California State Budget 2026-27

Gov. Gavin Newsom’s 2026–27 and final January budget proposal acknowledges that California faces a state deficit in the current fiscal year. However, the proposal is characteristically optimistic regarding the size of the deficit and remains equally ambitious in outlining how the state will deploy resources across key priorities, including agency consolidation, long-term debt repayment and legacy projects during the governor’s final year in office.

The budget reports a $2.9 billion deficit, described as a “modest shortfall” by Department of Finance staff. This estimate differs markedly from the Legislative Analyst’s Office (LAO) projection of a $17.6 billion deficit—a gap of $14.7 billion. According to department staff, the governor’s proposal incorporates $31.5 billion in additional revenues not included in the LAO forecast and excludes the risk of a stock market downturn that the LAO elected to factor into its analysis. Overall, the state budget totals $348.9 billion, including $248.3 billion in General Fund expenditures and $23 billion in total reserves.

Although the budget is balanced for the 2026–27 fiscal year, the state faces a projected $22 billion deficit in the following fiscal year, with additional shortfalls anticipated in subsequent years. To offset the expected deficit, the governor does not propose significant new investments beyond those that are constitutionally mandated (i.e. Proposition 98 funding) or required to accommodate capacity increases in essential programs. In addressing this outlook, the budget proposal states that California is facing “a benefit, a cost, and a challenge,” noting that the state benefits from a surge in 2025 revenues, incurs near-term costs associated with federal tax legislation and uncertain future impacts from high tariffs and restrictive immigration policy, and confronts the challenge of balancing the budget in 2026 and beyond.

In anticipation of the costs and risks, California is expected to face as a result of federal policy changes and projected stock market and asset price declines in the artificial intelligence sector, the governor reports a Budget Stabilization Account (also known as the Rainy Day Fund) totaling $14.4 billion for the 2026–27 fiscal year, an increase of approximately $3 million compared to the prior fiscal year. In addition, the governor signals a clear intent to reduce long-term debt, allocating $3 billion in 2026–27 and $11.8 billion over the subsequent four years. Finally, the governor has elected to set the Special Fund for Economic Uncertainties (SFEU), California’s discretionary General Fund reserve, at a lower level of $4.5 billion.

Gov. Newsom concludes his introduction by underscoring major accomplishments and progress achieved during his tenure. Many of these investments, including expanded funding for TK–12 education and child care, higher education affordability, climate and clean energy initiatives, workforce and apprenticeship development, and behavioral health and homelessness, represent legacy policies of the Newsom administration. While, as previously noted, no new significant investments are proposed, the governor maintains existing funding for many of these programs and leverages his authority to reorganize agency responsibilities to streamline program implementation. The ongoing Business, Consumer Services, and Housing Agency reorganization and the newly proposed shift in oversight authority for the management of the California Department of Education serve as examples.

As California recovers from a year marked by devastating natural disasters and continues to navigate an unprecedented political landscape with midterm and gubernatorial elections on the horizon, Gov. Newsom emphasizes that this year’s January proposal is “not the final word,” but rather a starting point for policymakers and stakeholders to collaborate on a final budget that will ensure California’s fiscal stability for years to come.

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