Governor’s 2026-27 Budget Forecasts $9 Billion Revenue Increase, Banks on AI Economy
TL/DR –
Governor Newsom’s projected 2026-27 budget for California plans for an additional $9 billion in revenue, considerably more optimistic than the Legislative Analyst’s Office’s prediction of an $18 billion deficit. The budget proposal relies heavily on continued income from tech and AI stocks and reveals a $2.9 billion shortfall for the upcoming fiscal year, as well as projecting a deficit of up to $22 billion for the fiscal year 2027-28. While the proposal calls for additional spending over this year, certain departments, such as housing and homelessness, may experience decreased funding.
Summary of Governor’s AI-Driven Budget Proposal
Aided by the AI economy, the governor’s 2026-27 budget proposal is $9 billion ahead of projections. Stay updated on your state representatives’ actions with My Legislator.
Predicted Shortfall for Upcoming Fiscal Year
Gov. Newsom’s office predicts a “modest shortfall” of $2.9 billion in the upcoming fiscal year. The nearly $349 billion budget proposal relies heavily on continued windfalls from tech and AI stocks. The proposal optimistically anticipates $9 billion more in revenue than expected, banking on the durability of the AI-driven economy.
The Risks of Market Downturn
“A downturn in the market is a top risk,” warns Joe Stephenshaw, state Department of Finance Director. The fiscal year 2027-28 projected deficit could balloon to $22 billion.
Fears of an AI-Driven Economy
Sen. John Laird, chair of the Senate Budget Committee, expresses concern that the AI-driven revenue is unsustainable. The Legislature must look for ways to tackle the long-term problem, such as allowing more deposits into the state’s rainy day fund.
The Increase in Spending
Newsom’s proposal for the next year calls for nearly $30 billion more in spending. The spike is largely in education and health care, primarily due to the need to implement federal cuts to the Medi-Cal program and requirements to deposit portions of higher-than-expected revenue into education and state reserves.
Increased Cost of Medi-Cal
Medi-Cal is expected to cost the state $2 billion more in the current fiscal year and $2.4 billion more next year with $1.1 billion just to cover the added costs under President Donald Trump’s budget bill, according to Guadalupe Manriquez, the Department of Finance’s health budget manager.
Slashes in Housing and Homelessness Funding
Newsom’s budget proposes a $1.3 billion reduction in housing and homelessness spending for next year. He also plans to cut the state’s climate budget by nearly $15 billion for programs to bolster coastal resilience as sea levels rise and prepare for wildfires.
Boosting the Rainy Day Fund
To address the “long-term structural challenge,” Newsom wants to deposit $3 billion into the state’s rainy day fund as well as $8.6 billion into two other reserve accounts.
More Funding for Education
Newsom’s budget calls for an additional $350 million for the University of California and $365 million more for the California State University system. This fulfills Newsom’s 2022 promise to increase spending by 5% annually for five years.
Impact on Immigrants
From October 2026, certain immigrants including refugees, asylees, and survivors of trafficking will have federal Medi-Cal funding cut. This group of around 200,000 immigrants in the state will be moved to a restricted program that only covers emergencies and pregnancy care.
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