California Governor Gavin Newsom delivered his annual State of the State address, outlining his administration's priorities and accomplishments. He subsequently proposed the 2026-27 state budget, which projected a smaller deficit than previous estimates, attributing anticipated revenue growth to the artificial intelligence sector, while also detailing spending allocations and reductions across various sectors.
State of the State Address Overview
During his State of the State address, Governor Gavin Newsom presented his vision for California, characterizing the state as a counter to the policies of the previous federal administration. He stated California's leadership in manufacturing, technology, education, and agriculture. Newsom highlighted a reported 9% reduction in unsheltered homelessness, the increased availability of cheaper insulin, and expanded clean energy use as key achievements. The address also included references to federal policies on issues such as policing and immigration, and Newsom reiterated a call for $34 billion in federal aid for Los Angeles to support wildfire recovery efforts. He mentioned progress regarding housing affordability, expanded healthcare coverage, universal pre-kindergarten, and fossil fuel-free initiatives. Long-term goals, such as building 3.5 million housing units or establishing a universal public healthcare system, were noted as not yet achieved.
Budget Proposal and Fiscal Outlook
Governor Newsom's 2026-27 budget proposal projected a $2.9 billion shortfall for the upcoming fiscal year, a figure lower than previous estimates. The proposed budget, totaling nearly $349 billion, anticipated a $9 billion increase in revenue, largely linked to the performance of the AI-driven economy. This projection differed from the nonpartisan Legislative Analyst's Office's November estimate of an $18 billion deficit. State Department of Finance Director Joe Stephenshaw identified a market downturn as a primary risk to the budget's assumptions. The proposal represents an approximate $30 billion increase over the current year's budget, with $248.3 billion allocated to the general fund. This increase was attributed partly to federal reductions in the Medi-Cal program and constitutional requirements for education funding and state reserves.
Key Policy Areas and Funding Decisions
- Homelessness and Housing: During his State of the State, Newsom emphasized his administration's focus on clearing street encampments and funding new mental health facilities through Proposition 1, a $6.3 billion bond approved by voters in 2024. Lawmakers noted that Newsom's reported 9% reduction in unsheltered homelessness followed years of increases, with homelessness in California reaching a record high of 123,974 unsheltered individuals in 2024, despite over $24 billion allocated to the issue during Newsom's two terms. Some individual counties, including Contra Costa, San Diego, and Los Angeles, reported local progress. The subsequent budget proposal included a $1.3 billion reduction in spending for housing and homelessness, representing over a 50% cut to the department's budget. This included the elimination of a $500 million annual state contribution to the Low Income Housing Tax Credit and a reduction in funding for local housing and homelessness services from $1 billion to $500 million, subject to accountability requirements.
- Education: The budget proposal allocated an additional $350 million to the University of California system and $365 million to the California State University system in 2026-27, aligning with a 2022 commitment for annual 5% increases. For K-12 education, the budget maintained initiatives for school meals, community schools, after-school and summer programs, and transitional kindergarten, avoiding cuts to these areas. Per-pupil spending was projected to increase to $27,400, with an additional $509 million for special education and a 2.41% cost-of-living increase. The universal transitional kindergarten program was estimated to cost $1.9 billion annually, and $1 billion was proposed for high-needs community schools.
- Healthcare and Behavioral Health: Newsom's State of the State address mentioned expanded healthcare coverage. The budget allocated an additional $2 billion for the current year and $2.4 billion for the next year to Medi-Cal, primarily to offset federal funding reductions. The Governor referenced federal policies that could affect millions of Californians' insurance coverage. In behavioral health, the budget proposed redirecting $1 billion annually from Proposition 1 mental health funds towards housing and homelessness subsidies.
- State Reserves and Pensions: The budget proposal included depositing $3 billion into the Budget Stabilization Account and $8.6 billion into other reserve accounts. It also proposed $11.8 billion over four years, with $3 billion in the upcoming year, to address state pension liabilities. The budget was also expected to include renewing a business tax credit.
Reactions and Concerns
Republican lawmakers characterized the State of the State address as a campaign speech, arguing that the state's economic conditions, including the high cost of living and delays in the high-speed rail project, did not align with the governor's statements. Moderate Democrats raised concerns about the lack of detailed discussion on the budget deficit and specific plans for economic growth and healthcare disparities.
Regarding the budget proposal, county officials and housing advocates expressed concern over the proposed reductions in housing and homelessness funding. The County Behavioral Health Directors Association stated that redirecting Proposition 1 funds would come at the expense of mental health treatment and prevention programs. Assemblymember Mia Bonta suggested exploring new funding sources, including potential wealth tax ballot measures, a proposal Governor Newsom opposes. Senate Budget Committee Chair John Laird expressed caution regarding the sustainability of the AI-driven revenue projections, suggesting that the Legislature proactively address the long-term structural deficit. Progressive Democrats had advocated for new taxes on wealthy Californians to address potential federal healthcare cuts, a proposal Newsom also opposes.