Newsom says budget is balanced, will still tap $7 billion in reserves

If you take Gov. Gavin Newsom at his word, California will have a budget surplus for the first time in several years, and his fellow Democrats who control the legislature won’t need to cut more programs as they try to make the state more livable.

In reality, the state’s financial future is murkier.

Newsom’s proposal for the 2025-2026 budget, unveiled Friday, has plans to pull $7.1 billion from the state’s rainy day reserve fund. That’s on the heels of a $5.1 billion draw from the fund that the governor agreed to last year, along with sizable cuts to government agencies and programs. Newsom and state lawmakers agreed to those cuts in June 2024 to balance a deficit of tens of billions of dollars.

Plus, the governor and nonpartisan experts agree that California’s future finances could be threatened by booms and busts in the stock market, the ongoing Southern California firestorm, President-elect Donald Trump’s plans to slash federal spending and more.

“We’re a lot better off than the last couple years,” California Director of Finance Joe Stephenshaw told reporters Friday. “We’re not facing a budget shortfall. We do recognize that we still have work to do to ensure sustainability.”

Republicans blasted Newsom on Friday for planning some new spending while dipping further into reserves.

“Only Gavin Newsom could raid over $7 billion from our rainy day savings and have the audacity to call it a ‘surplus,’ ” said Republican Senate Minority Leader Brian Jones of San Diego.

All told, the state will have a “modest” budget surplus of $363 million the next fiscal year — when dips into reserves and last year’s cuts are included, according to Newsom’s office. The proposal is a formal request to fund government programs through the next fiscal year, which stretches from July 2025 through June 2026.

Newsom is proposing $229 billion in general fund spending, up from $212 billion he approved last year. The plan would leave $17 billion in reserves by the end of the budget period, the administration said, including about $11 billion in the rainy day fund. That’s about $5 billion less than the state’s total reserves for this year.

With the modest surplus, Newsom is asking state lawmakers to approve $420 million in tax breaks for California’s powerful film industry and put nearly $2 billion more into wildfire response and resilience projects — $1.5 billion of which would be funded by a new climate bond approved by voters in November.

California is poised to receive about $16.5 billion more in tax revenue than Newsom’s administration expected last year. That’s largely because wealthy Californians are reaping stock market benefits amid hype about artificial intelligence, according to the nonpartisan Legislative Analyst’s Office.

California relies heavily on personal income taxes and taxes on capital gains. But that revenue has fluctuated wildly in recent years, making it difficult to bank on in the future, the analysts said in a November report.

The small surplus estimated by Newsom’s administration is slightly higher than the $2 billion deficit estimated by the Legislative Analyst’s Office in the fall. Given the amount of money and volatility involved in budgeting for the most populous state in the U.S., the analysts said, “the budget is roughly balanced.”

State agency budgets won’t see significant new cuts under the proposal, Stephenshaw said. However, some of the cuts Newsom agreed to last year will play out during next year’s budget.

Notably, officials expected to cut 10,000 vacant jobs in state government. That’s been downgraded to 6,500 cut positions, Stephenshaw said, for a savings of $1.2 billion.

Education continues to play an outsized role in the budget proposal, with 36% of the general fund going to K-12 education and 10% to higher education.

The plan continues major spending, and some new programs, in career education, student literacy and learning recovery, as well as additional training and professional development for teachers.

It also continues spending in the state’s universal transitional kindergarten program — which will be eligible for all four-year-olds in the 2025-26 school year — and doles out $435 million more for before, after and summer school programs for TK-6 grade students.

But the proposal also has cuts to California State University and the University of California systems, including deferring some funding for both systems to 2027-28 and also reducing funding — about $396 million for UC and $375 million for CSU.

That’s disappointing to CSU Chancellor Mildred Garcia.

“Larger class sizes, fewer course offerings and a reduced workforce will hinder students’ ability to graduate on time and weaken California’s ability to meet its increasing demands for a diverse and highly educated workforce,” she said.

Newsom didn’t propose any significant increases or cuts to homelessness programs. In its budget summary, the governor’s office said it’s “open to working with” lawmakers on boosting homelessness funding for local governments.

But the administration made clear that any new money must come with “stronger accountability policies,” which could include requiring cities and counties to develop a policy for clearing encampments or have a compliant state-mandated homebuilding plan.

The office did not provide a figure for total homelessness spending, which is spread across various state agencies and has been described as nearly impossible to track as homelessness continues to increase.

Advocates for the homeless were relieved to hear that homelessness programs wouldn’t be on the chopping block. But they remained frustrated that the money is still coming in the form of one-time earmarks rather than dedicated, ongoing funding.

“We’re not seeing the robust continued investments that would be needed to keep accelerating progress on housing and homelessness,” Susannah Parsons, director of policy and legislation for the Bay Area regional homeless solutions nonprofit All Home, said in a statement.

In part to expand oversight of homelessness programs and spending, the governor also proposed creating a new California Housing and Homeless Agency.

Administration officials said it would essentially be an offshoot of the Business, Consumer Services and Housing Agency, which currently oversees housing and homelessness.

Funding for the California Department of Corrections and Rehabilitation, which runs state prisons and correctional facilities, would drop by $400 million to a total of $13.9 billion. Criminal justice reforms are continuing to cut the state’s prison population.

However, Proposition 36, which toughens penalties for drug crimes and shoplifting, is expected to increase the prison population by 1,600 people during the next fiscal year. Stephenshaw said lawmakers could debate a funding increase for prisons this spring.

Newsom’s office will negotiate the budget with state lawmakers this spring. Those talks intensify in May before the budget is approved in June. Democrats hold supermajorities in both chambers and control the process.

“We look forward to working with the Legislature over the coming months to get to a final budget for the state of California,” Stephenshaw said.

Newsom previewed his budget proposal Monday during a press conference in the San Joaquin Valley. The governor was not present during the Friday press conference as he coordinated the state’s response to the devastating wildfires engulfing the Los Angeles area.