How California burned through a $97 billion surplus and landed in the red

Governor Bets on AI Boom in Final Budget

Governor Gavin Newsom released his final state budget proposal on January 9, 2026, projecting a $2.9 billion shortfall for the coming fiscal year.

That number is far rosier than what independent analysts expect.

Newsom is banking on continued windfalls from Silicon Valley’s artificial intelligence boom to keep California afloat.

But with his term ending in January 2027 due to term limits, the governor’s budget choices will define his legacy and shape his expected 2028 presidential run.

The gamble he’s making now could either vindicate his optimism or leave his successor holding the bill.

State Analysts Say Deficit is $18 Billion

California’s nonpartisan Legislative Analyst’s Office warns that Newsom’s plan fails to confront what it calls “alarming” multibillion-dollar deficits looming in the years ahead.

The LAO projected an $18 billion deficit for the 2026-27 budget, about six times the governor’s $2.9 billion estimate.

The report says the governor’s budget “does not include material actions to address either challenge. ” San Jose Mayor Matt Mahan blasted the proposal for “kicking the can down the road.”

The finance department pushed back, saying actual revenue receipts do not support that level of pessimism.

From $97 Billion Surplus to Red Ink

In 2019, first-year Governor Newsom inherited a state flush with cash, with a $21.4 billion budget surplus to play with.

He invested billions in affordable housing, child care, and health care expansion while paying down debt and building reserves.

By 2022, Newsom was boasting about a $97.5 billion surplus, saying no other state in American history had ever experienced one that large. Now it is the fourth consecutive year in Newsom’s tenure that California faces a deficit even as revenue grows.

The state’s rainy day fund stands at $14 billion, half its peak balance, after two years of withdrawals.

AI Boom Delivers Surprise Tax Windfall

Tax revenue from stock-option withholding paid by some of the state’s biggest tech companies made up about 10% of all income tax withholding in 2025. That figure is up from more than 6% just three years ago.

Shares of Nvidia, Broadcom, and Google did especially well in 2025, rising 25%, 46%, and 59% for the year respectively.

The governor’s budget proposal projects $9 billion more in revenue than anticipated, banking on the AI-driven economy to last.

California’s social safety net now depends heavily on a handful of tech giants continuing to thrive.

Analysts Warn AI Bubble Could Pop

The LAO warned that an overheated stock market driven by Silicon Valley’s AI boom is at “high risk of reversing course into a downturn in the next year or so.”

Researchers for Allianz Trade wrote that the financial market frenzy over AI shows classic signs of an asset bubble, including widespread consensus, unproven valuations, and returns detached from earnings.

If the AI market were to deteriorate, California could see these withholdings decline sharply. Despite the AI boom, the number of tech jobs in the Bay Area actually decreased from September 2024 to August 2025.

Medi-Cal Enrollment Frozen for Immigrants

As of January 2026, California froze new enrollments for full-scope Medi-Cal coverage for undocumented immigrants ages 19 and older.

This measure is projected to create almost $78 million in general fund savings in 2025-26 and up to $3.3 billion by 2028-29.

Starting in July 2026, the state will also eliminate full-scope dental benefits for undocumented enrollees ages 19 to 54.

The Newsom administration blames federal cuts under President Trump’s budget bill for forcing the state’s hand. Health advocates have called the rollbacks a betrayal of California’s progressive values.

Up to 1.8 Million Could Lose Coverage

Newsom’s analysts expect about 522,000 Californians to lose Medi-Cal coverage in the 2026-2027 fiscal year, rising in the future to 1.8 million.

His administration has said the state simply doesn’t have the money to pay for coverage for people who are booted off the program due to new federal laws.

Under the governor’s proposal, approximately 200,000 lawfully present immigrants, including refugees and asylum seekers, will lose full-scope Medi-Cal and be transitioned to emergency coverage only.

Progressive lawmakers and health advocates are demanding new taxes on corporations and billionaires to fill the gap.

Housing Goals Fell Far Short

Newsom ran on lowering housing costs by boosting production and said it was “achievable” for the state to build an ambitious 3.5 million new homes by 2025.

In 2024, the state added just under 120,000 new units, about a fifth of the annual rate needed to meet that goal. In media appearances, the governor now downplays his original figure as a “stretch goal.”

About 40% of California households are burdened by their rent or mortgage, meaning housing eats up more than a third of their income.

It remains perhaps the most visible measure by which Newsom will be judged after he leaves office.

Homelessness Got Worse Despite $24 Billion

Newsom vowed to tackle homelessness, which has only gotten worse over his seven-year tenure, despite the more than $24 billion his administration has poured into it.

Just months after being elected mayor of San Francisco in 2004, Newsom unveiled a plan he said would clear city streets of homeless people in 10 years.

Fourteen years later, while running for governor, Newsom declared that homelessness in San Francisco had “never been worse.”

In his recent State of the State address, Newsom claimed that unsheltered homelessness in California dropped 9% in 2025, while the nation saw an 18% increase.

Newsom Blames Cities and Counties

Newsom told legislators he is “providing counties what they’ve been asking for” and added, “No more excuses — it’s time to bring people off the streets, out of encampments, into housing, into treatment.

Counties need to do their job. ” County officials took umbrage, complaining that Newsom’s budget shifts the financial burden for several health and welfare programs to county governments.

California accounts for 30% of the country’s homeless population and 50% of its unsheltered people, despite making up less than 12% of the total population.

The blame game between Sacramento and local governments has defined Newsom’s approach to the crisis.

Next Governor Inherits a Fiscal Mess

The Newsom administration still projects the budget deficit will grow significantly in the next budget year to $22 billion.

Steadily rising Medi-Cal costs and pay raises for state workers are contributing to what Newsom and the LAO project will be $25 billion to $30 billion in annual state deficits in the next several years, despite record post-Covid revenues.

Over two dozen candidates have declared campaigns for the 2026 gubernatorial race, and the field is expected to grow.

Whoever wins will inherit a budget built on optimistic assumptions and a health care system under siege from federal cuts.

Newsom Eyes 2028 Presidential Run

Newsom has been viewed as a contender for the 2028 presidential election by The New York Times.

Asked whether he would give “serious thought” to running for president after next year’s midterm elections, Newsom responded, “Yeah, I’d be lying otherwise.”

Newsom has emerged as the front-runner in the early 2028 primary field, according to many strategists, with surveys generally putting him neck and neck with former Vice President Kamala Harris.

How he handles California’s budget crisis in his final year will follow him onto the national stage, for better or worse.

This article was created with AI assistance and human editing.

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