Stronger-than-expected revenues mean California Gov. Gavin Newsom's $348.9 billion budget needs to close a smaller-than-expected
The budget closes an expected $2.9 billion gap, much smaller than the
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The governor's annual January budget release launches several months of discussions with lawmakers that end July 1 with the 2026-27 fiscal year budget signing.
Stephenshaw described the budget as a "workload" budget maintaining the baseline that includes a $1.6 billion increase in spending from the prior year, primarily for higher education, ongoing projects and baseline adjustments.
Newsom said the budget makes some of the most significant investments in public education in the state's history because of the boosted revenues.
"As a result of this windfall, mindful of the erratic nature of our state revenue and our long-term structural challenges, we're rebuilding our reserves, adding $7.3 billion," Newsom said. "And paying down long-term pension obligations to the tune of $11.8 billion over the next few years, including $3 billion alone in next year's budget."
The draft budget presented by Stephenshaw would increase outlays by $27 billion over the current year to $321 billion, including a $248.3 billion general fund, up $20 billion.
The $42.3 billion projected revenue increase first revealed by Newsom in his State of the State speech on Thursday, would cover all but $2.9 billion of the spending plan hole, Stephenshaw said.
"While the budget is balanced in the 2026-27 fiscal year, with a discretionary reserve of $4.5 billion, it projects a deficit of roughly $22 billion in the 2027-28 fiscal year and shortfalls in the two years following," according to the draft budget. "The administration intends to build on this budget proposal in May with a revised plan — reflecting updated revenue and spending data — that balances the budget in both the 2026-27 and 2027-28 fiscal years with adequate budget reserves."
The plan anticipates, as is traditional, adjustments for actual revenues during the governor's May revisions.
Stephenshaw cited several items in the difference between the governor's projections and the LAO.
Both forecasts revised revenues higher than what was projected in the budget act for 2025-26, he said.
But the governor's forecast anticipated revenues $28.8 billion higher than the LAO's forecast.
The LAO also incorporates significant risk of a stock market downturn in their forecast, he said.
"We didn't do this," Stephenshaw said. "We don't build downturns into our forecast. We do discuss them as risk."
If there is a stock market correction of 20%, it would have a $30 billion impact to the budget, he said.
"We assume modest growth going forward, while the LAO assumes revenues will decline in 2026-27," he said. An LAO report on the budget is expected after press time Monday.
Newsom also announced significant housing and education policy proposals.
He plans to introduce legislation that would prevent investors from buying single-family homes by making changes to the tax code.
Institutional investors have been "snatching up homes by the hundreds and thousands at a time, crushing the dream of home ownership, and forcing rents too damn high for everyone else. It's shameful that we allow private equity firms in Manhattan to become the biggest landlords in many of our cities," Newsom said.
Newsom said he will work with lawmakers to "combat this monopolistic behavior, strengthen accountability, and level the playing field for working families."
The governor also proposed unifying policymaking by the State Board of Education and the Department of Education by allowing the State Superintendent of Public Instruction to align the state's education policies from early childhood through college.
The state has $109 billion in 28,000 infrastructure projects underway, including environment restoration, energy, roads and bridges, water and power, rail and ports, and broadband in rural communities, Newsom said. He also lauded progress on the high-speed rail system in the Central Valley where he said 50 major structures and 60 miles of guideway have been completed, so that tracks can be laid.
