The deficit arrives alongside a projected $1.4 billion loss in federal funding tied to changes in federal health care and food assistance programs, compounding fiscal pressure even as revenue growth has outpaced earlier expectations.

SACRAMENTO, Calif. — Gov. Gavin Newsom’s administration projected a $2.9 billion budget deficit for California in the current fiscal year, the governor’s office said Friday, extending the state’s streak of multibillion-dollar shortfalls to four consecutive years.

The $2.9 billion projection is lower than the $18 billion shortfall the nonpartisan Legislative Analyst’s Office forecast in November. Newsom’s administration said revenues came in higher than expected, driven by stock market gains and investment in artificial intelligence, helping close part of the gap.

The shortfall nonetheless leaves the Democratic governor with limited room to advance new programs in his final year in office. Newsom cannot seek a third term and leaves office in January.

“This budget really is about an eye towards ensuring that we have a sustainable fiscal plan going forward,” Finance Director Joe Stephenshaw said during a Friday briefing.

Federal Cuts Add Pressure

California faces a projected $1.4 billion loss in federal funding this year after changes to health care and food assistance programs for low-income people. Lawmakers have said the state is not positioned to replace that money, and Newsom’s proposed $349 billion spending plan does not fully address the loss.

State Controller Malia Cohen warned lawmakers this week that the state is already spending nearly $6 billion more than expected six months into the fiscal year. She urged a “disciplined approach.”

Looking further out, a structural deficit could climb to $22 billion the following year, according to budget projections that lawmakers must weigh as they negotiate. The state drew down roughly $12 billion in reserves over the past two years to close previous budget gaps, leaving less cushion for future shortfalls.

Education

Newsom said during his State of the State address Thursday that the budget will include “the most significant investments” in public education. His proposal would fully fund transitional kindergarten programs, spend more than $27,000 per student in the coming year, and direct $1 billion to high-need schools.

Newsom also proposed moving the state’s Department of Education into the executive branch. The state superintendent of public instruction is currently an elected position, and it was not immediately clear whether Newsom would ask voters to approve the reorganization.

Homelessness

Newsom’s proposal includes no new funding to local governments for homelessness programs. Last year, the state set aside $500 million for local programs, though that funding is not guaranteed to continue.

County officials said the absence of new funding risks undercutting programs they say have produced results. California State Association of Counties CEO Graham Knaus pointed to a 9% drop in unsheltered homelessness that Newsom cited earlier this week.

“It would make no sense to then stop the most successful program that is doing that,” Knaus said Friday.

Rebuilding Reserves

The budget proposal calls for the state to rebuild its financial cushion. Newsom proposed depositing 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 plan also uses $3 billion to pay down debt.

Other Proposals

The budget includes $200 million for a rebate program intended to help Californians purchase electric vehicles. The funds would come from revenues generated by the state’s cap-and-trade program and an air pollution regulation fund, partly to offset federal electric vehicle tax credits eliminated under Congress’s recent tax and spending legislation.

Newsom also proposed additional funding for the state’s Department of Justice to continue pursuing legal challenges to federal administration policies. California has filed more than 50 lawsuits against the Trump administration since last year.

Legislative Responses

Republican legislators said the recurring deficits reflect an ongoing fiscal problem. Democrats hold supermajorities in both chambers of the legislature, giving Republicans limited influence over budget decisions.

“California families have to balance their budgets and make tough choices. The state government should be held to the same standards,” Republican state Sen. Tony Strickland said.

Senate President Pro Tempore Monique Limón, a Democrat, said her caucus remains committed to addressing the shortfall.

“During these times of uncertainty, we must craft a responsible budget that prioritizes the safety and fiscal stability of California families,” Limón said in a statement.

Newsom and lawmakers are expected to spend the coming months negotiating over priorities and cuts before the budget is finalized.