California Gov. Gavin Newsom’s administration said the state faces a $2.9 billion budget deficit this year, an amount the office described as significantly lower than what legislative budget analysts projected. While the deficit is smaller than expected, the administration said it could still require cuts and means the Democratic governor will not have money to advance new programs during his last year in office.
Newsom’s office outlined a $349 billion budget, though his proposal for how to spend the money is far from final. The next several months are expected to include negotiations between lawmakers and the governor over priorities and possible reductions, a process that will unfold with the state still dealing with deficits for a fourth year in a row.
The state’s shortfall is arriving even as revenues are growing, fueled by stock market gains and investments in artificial intelligence, according to the AP report. Newsom’s administration also said the budget deficit is not the only strain lawmakers face: it also pointed to an additional $1.4 billion loss in federal funding tied to new federal policy changes affecting health care and food assistance programs for low-income people.
At a Friday briefing, Newsom’s Finance Director Joe Stephenshaw said, “This budget really is about an eye towards ensuring that we have a sustainable fiscal plan going forward,” according to the report. The administration said lawmakers have been clear that California is in no position to backfill the federal funding loss, and it said the budget does not fully address it.
The deficit picture includes estimates that differ between entities. The nonpartisan Legislative Analyst’s Office projected in November that California would face an $18 billion shortfall this year, and the AP report said the legislative analysts’ estimate and Newsom’s administration sometimes differ. Newsom’s administration said some of the deficit was offset after the state generated billions of dollars more in revenues than expected.
State Controller Malia Cohen warned lawmakers this week that California is already spending nearly $6 billion more than expected six months into the fiscal year, according to the report. Cohen urged lawmakers to take “a disciplined approach.”
Republican state Sen. Tony Strickland argued that the budget problem is nothing new and said, “California families have to balance their budgets and make tough choices. The state government should be held to the same standards,” the report said. Democratic leaders said they are committed to addressing deficits, with state Senate President Pro Tempore Monique Limón saying in a statement, “During these times of uncertainty, we must craft a responsible budget that prioritizes the safety and fiscal stability of California families.”
Education is a central piece of Newsom’s proposal, following remarks during his State of the State address on Thursday. The AP report said Newsom told audiences his budget will include “the most significant investments” in public education, including fully funding transitional kindergarten programs for all students, spending more than $27,000 per student next year, and providing $1 billion to high-need schools. The report also said roughly 40% of the state’s budget is required by California law to go to schools each year.
In addition, Newsom proposed moving the Department of Education into the executive branch, while the report noted the state superintendent of public instruction is an elected position and that it is not immediately clear whether Newsom will seek voter approval for the change. On homelessness, the governor’s plan does not propose new funding to local governments, and the AP report said last year’s agreement to set aside $500 million for local programs is not guaranteed.
County officials expressed concern that without new funding, local efforts to reduce homelessness may be harmed. The report said Graham Knaus, CEO of the California State Association of Counties, pointed to a 9% drop in unsheltered homelessness that Newsom touted earlier this week, and said, “It would make no sense to then stop the most successful program that is doing that,” as he argued for continuity.
Newsom’s proposal also includes steps related to reserves. The AP report said he is calling for the state to rebuild reserves after withdrawing roughly $12 billion in the last two years to address budget problems, including deposits of roughly $3 billion into the state’s rainy day fund, $4.5 billion into a special fund for economic emergencies, and $4.1 billion into schools’ reserve funds. The governor also wants to use $3 billion to pay down debt.
Other elements of the budget plan include $200 million to create a rebate program to make buying an electric car more affordable, with the report saying the money would come from revenues generated by the state’s cap-and-trade program and an air pollution regulation fund. Newsom’s office said the goal is to backfill federal tax incentives for electric vehicles that were slashed by a Trump tax and spending cut bill.
The budget proposal would also increase funding for the state Department of Justice, the report said, to help California fight the Trump administration’s agenda. The AP report said California has sued the Trump administration more than 50 times since last year.
As Newsom weighs these priorities in what the report described as his final year as governor—when he cannot seek a third term and will leave office in January—lawmakers are also expected to contend with the possibility that the state’s structural deficit could climb to $22 billion the following year, according to the AP report.