California Budget Deficit Overview
Governor Gavin Newsom is scheduled to present his final spending plan this Friday, facing a projected $18 billion state budget deficit. This contrasts with his first year in office in 2019, when the state held a $21.4 billion budget surplus, enabling investments in affordable housing, child care, and health care expansion, alongside debt reduction and reserve increases. The Legislative Analyst’s Office (LAO) indicates that without long-term solutions, the deficit could escalate to $35 billion annually in the coming years.
The current deficit is attributed to increased state spending, reductions in federal funding, and economic uncertainties. Potential solutions include increasing state revenue through taxes or implementing spending cuts. Both options present political challenges for the governor and legislative leaders.
Funding Challenges and Historical Approaches
State leaders have historically avoided increasing taxes on average Californians and high-income earners due to existing tax rates and growing revenues. Spending cuts are also challenging, particularly for Democratic legislators seeking re-election who have advocated for expanded services like Medi-Cal.
The state has projected a deficit for the fourth consecutive year during Newsom’s tenure, despite overall revenue growth. Past responses have included temporary measures such as internal borrowing, payment deferrals, one-time cuts, and utilizing California’s rainy day fund. The state's reserve currently stands at $14 billion, representing half of its peak balance after two years of withdrawals. Additionally, over $20 billion has been borrowed from other state funds, with repayment due in future years. The LAO has warned that continued reliance on these methods would leave the state less prepared for an economic downturn.
Health Care Funding Concerns
Medi-Cal, the state's primary health insurance program for low-income residents, is the most expensive state program, with over half its funding from the federal government. Last year, to address a $12 billion budget gap, new Medi-Cal enrollment for undocumented immigrants was frozen, a $30 monthly premium was introduced for immigrant enrollees, and certain benefit cuts were postponed. An additional $6.2 billion was allocated midyear by the state Legislature to prevent a program shortfall. Health care advocates and some Democratic lawmakers expressed concerns regarding these actions.
Changes in the federal budget have reduced the federal government's share of Medi-Cal funding, necessitating increased state contributions to maintain current benefits. California is projected to spend at least $1.3 billion more to implement this change, with potential increases up to $5 billion by fiscal year 2029-30, according to LAO estimates. Assemblymember Mia Bonta, chair of the Assembly Health Committee, has stated that budget solutions should not compromise health care and called for innovative alternatives.
Other Program Funding and Tax Policy Discussions
Other areas potentially impacted by budget adjustments include a $500 million commitment for homelessness funding to counties, which was delayed to the next year and is not guaranteed. Governor Newsom also urged Bay Area transit advocates to utilize previously allocated funds to support regional transit networks, rather than the requested $750 million loan.
Discussions regarding tax increases have encountered political resistance. Former Assembly Speaker Anthony Rendon noted limited appetite among California Democrats for higher taxes. Governor Newsom has publicly opposed 'The 2026 Billionaire Tax Act,' a proposed ballot measure supported by labor unions and health care providers seeking a one-time 5% tax on individuals with a net worth of at least $1 billion to fund health care and education. State Senator Roger Niello (Republican) supported Newsom's opposition to the proposed tax increase, arguing against further revenue increases when the economy is not in recession and revenues are growing.
Political Implications
Political strategists have indicated that the governor's approach to the structural deficit could impact his political future. Assemblymember David Tangipa (Republican) has attributed the budget problems to the governor's management.