Gov. Gavin Newsom touted higher than expected tax revenues and a “modest surplus” in an unconventional preview of his $322.2 billion spending proposal for the upcoming fiscal year, but his office said he still plans to pull money from the state’s rainy day reserves to pay for policy priorities.
The Democratic governor delivered a selective presentation of his initial 2025-26 budget at Cal State Stanislaus on Monday that largely praised the state’s economic position under his leadership and made it difficult to understand the full scope of his spending plan. Newsom said details would be forthcoming at the end of the week.
The early, yet incomplete look at his proposal shows that Newsom’s annual spending plan has grown by $24 billion compared to the current budget enacted in July. The governor announced a projection of an extra $16.5 billion in tax revenue above his administration’s prior estimates, which the Department of Finance said is spread over three years.
“The top lines include a balanced budget, no deficits,” Newsom said.
The proposal kicks off the annual six-month process in which the governor and lawmakers negotiate a final spending plan to be approved in late June. Newsom’s presentation at a college campus in the Central Valley town of Turlock was an unusual twist on the ritual, driven by Newsom’s decision to travel to Washington, D.C., later this week for the funeral of former President Carter.
Because he presented the budget a few days earlier than initially planned, Monday’s rollout did not include the detailed budget document that typically accompanies the governor’s presentation.
Newsom described his proposal as making “significant commitments to accountability, transparency and results” and “maintaining fiscal discipline in a time of deep uncertainty.”
Despite the revenue increase, the cost of providing Medi-Cal coverage to seniors and more undocumented immigrants, offering pre-kindergarten to all 4-year-olds, creating a new $420-million tax break for Hollywood film studios and funding other signature Newsom policies leaves California with a spending problem.
Newsom’s office said he plans to withdraw another $7.1 billion from California’s rainy day reserves in the upcoming budget year, after declaring a fiscal emergency last year to take out $5.1 billion to balance the current budget and another $900 million from a safety-net reserve.
The decision to dip into the state’s savings account was part of an agreement made last year with lawmakers to also delay programs, cut spending and rely on the occasional accounting gimmick to solve a $46.8 billion deficit. California leaders were forced to reconcile a $31.7 billion deficit the prior year.
Senate President Pro Tem Mike McGuire (D-Healdsburg) said those tough decisions put California in a better financial position today.
“We look forward to taking a close look at the governor’s full proposal later this week,” McGuire said in a statement. “The major work will happen in the months ahead, when we’ll get down to brass tacks and craft a responsible and balanced budget which will help make California more livable and affordable.”
Assemblymember Carl DeMaio, a Republican elected in November to represent inland San Diego County, called the governor’s proposal “negligent” before Newsom even delivered his presentation.
“Gavin Newsom is in over his head and hopes that no one notices — but no amount of Enron-style accounting will change the alarming reality that Gavin Newsom has created a fiscal crisis,” DeMaio said in a statement, calling on his fellow lawmakers to reject the governor’s proposal.
Analysts warn that the financial outlook will worsen in the future with the potential for even greater economic upheaval under the incoming Trump administration.
The California Legislative Analyst’s Office in November predicted a largely balanced budget in 2025-26 with a shortage of $2 billion, while anticipating a deficit of about $20 billion in 2026-27 and an even higher shortfall by 2028-29 of about $30 billion.
The LAO reported that the California economy has been in a gradual slowdown over the last two years, with about 25% more unemployed workers overall and declining trends in consumer spending.
Newsom did not offer a deficit projection for future years and said he will share more when he presents his revised budget proposal in May.
Corrin Rankin, vice chair of the California Republican Party, criticized the governor for not doing enough to help regular Californians.
“Handing out tax breaks to Hollywood and spending on AI is great for the state’s billionaires,” Rankin said in response to Newsom’s presentation. “However, the rest of us feel like we’re drowning in growing costs and our lives haven’t been improved.”
Assembly Speaker Robert Rivas (D-Hollister) agreed that the state needs to tackle cost-of-living issues.
“We also need to prepare for challenges ahead and must show restraint with spending,” Rivas said in a statement. “I am committed to working with the governor and my colleagues on a budget that protects essential services and makes life more affordable.”
The Newsom administration has said President-elect Trump’s plan for international tariffs, uncertainty around federal Medi-Cal funding and threats to withhold disaster funding increase the likelihood of even greater budget uncertainty in the years ahead.
“We really have to see what fire and fury comes from Trump in the next few weeks and really get a sense,” Newsom said.
The governor is expected to leave for the Carter funeral after he spends time with President Biden Tuesday in California to celebrate the new Chuckwalla National Monument near Joshua Tree and the Sáttítla National Monument near the Oregon border.
Joe Stephenshaw, director of the California Department of Finance, will formally present the budget to the Legislature and answer questions on Friday.
Newsom plans to leave the state Saturday for a vacation with his family.