Newsom’s smaller estimate doesn’t include a possible stock market slide, while the bigger shortfall forecast by the Legislative Analyst’s Office, or LAO, does.
“The LAO incorporated a significant risk of a stock market downturn into their economic forecast,” explained Joe Stephenshaw, the Newsom administration’s finance director, during a budget presentation at the Capitol. “We do not do that. We don’t build in downturns, recessions.”
He added that the state collected $42.3 billion more in revenue last year than expected. That’s largely due to higher capital gains tax revenue generated by the AI stock market boom, though there are questions about whether that boom will continue this year.
Two top Democrats urged fiscal caution given political and economic uncertainty, noting today’s “roaring tax revenues may not last.”
“With Trump targeting our state, we must defend vulnerable communities and protect essential programs that help families put food on the table and see a doctor,” Democratic Assembly Speaker Robert Rivas and Assembly Budget Chair Jesse Gabriel said in a joint statement.
Senate Budget Vice Chair and Republican Roger Niello said Newsom’s plan fails to address long-term challenges, despite continued spending growth.
“This budget proposal feels as though the state is running in place,” said Niello, who represents parts of Sacramento and Placer counties. “The state is spending more without achieving meaningful progress.”
Newsom and past governors have traditionally presented their spending plans to the press and taken questions, but Newsom left that job entirely to his finance director this year.
January plan kicks off budget negotiations
The governor’s overall budget calls for spending $348.9 billion, or 8.7% more than last year’s overall total. It includes $248.3 billion for the state’s general fund, up 8.9% from the year before. Despite those increases, Stephenshaw said the budget “does not include new significant investments,” reflecting this year’s fiscal constraints.
California’s state budget has grown considerably since Newsom took office. Former Governor Jerry Brown’s final spending plan was $201.4 billion with a general fund of $137.7 billion for the 2018-19 fiscal year.
Newsom’s January budget kicks off months of negotiations between the governor and Legislature before a final spending plan can be reached in June. The governor will release a revised budget in May.
As Newsom and legislators start the process of closing California’s budget gap, they’ll contend with a Trump administration that’s cut off billions of dollars in federal funding for state programs over the past year. That includes a funding freeze this week for state childcare services and transportation projects following fraud allegations.
California’s reserve funds
In his January budget, Newsom called for rebuilding state reserves. That’s after California used $12 billion in savings over the last two fiscal years to meet shortfalls. California’s current reserves amount to around $14 billion. Newsom proposed adding $3 billion to the state’s Rainy Day Fund, $4.5 billion to the Special Fund for Economic Uncertainty, and $4 billion to the Public School System Education Account.
California’s overall reserves would increase to $23 billion under Newsom’s January proposal, though the legislature has yet to weigh in.
Housing and homelessness
Newsom touted a 9% decrease in unsheltered homelessness during his State of the State Address, though that’s been questioned given many California communities didn’t conduct a homeless count last year.
His starting budget proposal doesn’t include any new funding to combat homelessness. The governor and lawmakers agreed to set aside $500 million for counties to reduce homelessness at the local level, but Newsom’s administration has indicated additional accountability measures will be tied to those funds.
Sacramento City Councilmember Roger Dickinson criticized the reduction in funding.
“We can ill afford to lose the momentum that has been generated to reduce the unsheltered population in [Sacramento],” Dickinson said.
He urged lawmakers to increase funding for the state’s Homeless, Housing, Assistance and Prevention (HHAP) program to “at least $1 billion.”
This week Newsom also floated a proposal to crack down on private equity groups that purchase rental housing in the state, which he blamed for rising rents. The issue’s also piqued interest among lawmakers and is likely to crop up in the form of legislation this year.
Education
Education features prominently in Newsom’s budget. The proposal puts the Proposition 98 funding guarantee for K-12 schools and community colleges at $125.5 billion in 2026-27, after a dip to $121.4 billion in 2025-26. But the budget does not plan to fund the full amount next year, instead delaying part of the funding until later. It proposes a $5.6 billion ‘settle-up’ in 2025-26, which means schools would receive less funding upfront, with the final amount determined later based on actual revenues.
For TK-12, the budget includes a 2.41% cost-of-living increase in the state’s main school funding formula and repays $1.9 billion in earlier deferrals in 2026-27. It also proposes $2.8 billion in one-time flexible funding for school districts, plus $1 billion ongoing to expand community schools that offer wraparound support such as mental health and social services. The budget also includes a $509 million ongoing increase for special education aimed at leveling out funding differences between school districts.
