Newsom releases budget plan to close $2.9 billion shortfall

Gov. Gavin Newsom on Friday released his budget proposal to close a projected $2.9 billion shortfall — significantly less than the $18 billion initially estimated — that includes few large cuts and limits spending on new programs, and lacks a specific plan for the prospect of potentially millions of Californians losing their health insurance as a result of recent federal policy changes.

“This budget reflects both confidence and caution,” Newsom, who skipped a news conference announcing the spending plan following his State of the State speech Thursday, said in a statement.

Newsom’s plan is only an initial proposal and will evolve as the financial forecasts are updated and state lawmakers, who must work with the governor to finalize the budget by mid-June, negotiate changes. Government analysts have warned that the state’s tax revenues, which are heavily reliant on wealthy residents’ stock gains, could take a hit in a financial downturn.

Republicans slammed Newsom’s nearly $350 billion budget proposal, noting that the state’s nonpartisan Legislative Analyst’s Office in November projected a budget deficit about six times higher than his administration’s estimate.

“California families have to balance their budgets and make tough choices,” Tony Strickland, a Republican state senator from Huntington Beach, said in a statement. “The state government should be held to the same standard.”

Newsom’s plan aims to fill the budget gap in part by proposing $1.55 billion in cuts to “state operations” and $1.2 billion in savings over two years by eliminating approximately 6,000 long-vacant positions. At the same time, it proposes a $1 billion expansion of community education programs and $195 million in new public safety investments, the governor’s office said.

The budget estimates the state will incur $1.4 billion in administrative and other costs as a result of changes to federal healthcare and food assistance programs, officials said. But it does not lay out a plan for low-income residents who could lose their insurance due to the changes. Administration officials said they were open to working with lawmakers to find solutions.

“It’s something we’re going to have to monitor,” said Joe Stephenshaw, the state’s finance director on Friday. “That’s the work we need to do over the coming months.”

The future of Medi-Cal, the state’s health insurance program for more than one-third of its residents, figures to be a major part of budget negotiations this year. The program is mostly funded by the federal government, and Trump’s “One Big, Beautiful Bill” cuts billions of dollars from it into the 2030s. As many as 3.4 million Californians could lose their eligibility for Medi-Cal.

The proposed budget would pump an additional $2.4 billion of general funding into Medi-Cal in the next budget year, for a total of $48.8 billion. But it does not indicate whether Newsom aims to backfill $373 million in lost federal funds during the next budget year due to the work requirements, or $658 million in lost funds for emergency services for immigrants without legal status, as well as other major revenue reductions.

On the environment, Newsom’s budget proposed to offset a number of cuts that were made by President Trump and Republican leaders in Congress last year.

In particular, Newsom aimed to spend $200 million to create a new state rebate program for Californians who buy electric vehicles. Last year, Trump’s budget eliminated a federal tax credit of up to $7,500 that the Biden administration had passed to encourage people to buy EVs. Trump also ended federal approval for programs that allow solo drivers of EVs to drive in carpool lanes on freeways.

California operated a rebate program from 2010 to 2023 that provided rebates of between $1,000 and $7,500 to EV buyers. California currently has more EVs on the road than any state, making up about 25% of new car sales statewide, with the Tesla Model Y and Model 3 being the top-selling vehicles of any type in recent years. But to reach its climate goals, the trend needs to continue to grow.

Newsom also proposed Friday spending $2.1 billion from Proposition 4, a $10 billion climate bond passed in 2024 by voters, to increase wildfire prevention, flood protection, and parks projects.

Silicon Valley’s artificial intelligence boom has helped push the state’s revenues $42 billion higher than expected, as investors’ “enthusiasm” for the technology has boosted tech giants’ stock prices, leading to a bountiful income tax harvest, the budget summary said. But, the document warned, the stock market could suffer “a significant downturn if returns on investment in artificial intelligence fall short of lofty expectations,” and, “history indicates that these surges cannot be sustained indefinitely at such high levels.”

Uncertainty around future corporate revenues from AI has also fueled worries over the rapid, massive expansion of energy-intensive AI data-processing centers. The budget would add three state staff to implement Senate Bill 57, signed into law by Newsom in October, which calls for assessing risk that the data center buildout could saddle residents and businesses with higher electricity bills.