May Budget Revise 2025-2026 Grows to $322 Billion, with $12 Billion Deficit

Governor Gavin Newsom unveiled his revised 2025-2026 budget on Wednesday, proposing a $12 billion deficit in California alongside his $321.9 billion budget.

In his speech, and later in a statement, Newsom primarily blamed President Donald Trump for the $12 billion shortfall, calling it the “Trump slump.” Newsom said that tariffs disruption, market volatility, and a decline in international tourism that have directly resulted in a staggering $16 billion estimated hit to the state’s revenues. However, Newsom also begrudgingly admitted that many state issues, primarily the expansion of Medi-Cal to include all illegal immigrants, were likewise huge factors that cost the state billions more a year. Medi-Cal alone saw costs shooting up nearly $3 billion in less than a year thanks to the illegal immigrant expansion, resulting in Newsom calling for a halt to the program expansion – something which he previously vowed never to do.

“California is under assault, the United States of America in many respects is under assault, because we have a president that’s been reckless in terms of assaulting those growth engines and has created a climate of deep uncertainty,” said Newsom. “The impacts are being felt disproportionately in the fourth-largest economy in the world.”

In addition to Medi-Cal, state workers were on the chopping block. In his revision, the Governor proposed that the state cut $767 million from the state’s payroll expenses in salaries and wages, meaning the majority of state workers could see a little less pay coming in. However, should worker unions disapprove of it, Newsom would go to plan B, “reductions,” which likely means layoffs.

“The intent is really to avoid increased costs in the upcoming fiscal year and it’s not to implement furloughs or personal leave programs or those type of things, explained Finance Director Joe Stephenshaw.

Major cuts were seen elsewhere in the budget, including in education (and a 3% cut to UC and Cal State spending), healthcare drug coverage (with Ozempic specifically no longer covered), environmental protection, home health services and natural resources. Surprisingly, no funding was given to Prop 36, which would give drug and mental health treatment to addicts, as well as exponentially increase public safety measures across the state and bring in more tougher on crime measures. In addition, $7 billion in funding would be shifted to the budget from the rainy day fund, leaving only $15.7 billion in reserve.

“We’ve got a spending problem,” admitted Newsom. “We can deny that we have a shortfall. We can deny that we have a deficit. We can deny we have a problem in the system and we could put it off and be irresponsible.”

However, not everything saw funding slashes. The cap-and-trade emissions reduction program will be expanded for 15 more years under the revised budget, with an end date going from 2030 to 2045. The expansion of the state film and tv tax credit was also green-lit with an annual $420 million increase as a way to help the film industry come back to LA from places like Vancouver, Atlanta, and London. With a foreign film tariff on the horizon, the combination of the two could jumpstart the struggling film industry in California and Los Angeles.

“I want to get the economy moving again,” stressed Newsom. “Revenue doesn’t come from trees, it doesn’t come from printing presses.”

Going unaddressed was how much of a fall from grace this was compared to the initial budget proposal, which boasted a $300 million surplus. The updated budget was actually far more in line with the November 2024  LAO forecast, which saw a $2 billion shortfall by the beginning of 2025, followed by $20-$30 billion being added to the deficit for each of the next 3 fiscal years unless more cuts are made. The state facing a $12 billion shortfall with some cuts taken perfectly aligns the state being under the LAO forecast metric.

In his official statement, Newsom tried to paint a rosy picture of the situation. He listed multiple positive programs being funded by the state under the revision, including tax cut for military retirees, universal pre-kindergarten for all, free school meals for all kids, boosting literacy & reading, more housing being built, more water for Californians, lowering drug costs, expanded abortion access, and more public safety investments (despite no funding going to Prop 36 measures). He also went all out in his blame on Trump.

“California’s fundamental values don’t change just because the federal winds have shifted,” added Newsom. “Even as the Trump Slump slows the economy and hits our revenues, we’re delivering bold proposals to build more housing, lower costs for working families, and invest in our kids.”

