocates for universal health care.

This year, Trump’s budget cut the federal government’s share of Medi-Cal funding, requiring the state to pay more to provide the same benefits. California is projected to spend at least another $1.3 billion to implement this change, a figure that could reach $5 billion by fiscal year 2029-30, the LAO estimated.

MP Oh my godOakland Democrat, who chairs the Assembly Health Care Committee, said solving the state’s budget crisis should not come at the expense of health care.

“California needs its state and federal leaders to look for more innovative solutions to close the gaps, make health care affordable and keep our families healthy,” she said in a statement that did not offer specific alternatives.

Any cuts to Medi-Cal could have political ramifications for Democrats, who often pride themselves on expanding social services. Repealing Medi-Cal could also damage Newsom’s legacy, since it was under him that the state began offering Medi-Cal to immigrants.

“Democrats are the party of health care expansion,” Mavilio said. “Cutting it goes against everything they stand for.”

McAllister-Wallner admitted she was not optimistic about the budget outlook. But she said she hopes the state will find new revenue by taxing corporations rather than making cuts to vulnerable populations.

If “we’re only dealing with this through cuts and cuts to the most vulnerable, that’s not the leadership we’re looking for,” she said.

State leaders could also roll back some of last year’s funding commitments in other areas. While state lawmakers negotiated $500 million for the county’s homeless and delayed it until next year, it’s not guaranteed. Newsom, who blamed local governments for the state’s homelessness problem, could keep the money.

Newsom also promised last year that he would strike a deal with Bay Area transit advocates for state funding to save the area’s transit network from collapse. But last month, in light of the budget deficit, Newsom urged advocates to dip into pre-allocated dollars to save the regional transit network, instead of a $750 million loan that advocates had requested.

Taxing the wealthy is a non-starter for Newsom

It will be difficult to muster the political will in Sacramento to raise taxes.

Former Assembly Speaker Anthony Rendon, a Los Angeles Democrat who is running for state superintendent of public instruction, said he has long supported higher taxes on industries that “have long moved away from taxation.”

But even California’s most progressive Democrats don’t have much of an appetite for raising taxes, he said, because many of them represent wealthy areas like Silicon Valley, where their wealthy donors live.

Even as the state faced a projected deficit of $56 billion over two years in 2023, Rendon said Democrats were “shrugging” at the problem and pointing to state reserves as a solution, which he said reflected a culture of reliance on the rainy day fund.

This year, Newsom has already spoken against a proposed labor-backed wealth tax measure, in line with his past opposition to such proposals.

The ballot measure, entitled the “Billionaire Tax Act of 2026.” and filed with the state attorney general’s office in October, seeks to impose a one-time 5 percent tax on those with a net worth of at least $1 billion and use the money to fund state health and education programs. The effort is being led by SEIU-UHW, a powerful union representing health care workers, and the St. John’s Community Health, one of the largest not-for-profit health care providers in Los Angeles County.

condition. Sen. Roger NielloRoseville Republican and vice chairman of the Senate Budget Committee, applauded Newsom’s opposition to the proposed tax hike.

“To have a situation where we’ve run a growing deficit in the face of an economy that’s not in recession and revenues are increasing, it seems foolish to solve that by further increasing revenues,” he said.

While taxing the wealthy is a popular Democratic talking point, supporting a proposal like this could mean alienating the wealthy donors Newsom is likely to rely on for his presidential bid.

Also, there would be no political payoff for Newsom in his final year to stabilize the state’s progressive tax structure, which relies heavily on high-income earners, despite him promising to do so when he takes office.

“He’s going to make more enemies by doing it than if he didn’t,” Mavilio said.

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