Gavin Newsom says California has no deficit, but the $350 billion price tag is drawing fire

Newsom unveils his revised budget

California Gov. Gavin Newsom unveiled his revised roughly $350 billion state budget proposal on May 14, 2026. He said California faces no deficit this year or next year. His office said the plan removes the structural deficit through July 2028 and balances the 2026-27 and 2027-28 fiscal years.

Newsom described the budget as fiscally careful because it lowers General Fund spending by $1.8 billion while protecting core programs. The plan adds little new ongoing spending and avoids major cuts. It is also Newsom’s final May budget revision before leaving office in January 2027.

A big change from January

In January 2026, Newsom’s administration projected a $2.9 billion shortfall for 2026-27 and a roughly $22 billion gap for 2027-28. By May, the governor said those near-term deficits were gone.

His revised budget counted $16.5 billion more in revenue than the January forecast over a three-year budget window. Strong income tax collections, stock market gains, and AI-driven technology wealth helped improve the outlook.

Newsom’s office also said the revised plan cuts the long-term operating deficit by more than half, though analysts warned that the revenue surge may not last.

Tech wealth helped the budget

The budget’s better outlook depends heavily on California’s tech economy. The Legislative Analyst’s Office said income tax collections grew at double-digit rates in recent months. It said AI excitement, record stock values, and higher pay for technology workers helped drive the growth.

The May Revision also says Big Three revenue growth jumped 12.4% in 2024-25 and is projected to grow 8.7% in 2025-26. That growth is expected to slow to 0.7% in 2026-27 as capital gains fall from high levels. The money helps now, but the risk remains large.

Newsom builds state reserves

Rather than spend all of the new revenue, Newsom proposed building reserves and holding money for future risk.

His office said the May Revision protects core services while keeping strong reserves. The plan includes a $9.7 billion holding-account set-aside and a Budget Stabilization Account balance of about $15.1 billion in 2026-27.

The budget also includes $4.5 billion in the Special Fund for Economic Uncertainties and $10.3 billion in the school reserve, bringing combined reserves to roughly $29.9 billion. The budget also continues talks on reserve-rule changes.

Little-known fact: California’s Budget Stabilization Account is basically the state’s rainy day fund. It exists so California can save money in stronger years and draw on reserves when revenue drops, or budget problems arise.

Republicans push back

Republican lawmakers rejected Newsom’s deficit-free framing. State Sen. Roger Niello, a Roseville Republican and vice chair of the Senate Budget Committee, said the proposal still leaves California facing a structural deficit later.

Republicans argued that the governor’s plan relies too much on temporary revenue from stock gains and AI-driven wealth. They also said the state needs deeper spending reforms rather than relying on volatile income tax collections.

Their criticism matched warnings from the Legislative Analyst’s Office, which said recent revenue gains may not last if the stock market falls or tech growth slows.

Interesting facts: Forbes reported that at least 86 AI billionaires are on its 2026 billionaires list, worth a combined $2.9 trillion. That shows how much personal wealth is now tied to the AI boom.

Spending has grown fast

California’s nonpartisan Legislative Analyst’s Office said General Fund spending has grown by just over $100 billion since 2019-20, rising from $146 billion to $248 billion under the governor’s 2026-27 proposal.

The LAO said about 70% of that growth went to keeping existing services running, while 30% went to expanding or creating programs.

The office also warned that it and the administration had estimated structural deficits of $20 billion to $30 billion a year. Recent stock-market and AI-driven revenue helped the short-term outlook, but long-term budget pressure still remains.

Little-known fact: California’s Legislative Analyst’s Office was created in 1941 and claims to be the first nonpartisan legislative fiscal office in the country.

Analysts warn about risk

California’s nonpartisan Legislative Analyst’s Office warned that the state’s stock-market-driven income is fragile. The LAO said strong income tax collections have been driven by AI excitement, record stock prices, and higher pay for technology workers.

It also said several signs point to an overheated market. These signs include historically high stock values and households holding more stock-market exposure than at any point in at least 70 years.

The office built some caution into its forecast because a market downturn could quickly weaken state revenue. It said California’s long-term budget imbalance likely needs major policy changes.

Federal policy adds uncertainty

The revised budget names federal policy and global uncertainty as risks to California’s outlook. The May Revision says recession risks remain high due to unpredictable federal policy, geopolitical risks, and the effects of the Iran war on consumers.

It also says higher diesel prices are expected to slow sales tax growth in 2026-27. Newsom’s office framed the budget as protecting health care, education, and essential services during federal pressure on health programs and working families.

The danger is that trade, energy, and federal policy shocks could weaken consumer demand and reduce state revenue.

Health care gets support

The revised budget includes $300 million to support health care affordability in Covered California, the state’s health insurance marketplace. A Senate budget summary said the May Revision adds $110 million from the Health Care Affordability Reserve Fund.

That, combined with ongoing resources approved in the 2025 Budget Act, provides $300 million for affordability in the exchange. Medi-Cal remains a major budget pressure.

In 2025, California approved funding to close a Medicaid gap after costs rose above expectations. The revised plan focuses on protecting core health programs during tight financial conditions.

Schools get a stronger outlook

California’s revised budget increases support for schools and community colleges compared with the January plan. The May Revision says the Proposition 98 guarantee for TK-14 schools rose by about $6.4 billion from the Governor’s Budget across the three years.

It also includes a nearly $2.4 billion increase in special education funding, or 43% over the 2025 Budget Act. The plan adds $428.8 million for literacy coaches and reading specialists and $60 million for math professional learning. Education groups still raised concerns, but schools had a more positive outlook than in January.

Wildfire rebuilding gets help

The budget creates a $100 million Disaster Rebuilding Fund to help homeowners rebuild after natural disasters such as wildfires. A Senate budget summary says the fund would use a loan-loss guarantee program, an interest-rate buydown program, and other tools to reduce borrowing costs and improve access to private financing.

Newsom’s office described the fund as help for wildfire survivors rebuilding homes. Separate public safety investments were proposed in the January 2026 budget. Those included $194.6 million in new public safety spending and a total state commitment of $2.1 billion since 2021-22.

Homelessness funding continues

California’s Homeless Housing, Assistance, and Prevention program has a seventh round of funding planned at $500 million, contingent on stronger accountability and performance requirements for local governments.

The May Revision does not add new HHAP funding, but it maintains the planned Round 7 amount and proposes affordable housing reforms that would reduce local development fees on some state-funded affordable housing projects.

Local government groups criticized the funding level because earlier HHAP rounds were larger and cities and counties rely on the money for shelter beds, prevention programs, and other homelessness services. The May Revision does not restore HHAP funding to the earlier $1 billion level.

13 painful truths about living in California in 2026 fit the wider concern over housing, homelessness, taxes, and the rising cost of public services.

The budget is not final

The May Revision is not California’s final budget. It begins the last stage of negotiations between Newsom and the Legislature before the new fiscal year begins on July 1, 2026. Newsom cannot seek another term and is expected to leave office in January 2027.

That means the next governor will inherit the state’s fiscal outlook. Newsom said his revised plan balances the budget for the next 18 months after he leaves office.

The Legislative Analyst’s Office said the May Revision cuts future deficits about in half, to roughly $10 billion per year, but warned that California’s underlying budget condition remains unsound and vulnerable to a decline in stock-market-driven revenue.

California budget includes funding request for Newsom’s official portrait, adding a political detail to a budget debate already shaped by long-term fiscal pressure.

Do you think California can claim there is no deficit while a nearly $350 billion budget still draws criticism? Share your thoughts and drop a comment.

This slideshow was made with AI assistance and human editing.

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