Gov. Gavin Newsom is proposing further budget cuts and expanding the state’s reserves despite a recent surge in tax revenue — an attempt to balance the books in anticipation of a long-term deficit in the coming years, he said.
In a presentation riddled with criticism of the Trump administration and featuring memes including an image of President Donald Trump and Treasury Secretary Scott Bessent as “Dumb and Dumber,” Newsom released his last budget plan as governor on Thursday.
He proposed a nearly $350 billion spending plan that would balance the budget for two years and cut longer-term budget gaps in half. Newsom had pledged not to leave his successor with a giant structural deficit. Under his plan, the state would face a $10.3 billion deficit in fiscal year 2028-29 and $9.6 billion in fiscal year 2029-30.
“I’m not trying to get out of Dodge,” Newsom said. “This is a balanced budget structurally for the next 18 months after I’m gone.”
He proposed slashing general fund spending by $1.8 billion, primarily by further cutting Medi-Cal, including by raising monthly premiums on undocumented immigrant adults by $20 and reinstating Medi-Cal asset tests.
While Newsom wants the state to continue withdrawing $7 billion from reserves this year, his proposal would also shore up the rainy day fund by transferring $3.6 billion to the account next year and setting aside nearly $10 billion more for fiscal year 2027-28.
Senate Budget Committee Vice Chair Roger Niello, a Roseville Republican, said the governor’s proposal does not go far enough to cut spending and dips into the reserves despite a year of strong revenue. The structural deficit would also remain beyond fiscal year 2027-28, Niello said.
“I just don’t see how he can say that he’s leaving (behind) a good budget situation, even a balanced budget, when we know we’re up for a significant (structural deficit),” he said.
The governor’s presentation is an updated outlook at the state’s finances since January, when Newsom’s administration projected a “modest shortfall” of $2.9 billion that would grow to a $22 billion deficit in fiscal year 2027-28.
Since then, tax revenue grew faster than anticipated, thanks to a robust stock market and California’s flush AI-driven technology sector. Newsom projects that the state will see $16.5 billion more in revenue over a three-year budgeting window than expected in January.
But Newsom said the state’s financial outlook remains ominous, attributing much of the uncertainty to Trump’s policies, including a spending plan the president calls his “one, big beautiful bill,” which could strip 2 million low-income Californians of health insurance coverage. Newsom also slammed the war in Iran, which has sent gas prices skyrocketing nationwide.
“We have a president who … doesn’t particularly give a damn about the financial situation of the average American,” Newsom said.
It’s unclear how long California’s revenue boon would last. The recent spike in tax collection suggests that the stock market is reaching “bubble territory” and could head toward an “eventual bust,” said the nonpartisan Legislative Analyst’s Office, which advises the state Legislature. “The state should be prepared for revenues to be tens of billions lower within one or two years.”
California’s spending has continued to outpace revenue growth. Since fiscal year 2019-20, spending has grown by more than $100 billion, primarily from maintaining and expanding K-14 education, according to the LAO.
“We need to tighten our belt, and we need to focus on the outcomes,” he said.
But Newsom is proposing new spending in some areas, including $300 million to subsidize private healthcare for low-income and middle-class Californians as well as money to offer paid pregnancy leave for TK-12 and community college employees and to cut filing fees for roughly 250,000 new businesses in half.
Will Newsom butt heads with legislators?
Parts of Newsom’s spending plan are in sharp contrast to what Democrats in the Legislature want. They prioritized preserving healthcare and education funding in their budget proposals.
He stuck to his plan to limit care for roughly 200,000 immigrants, such as refugees, asylees and trafficking survivors but delayed it until July 2027. Senate Democrats want the state to fully fund their benefits.
Newsom also stuck to his proposed cuts to the state’s in-home supportive services program, which both Democrats and Republicans in the Legislature oppose, and rejected appeals from Senate Democrats and local governments to spend more on homelessness and on Proposition 36, the voter-approved initiative that increased penalties for petty crimes.
His plan also steers clear of any major tax increases, putting him at odds with progressive legislators who have for months called for tax increases on big corporations.
Newsom, who called himself a “small business guy,” says he also wants companies to pay their fair share — by capping their corporate tax credits permanently at $5 million or 50% of a company’s tax liability, whichever is higher. He estimates it would bring in $850 million next year and $1.7 billion the next.
The California Chamber of Commerce opposes the proposed tax increase, saying it “will burden our entrepreneurs and employers who are driving higher-than-expected revenues” and likely be passed on to consumers.
Senate Democrats want corporations with several hundred employees to pay up if their workers are enrolled in Medi-Cal — Senate leaders say that would generate $5 to $8 billion a year.
