After 2 years of deficits, California Governor Newsom proposes a $322 billion deficit-free budget

TURLOCK, Calif. — California Gov. Gavin Newsom has proposed a $322 billion deficit-free budget, a welcome change after two years of large budget shortfalls in the nation’s most populous state.

But the budget Newsom announced Monday is mostly a placeholder as California waits to see whether new President Donald Trump follows through on his threats to withdraw billions in federal dollars, which could force lawmakers to make painful cuts in essential programs. About a third of California’s budget depends on federal funding, including tens of billions of dollars to provide health services. Trump takes office on January 20, and Newsom must sign the final budget by the end of June.

California lawmakers have already opened a special session to consider giving an additional $25 million to Attorney General Rob Bonta’s office to defend itself or face possible legal challenges from the Trump administration. Conflicts are likely between California and Washington, D.C., over climate policy and immigrant rights. State senators also proposed additional funding to provide free legal services to immigrant communities.

Finding a way to balance the budget in the face of possible federal funding losses will be a major test for Newsom, who is entering the final two years of his final term and continues to be seen as a future presidential contender.

The Democratic governor offered few details on his budget proposal, but used his presentation to tout progress on issues the state has been criticized on, including investments in education and infrastructure and efforts aimed at solving the homelessness crisis.

On Monday, Newsom expressed optimism about the state’s future despite the uncertainties ahead.

“We also find ourselves facing headwinds, at a radically different moment in American history,” he said. “We must be prepared, and I hope you will recognize that this budget reflects a fundamental direction.”

The Newsom administration plans to provide more details on the budget proposal before Friday’s deadline to present it to lawmakers. Newsom announced the numbers early before leaving the state for the funeral of former President Jimmy Carter.

Newsom said he was proposing little new spending, but the budget allows the state to fully implement the nation’s first universal transitional kindergarten program, which would make that school free for some 400,000 4-year-olds in all of California. It’s an effort Newsom has championed since 2021. His plan also includes increasing the state’s film and television tax credit to $750 million a year to bring back Hollywood jobs that went to New York and Georgia.

He said good planning in the last budget helped the state avoid a major deficit this year.

“Last year we worked hard to make this year’s budget a non-event,” he said.

The governor’s office also estimates that tax revenues for this year are $16.5 billion higher than forecast, thanks to the stock market boom and rapid income growth for high-income Californians.

This has helped the state weather a slowing economy characterized by limited job growth and persistent weakness in consumer spending.

California’s economy is the fifth largest in the world. Last year, the state faced an estimated budget deficit of $46.8 billion, and the year before that, a budget deficit of $32 billion. The state also saved $1.2 billion over two years by eliminating about 6,500 vacant positions in state departments and another $3.5 billion by cutting travel budgets and modernizing IT systems, a Newsom said.

Yet those deficits have forced the state to scale back or delay some of its progressive policies, fueled by record surpluses during the COVID-19 pandemic.

Republican Sen. Roger Niello, who serves on the budget committee, said the governor has failed to provide a plan to help resolve future budget shortfalls. In November, the nonpartisan Office of Legislative Analysts warned that the state could face double-digit deficits in the coming years.

“We’re looking at deficits of $20 billion to $30 billion, and if we don’t start doing something about this problem now, it’s going to get very difficult,” Niello said in an interview.

Newsom said Monday he supports efforts to increase the state’s rainy day fund, but acknowledged it would be a “herculean effort.”

Newsom criticized Trump’s proposed Department of Government Effectiveness, which will be led by Elon Musk. The governor highlighted his own efforts to create an Office of Data and Innovation designed to streamline government in 2019.

“Our DOGE is spelled ODI,” he said.

Unlike most states, California taxes capital gains – primarily money from investments and stocks – at the same rate as money from wages and salaries. The result is that almost half of the state’s tax revenue comes from just 1% of the population. This has led to unpredictable and significant fluctuations in California budget revenues.