Failed State California: $18 Billion Deficit, High-Risk State Agencies, Record Out-Migration

“The Legislature has needed to address budget problems for three years in a row,” the California Legislative Analyst warned in their November report on California’s fiscal outlook.

And the really bad news: California has an $18 billion budget deficit, $5 billion higher than expected, according to a November report from the Legislative Analyst’s Office.

“The California State Auditor published a scalding report Friday that is an unvarnished indictment of Governor Gavin Newsom and his administration,” the Globe reported Monday following the Auditor’s new report. “The report should have everyone living in California horrified.”

“The Auditor’s report finds Gavin Newsom while in his final year as governor, has upended the state’s financial structure, compromised public safety, and left the state’s infrastructure in far worse condition.”

So, California has many “High-Risk” state agencies and an $18 Billion budget deficit… the makings of an unstable failed state.

Our own report in August, “How To Kill A State In 5 Easy Steps – Gavin Newsom’s California,” appears to be on target. Sadly. No one is celebrating California’s demise except maybe China and Venezuela.

Between the State Auditor’s scathing report and the Legislative Analyst’s gloomy update and forecast, it’s wake-up time for the state’s elected lawmakers – many will still be in office long after Gavin Newsom’s presidential campaign.

2026‑27 Budget Problem Now Larger Than Anticipated, Legislative Analyst Gabriel Petek reported:

“Under our revenue and spending estimates, the Legislature faces an almost $18 billion budget problem in 2026‑27. This is about $5 billion larger than the budget problem anticipated by the administration in June, despite improvements in revenue. This is because constitutional spending requirements under Proposition 98 (1988) and Proposition 2 (2014) almost entirely offset revenue gains. Moreover, we estimate costs in other programs to be about $6 billion higher than anticipated.”

“Starting in 2027‑28, we estimate structural deficits to grow to about $35 billion annually due to spending growth continuing to outstrip revenue growth.” Ouch. That’s going to leave a mark. 

“Budget Position Is Weak. We advise the Legislature to address the budget problem through a combination of ongoing solutions—namely, achievable spending reductions and/or revenue increases. There are three reasons these actions are now critical. First, the budget problem is now larger than anticipated, despite improvements in revenue, and the structural deficits are significant and growing. Second, while our revenue estimates hedge against a market downturn, they do not reflect the revenue declines the state would experience in a recession. Third, the state has used most of its budget resiliency tools to address prior deficits. If our estimates hold, the Legislature will face a fourth consecutive year of budget problems—all during a period of overall revenue growth. As it stands—with larger forecasted deficits and many fewer tools available to address them—California’s budget is undeniably less prepared for downturns.”

California’s budget problem is now significantly larger than anticipated – and the state is undeniably less prepared for downturns.

Another notable area is constitutional budget requirements, like education spending.

“Revenue Improvement Almost Entirely Offset by Constitutional Requirements. Across 2024‑25 to 2026‑27, our revenue estimates are up $11 billion compared to the budget act. These revenue improvements do not, on net, improve the budget’s bottom line, however. This is because of the requirements of Proposition 98 (1988), which governs school and community college funding, and Proposition 2 (2014), which specifies reserve deposits and debt payments… Together, due to higher revenue estimates, these requirements increase by over $10 billion—representing nearly all of the revenue gain.”

The Legislative Analyst also warns that the Trump Administration’s One Big Beautiful Bill, H.R. 1, will cost the state about $5 million more at the current rate of Medi-Cal spending.

“In total, we estimate H.R. 1 will increase state costs by about $5 billion by 2029‑30. Specifically, we estimate Medi‑Cal costs will increase on net by $3 billion and CalFresh costs will increase by almost $2 billion.”

As we reported Monday, the State Auditor concurs, and explains why:

“The California Department of Social Services met our criteria to be designated as a high-risk agency, and we are adding it to the high-risk list. Because of recent changes to federal law, the State will soon be required to pay a portion of its CalFresh benefits. This cost, which could be as much as $2.5 billion in federal fiscal year 2028, is based on California’s payment error rate, which measures the accuracy of the State’s eligibility and benefit determinations.”

California will likely need to spend about $2.5 billion annually to maintain CalFresh benefits. In July 2025, the One Big Beautiful Bill Act became federal law and made changes to SNAP that will increase states’ share of SNAP costs in two ways.

The Legislative Analyst warns that Structural Deficits Now Moving in the Wrong Direction. This means that the state is spending more than it brings in through taxes. Gird your loins. 

The Legislative Analyst has several warnings:

Budget Position Is Weak.

Budget Resilience Waning.

Ignoring Risks Could Create Serious Challenges Later.

Upside on Revenue Unlikely to Balance Budget.

Today California ranks toward the bottom in attracting all newcomers from other parts of the country, demographer Joel Kotkin recently reported. “Rather, many affluent young professionals are migrating out of the state. In 2022, California lost more than 200,000 net migrants 25 or older, the bulk of whom had either four-year or associate degrees, while that cohort’s numbers surged in Nevada, Arizona, Texas, Florida and the Carolinas.”

South Dakota, Hawaii, Vermont, North Dakota and Alabama report the lowest unemployment nationally – 2.0% to 2.8%, respectively.

Kotkin reports that more than 4 million people left California for other states since the start of the century.

In March, the Legislative Analyst’s Office published “Annual Revision to Monthly Jobs Survey Shows Far Fewer Job Gains in 2024,” which showed no growth at end of 2024.

California’s unemployment rate continues to hover at 5.6% – the highest of any state in the country – as of September, which reflects an increase from the previous month. The national unemployment  rate is 4.4%.

“Not only is California’s unemployment rate again the nation’s highest among the 50 states, the number of unemployed workers in the state was up for the sixth straight month,” the Sacramento Bee even reported.

Only the District of Columbia has a higher unemployment rate than California, at 6.2%. (below)

California does not have a healthy economy, any more than its state agencies are in good shape.

The California County unemployment map is interesting – or hair-raising:

The EDD reports:

Nonfarm jobs in California have increased over the past year in four industry sectors: private educational and health services (4.7 percent); government (1.6 percent); leisure and hospitality (0.6 percentage point); and
other services (0.5 percentage point). The sectors that lost jobs were: manufacturing (-2.9 percent); professional and business services (-2.3 percent); financial activities (-1.9 percent); construction (-1.6 percent); information (-1.5 percent); and trade, transportation, and utilities (-0.5 percentage point). Mining and logging remained unchanged over the year.

Government jobs increased in California more than jobs in leisure and hospitality.

Private sector employment in California, which excludes government, lost 6,300 jobs (0.0 percentage point) in September following a decrease of 8,200 jobs (-0.1 percentage point) in August.

Unemployment Rates for States, Seasonally Adjusted