Newsom's financial proposal relies on robust income even in the face of economic uncertainties

Newsom Unveils Budget Amid Fiscal Uncertainty

Governor Gavin Newsom delivered his final State of the State address at the Capitol in Sacramento on Thursday.

Photo credit: Hector Amezcua / Sacramento Bee

California Faces Unpredictable Financial Outlook

California and its state-supported programs are entering a period of financial instability, influenced by developments in Washington, D.C., and fluctuations in the financial markets.

On Friday, the governor’s chief budget officer cautioned that while the surge in revenue from the artificial intelligence sector has been significant, it is being counterbalanced by escalating expenses and reductions in federal funding. As a result, the state anticipates a $3 billion budget gap for the upcoming fiscal year, even though no major new spending plans have been introduced.

Budget Proposal Kicks Off Legislative Negotiations

The Newsom administration released a proposed $348.9 billion budget for the fiscal year starting July 1, officially beginning discussions with lawmakers over spending priorities and policy objectives.

“This budget demonstrates both optimism and prudence,” Newsom stated. “California’s economy remains robust, revenues are exceeding forecasts, and our financial standing is secure thanks to years of careful management. Still, we are committed to maintaining steady progress without overreaching.”

Federal Cuts Impact Social Programs

The proposed budget does not allocate funds to compensate for substantial reductions to Medicaid and other social assistance programs enacted by President Trump and the Republican-controlled Congress. These changes are expected to result in millions of low-income Californians losing access to healthcare and other benefits.

“If the state fails to intervene, communities throughout California will be at risk,” warned Graham Knaus, CEO of the California State Association of Counties.

Budget Revision and Approval Timeline

The governor is set to update the budget proposal in May, after new revenue data becomes available following the tax filing deadline. Lawmakers are required to finalize and approve the budget by June 15.

Unusually, Newsom did not attend Friday’s budget presentation, instead delegating California’s Director of Finance, Joe Stephenshaw, to answer questions about the spending plan.

“There are no major increases or deep cuts to programs in this budget,” Stephenshaw explained, emphasizing that the proposal remains subject to change.

California’s Revenue Volatility

The state’s tax system is particularly unstable, relying heavily on income taxes from high earners whose capital gains can fluctuate dramatically with the stock market.

As budget talks begin, many anticipated significant spending reductions after the nonpartisan Legislative Analyst’s Office (LAO) projected an $18 billion shortfall in November. However, the governor’s office and Department of Finance often use different estimates than the LAO.

Discrepancy in Deficit Projections

On Friday, the Newsom administration projected a much smaller deficit—around $3 billion—based on expectations of higher revenues over the next three years compared to last year’s forecasts. The difference between the governor’s estimate and the LAO’s largely stems from varying assumptions about economic risk, with the LAO factoring in the possibility of a major downturn in the stock market.

“We do not include that scenario,” Stephenshaw noted.