SACRAMENTO, California — California is projected to face an $18 billion budget deficit next year, according to an update released Wednesday by Legislative Analyst Gabe Petek. The Legislative Analyst’s Office (LAO), which advises lawmakers on fiscal conditions, said program costs are rising faster than expected, with Medi-Cal, CalFresh, and education spending collectively running about $6 billion over prior estimates. Federal policy changes—including reduced health-care support—are expected to add another $1.3 billion in state costs.
Petek noted that despite strong tax revenues from high-income earners and market gains, the state’s structural imbalance remains severe. July through October revenues came in roughly $6 billion ahead of projections, yet the emerging deficit is still $5 billion larger than Gov. Gavin Newsom’s administration anticipated.
California has $14 billion remaining in reserves, but the LAO warned that the state cannot continue depending on borrowing, delays, and cost shifts—tools used heavily during the past three years of deficits. The office’s long-term outlook shows shortfalls of roughly $35 billion annually in the coming years.
Petek urged lawmakers to consider either significant spending cuts or new revenue sources, calling action “critical” before the governor releases his January budget proposal. Newsom’s Department of Finance agreed with the overall assessment, citing ongoing federal uncertainty and program cost pressures but did not outline specific solutions.
The 2026–2027 budget must be finalized by July 2026.
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