SACRAMENTO — Governor Gavin Newsom’s $349 billion spending plan for fiscal year 2026-27 is technically balanced, but the math relies heavily on reserves, delayed obligations and targeted tax increases as long-term cost pressures continue to outpace revenue growth.
State fiscal analysts estimate the budget faced an estimated $18 billion shortfall before those fixes were applied, even as tax collection surged alongside stock market gains tied to the tech industry, most notably with artificial intelligence (AI). Newsom is proposing to close the gap by drawing down about $20 billion in reserves and suspended deposits and adding roughly $4 billion in borrowing, according to the Legislative Analyst’s Office (LAO), the legislature’s nonpartisan fiscal adviser.
Even after those proposals, the state’s structural imbalance persists. The LAO projects ongoing deficits between $20 billion and $35 billion annually beginning in FY 27-28 as spending continues to dramatically outpace revenues.
“The state’s current fiscal situation is genuinely unprecedented. Despite booming revenues, the budget position is overextended, reflecting: a structurally higher spending base, diminished reserves, an already accumulated wall of debt, and an operating deficit,” the LAO wrote in its assessment of the budget. “Meanwhile, a revenue shock could be coming…..
