SACRAMENTO, CA — Governor Gavin Newsom introduced a $349 billion state budget proposal for the 2026-2027 budget year on Jan. 10. The plan aims to address a projected $2.9 billion shortfall by counting on more tax money from the growing technology and artificial intelligence (AI) sectors.

An expected $9 billion boost in tax revenue from the tech industry helped lower the projected shortfall in the current proposal. Despite this growth, California faces its fourth consecutive year with a budget deficit.

Differing Estimates

Newsom’s $2.9 billion deficit estimate is much lower than the $18 billion predicted in November by the Legislative Analyst’s Office. This office is an independent group that advises the state on budget issues. The two offices reached different totals because they use different methods to predict how the state’s economy will grow.

State Controller Malia Cohen, the state's top accountant, also reported that California has already spent $6 billion more than planned during the first half of the current budget year.

Focus on Education

The state’s General Fund—the main account used for most state services—is expected to grow by $18 billion to a total of $248.3 billion. Public education remains the primary focus for General Fund spending.

The plan increases the amount spent on each student to $27,400 and includes an additional $509 million for special education and $1 billion for high-needs schools. Higher education funding would rise by 5 percent. If approved, this would fulfill a 2022 promise to provide an extra $350 million for the University of California and $365 million for the California State University system.

Newsom also proposed a major administrative change: putting the Department of Education under his direct control. Currently, the department operates independently and is led by an official who is elected separately from the governor.

Spending Cuts and Redirections

Several programs face deep spending cuts to balance the budget. The plan cuts climate spending by nearly $15 billion as temporary funding runs out. These cuts will affect wildfire preparation and the state's water supply.

Funding for housing and homelessness faces a 56 percent cut. Grants for local governments would drop from $1 billion to $500 million, with no other new homelessness funding proposed. To get their share of the remaining $500 million, local governments must follow new state rules on how to spend the money.

Newsom also proposed moving $1 billion in funding from Proposition 1—a mental health measure recently approved by voters—to focus on housing and medical care for the homeless.

Changes to Healthcare and Social Services

About 200,000 immigrants, including refugees and survivors of human trafficking, will stay on the state’s low-income insurance program, Medi-Cal. However, starting in October 2026, the program will only cover emergency care and pregnancy services for these residents.

This change comes as federal funding for full insurance coverage ends. Additionally, the state expects to receive $1.4 billion less in federal money for low-income food and health programs due to changes in federal laws. State lawmakers said California cannot afford to replace this lost federal funding.

Reserves, Debt, and New Programs

The plan includes depositing $3 billion into the state’s rainy day fund and $8.6 billion into extra backup accounts. These deposits would help replace $12 billion the state withdrew from its reserves over the last two years.

To handle long-term debts, the budget puts $3 billion toward state worker retirement benefits. This is part of a larger $11.8 billion plan to cover these costs over the next four years.

Finally, the budget includes a $200 million program to help residents buy electric vehicles, replacing federal tax breaks that recently ended. It also provides more funding for the state Department of Justice to handle lawsuits against federal government policies.