Report: California Faces $18 Billion Budget Shortfall

The nonpartisan California Legislative Analyst’s Office (LAO) today released a grim fiscal outlook for the 2026-2027 budget year (see below), warning “budget problem now larger than anticipated” with an $18 billion shortfall. Their estimate is $5 billion more than what was projected by Governor Gavin Newsom’s administration predicted in June.

In June, the Globe reported that adding an approximate  2 million illegal aliens to Medi-Cal added billions of dollars to the budget. Despite Governor Newsom rolling back the program, those undocumented enrollees will remain on the taxpayer funded entitlement program, for a mere $30/month. The Health and Human Services budget line item illustrates a six percentage annualized growth.

Governor Gavin Newsom reached a $321.1 billion budget agreement with the state legislature late on Tuesday, with large cuts of Medi-Cal that will result in the freezing of new illegal immigrant applicants from being accepted.

While both the Governor and Legislature made significant cuts from other versions from earlier in the year, there is still a $12 billion budget deficit following the agreement. Many planned deep cuts were undone in the leadup to the final budget this week, including maintaining cost-of-living increases for child-care workers and undoing planned reductions to in-home caregiver hours. In fact, some areas actually saw significant budget increases, like an additional $500 million in homeless grants being pushed through.

While Medi-Cal was expanded to cover undocumented children in 2015 and undocumented seniors 50 and older in 2022, the governor expanded the program to cover all illegal immigrants last year ballooned the cost of Medi-Cal for all illegal immigrants under the program to $9.5 billion. The state received more than the intended number of recipients, causing a $6.2 billion deficit to open up.

In less than a year after expanding the program, Medi-Cal costs to the state shot up by $2.7 billion, as illegal immigrants were easily accepted and many did not contribute with taxes or by other means. As a result, Newsom was forced to sign a bill in April that paid off a $2.8 billion budgetary shortfall for Medi-Cal, allowing it to run through the end of the fiscal year at the end of June.

The $2.7 billion was only a stopgap however, with the real challenge coming with the revised 2025-2026 budget. The huge deficit forced his hand, and in May Newsom said that he would halt any more illegal immigrants from enrolling into the program starting in 2026. Those already in the program will not be kicked out.

That $12 billion deficit has now ballooned to almost $18 billion.

“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,” the LAO reports.

Looking towards 2029 doesn’t look any better as “Budget Problems Now Moving in the Wrong Direction” with a projected deficit skyrocketing to $35 billion annually in the 2027-2028 budget year.

The LAO recommends 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,” the LAO advises.

Although California has $14 billion in reserves, the state has used over $20 billion in borrowing for previous shortfalls and “temporary spending solutions are exhausted,” according to the report.

“As it stands—with larger forecasted deficits and many fewer tools available to address them—California’s budget is undeniably less prepared for downturns,” the report predicts.