On higher education, the budget continues the state’s multiyear funding agreements with universities and community colleges. It proposes $5.3 billion from the general fund for the University of California, and $5.6 billion for California State University, with year-over-year increases. For community colleges, the budget proposes $15.4 billion in general funds and local property taxes, including funding to repay past deferrals and to cover a 2.41% cost-of-living adjustment.
Health care
Health care remains one of the largest pressure points in the state’s budget. The state’s Medi-Cal program provides low or no-cost coverage to about 14 million Californians; including children, seniors, people with disabilities and many working families. In the 2026-27 budget, Medi-Cal spending is projected to rise to $222.4 billion, up from $196.7 billion the previous year; even as enrollment is expected to drop slightly.
The governor’s proposed budget says the increase is driven less by the program’s expansion than by higher costs and new federal rules. The budget projects a $2.4 billion increase in state general fund spending for Medi-Cal next year, in part, because temporary funding sources are expiring and federal matching funds are changing. Some of those federal changes could reduce coverage for some adults, including those who do not meet new work requirements or who lose eligibility for federally supported coverage.
For patients who already rely on the system, the budget largely keeps existing health care programs intact, including behavioral health services and programs to connect care with housing and social support.
Impact on Californians without legal status
Betzabel Estudillo with Nourish California said she was pleasantly surprised that the budget didn’t include cuts to food assistance programs like CalFresh. But she said the budget doesn’t address the impact of new federal requirements.
“We have to ensure that our state is continuing to mitigate the harm of H.R. 1 and making more investments to ensure that people are not losing eligibility to CalFresh because of their immigration status, or they’re losing CalFresh eligibility because of new work requirements,” she said, referencing the Republican-led federal budget passed last year.
Estudillo said this could be an opportunity for state-funded programs — like the California Food Assistance Program, which supports legal immigrants who don’t qualify for CalFresh — to show their value.
Others said they were disappointed in Newsom’s budget.
Masih Fouladi, executive director of the California Immigrant Policy Center, said it failed to increase investments or protections for immigrant Californians.
“California was on a much stronger path toward health care for all in 2024, but recent budget decisions — including freezing Medi-Cal enrollment and proposing premiums — have already slowed that progress,” Fouladi said in a statement. “This budget proposal would further push working immigrants, who are essential to California’s health care, food and caregiving systems, out of comprehensive coverage and into emergency-only care.”
Fouladi called on the state to protect immigrant access to food and health care arguing that when “immigrant families have the food they need and can see a doctor before they are in crisis, all Californians benefit.”
Transportation
Active transportation advocates expressed concern that the budget didn’t show any increased commitments to improving biking and pedestrian infrastructure. Jared Sanchez, a spokesperson for bike advocacy group CalBike, said the state cut $400 million in active transportation funds in the 2024-25 budget that Newsom promised to return, but Sanchez said that never happened.
“In the last cycle in the active transportation program, it only was able to fund around 10 to 15 projects, which are local projects, sometimes a mile or so long,” he explained. “But there’s hundreds of applications seeking funding from the state to fulfill their projects.”
Sanchez said these investments are critical, especially as e-bikes boom in popularity.
“We need to make sure our streets are safer for people to go slower speeds and shorter distances, and really get out of our cars and to be more active,” he said. “A lot of concern that we’re hearing instead is these e-bikes are too dangerous, so there’s a very different narrative out there that we try to counter.”
California last year cut an e-bike incentive program, which provided vouchers for low-income individuals to purchase an e–bike.
The budget also included a $1 billion commitment to the state’s High Speed Rail project, which will be funded entirely through the state’s cap and trade program.
Stephenshaw said no additional funding will be added to the now over $120 billion dollar project.
Impact of AI industry on state budget
Artificial intelligence shows up early in the governor’s budget as both a boost and a risk. The administration credits strong revenue gains in part to surging stock prices at major technology companies tied to investor enthusiasm around AI. Those gains helped push personal income tax collections well above expectations last year.
At the same time, the budget warns that AI-driven stock growth may not be sustainable. It notes a relatively small number of technology companies now have an outsized effect on California’s revenue picture. If AI-related markets cool, it warns the state could see sharp swings in tax collections.
Much could change economically and politically between now and the state’s final budget negotiations. Newsom is expected to release a revised budget in May. The governor and lawmakers have until June to reach a final spending plan.