Lawmakers from both parties heavily criticized the new budget proposal after release on Wednesday. Democrats blasted Newsom for reneging on funding for several measures, including Medi-Cal for all illegal immigrants. The GOP, meanwhile, said the blame was misplaced, with the high spending and $12 billion deficit being the fault of Governor Newsom and Democrats in the Assembly and Senate.

The response from lawmakers

“The Governor’s revised budget proposal is unfortunately just more of the same overspending and misplaced priorities we have become accustomed to,” said Senator Suzette Valladares (R-Santa Clarita). “California is facing a huge $12 Billion budget deficit, and despite their efforts to blame the federal government, wildfires, and whatever else they can come up with, the responsibility lands squarely with the Governor and the Democratic Majority.

“The Governor and his team of happy spenders took a surplus of $98 billion in 2022 and overspent their way to years of deficits. Each year since was a missed opportunity to save, pay down debt, and plan for tougher years. Instead, they overspent on fruitless programs and waste.”

“Today during his budget update, the Governor blamed the President for California’s poor budget situation,” added Assemblywoman Diane Dixon (R-Newport Beach). “Shifting blame doesn’t help fix California’s issues.

“The majority party is planning to continue diverting $7 billion in this updated budget from the sacred rainy day fund to balance the budget, despite revenues exceeding expectations by $7.9 billion. Additionally, the nonpartisan Legislative Analyst’s Office (LAO) suggests that revenues are unlikely to grow fast enough to catch up with atypically high spending growth. There is a bottom line that the Governor continues to ignore: The California Legislature continues to create programs it cannot pay for.

“In my third year as an Assemblymember, I repeat myself: we need to set priorities for state spending. These dollars are hard-earned taxpayer dollars. The LAO points out that ‘outside of healthcare and government, California has added no jobs in a year and a half’ leading to a ‘sluggish economy.’ The Governor boasts about being the fourth largest economy in the world. California is struggling with a budget deficit for the third year in a row while watching jobs, people and their taxpayer dollars leave the state.”

Senator Tony Strickland (R-Huntington Beach) gave a unique view on the situation as he was in office over a decade ago dealing with other tight budgets.

“When I left the legislature in 2012, the state budget was $98 billion for everything, yet Governor Newsom’s proposed budget today is more than three times that amount,” explained Strickland. “California does not have a revenue problem; it has a wasteful spending problem. A good example of this governor’s poor performance is the missing $27 billion that he has spent on homelessness, with no statewide metrics to show for it.

“Californians are sensitive to government waste, and a budget is a blueprint of priorities. Here again, Newsom is out of step with Californians by not fully funding Prop. 36, which passed by nearly 70% and in all 58 counties, yet he insists on throwing good money after bad to the high-speed rail, which needs more than just a Newsom’s lifeline.”

Gubernatorial candidates also released statements.

“Californians pay the highest taxes in the country, with nothing to show for it. Our schools are some of the worst in the nation, our roads are crumbling, our water infrastructure hasn’t been updated in a half century, and our utility and energy rates keep climbing,” said Riverside County Sheriff Chad Bianco.

“California’s budget shortfall isn’t President Trump’s fault, it’s the fault of Gavin Newsom and his Democratic supermajority. Their mismanagement of nearly every facet of our state government has created a cost of living crisis, turning the California dream into an unaffordable nightmare. Californians deserve better.”

Gubernatorial candidate Steve Hilton weighed in as well:

“It is completely outrageous and unacceptable that Gavin keeps dipping into our state’s ‘Rainy Day’ fund, designed for times of recession and crisis, to bail out his own weakness and irresponsibility. I guess the ‘Rainy Day’ is Gavin Newsom as Governor.

“This is what you get from 15 years of one-party Democrat rule. We can’t go on like this, with Californians paying more and getting less. It’s time for change. Time to let the sunshine in!”

The budget now must be approved by the state legislature by June 15th.