But there is some common ground. Both Newsom and Democratic legislators want to increase how much the state can save in its rainy day fund during a good year, which would require voter approval. Newsom said wants to increase it to 20% of the state’s general fund tax revenues. California has a volatile tax system that swells with capital gains when the stock market is surging and contracts in down years. A larger rainy day fund would cushion the leaner years.
Newsom’s presentation marks the beginning of budget negotiations between the governor and state lawmakers. Legislators have until June 30 to work out a deal with the governor ahead of the new fiscal year.
Health premiums for undocumented immigrants would rise
Newsom’s budget includes a significant change in healthcare for unauthorized immigrants. About 1.3 million of them who are enrolled in Medi-Cal would move to a separate fee-for-service program, a change meant to prevent the state from losing federal funding for Medi-Cal. They would lose access to benefits such as case management, some housing assistance and medically tailored meals.
Newsom’s proposal would hike the monthly premium for undocumented immigrant adults from $30 to $50 starting July 2027, on top of previously approved cuts that included freezing new enrollment for adult undocumented immigrants and eliminating dental coverage for those already enrolled.
“No one in the country has done more and no one has done better to address their anxiety and needs,” Newsom told reporters. “To the extent we are forced to make decisions, that’s called reality, that’s called math.”
He would also further reinstate Medi-Cal asset tests for seniors and adults with disabilities.
Healthcare advocates are infuriated by the cuts.
“We’re hopeful that the Legislature will stand up for immigrants, frankly in a way the governor has not,” Kiran Savage-Sangwan, executive director of the California Pan-Ethnic Health Network.
Graham Knaus, CEO of the California State Association of Counties, said Newsom’s budget proposal leaves counties out to dry. Counties are requesting $6.4 billion over the next two years to care for Californians at risk of losing Medi-Cal coverage and to support hospitals and behavioral health services.
“The governor proposes to hide from state responsibility while demanding counties do the state’s job for free, and we don’t see how that aligns with California values,” Knaus told CalMatters.
Some lawmakers are urging the state to delay those previously approved cuts. Sen. Maria Elena Durazo, a Los Angeles Democrat, introduced legislation to reverse some of those cuts and maintain Medi-Cal eligibility for the poorest undocumented immigrants, although it’s unlikely Newsom would sign it.
Tug of war over education funding
The governor touted a “record-high level of education spending” while withholding $3.9 billion in constitutionally required funding for TK-12 schools and community colleges — an accounting maneuver meant to guard against faulty revenue projections. Legislative Democrats support giving districts the full amount.
It’s less than Newsom proposed withholding in January. By law, the state must direct roughly 40 cents for every dollar in general fund revenue toward the schools, prompting teachers unions and school districts to accuse the governor of shortchanging schools and violating the constitution.
Newsom wants to require TK-12 schools and community colleges to give teachers and school staff up to 14 weeks of paid pregnancy leave, which teachers unions have championed for years. Currently, educators are not eligible for paid parental leave and must dip into their personal time off or sick days. In 2019, Newsom vetoed a similar bill that would have given school employees at least six weeks of paid pregnancy leave, citing high costs.
Newsom said the cost of the benefit will be absorbed by local education agencies, which will receive $907 million more than statutorily required.
The governor also proposed increasing special education funding by $2.4 billion and spending $500 million on literacy and math specialists in high-need schools.
Newsom seeks restrictions on housing, homelessness dollars
It would be harder for local governments to receive funding for housing and homelessness under the governor’s proposal.
Newsom wants to ban cities from imposing impact fees on affordable housing developments that also receive state subsidies. A recent study by UC Berkeley’s Terner Center for Housing Innovation found that the vast majority of recent affordable housing developments in California were subject to such fees, adding nearly $20,000 in costs per unit.
Though the Legislature has begun to take aim at these fees in recent years, proposals to ban, waive or delay them often flounder amid pushback from local governments, who argue that they fund essential public services. Contentious policy proposals often have an easier time becoming law when packed into the budget, which Newsom may be hoping to exploit.
The revised budget maintains the $500 million in local funding Newsom proposed to give local governments in January — a 50% reduction from prior years — but he added a new rule designed to ensure local governments put “some skin in the game.” Cities and counties would not be eligible for Homeless Housing, Assistance and Prevention funds unless they match that funding.
That could hurt smaller, rural communities that don’t get much federal homelessness funding and don’t have money in their coffers to contribute, ultimately punishing the unhoused people who live there, said Alex Visotzky, senior Califonia policy fellow for the National Alliance to End Homelessness. The nonprofit forecasts that homelessness will increase 20% statewide next year if funding remains at the proposed level.
CalMatters’ Ben Christopher, Kristen Hwang and Marisa Kendall contributed reporting.