In the new year, same budget headache for California
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SACRAMENTO — Congratulations, you survived 2025. What will the new year bring? Joy and prosperity for all, hopefully, but it’s hard to say.
Few in California could have predicted some of the most life-changing events of 2025 — the deadly Los Angeles area wildfires, the Trump administration’s militant, often inhumane immigration crackdown and an obscure congressional redistricting fight that could alter the balance of power in Washington.
With that in mind, California can expect one of 2026’s most consequential stories to be the turmoil in Sacramento over the entrenched state budget deficit — which will be compounded by the massive federal healthcare cuts by the Trump administration.
The good news is that, after a rain-soaked Christmas holiday, California enters the new year with reservoirs brimming, even if its coffers are not. It also just got easier to delete Facebook, X and other social media accounts that consume too much of our lives. And let’s not forget that the Los Angeles Dodgers reign as World Series champions!
Happy New Year! This is Phil Willon, the California Politics editor for the Los Angeles Times, filling in for columnist George Skelton. Along with the state budget crisis, 2026 will bring a wide-open race for governor — and the person the candidates hope to replace, Gov. Gavin Newsom, is flirting with a run for president in 2028 and has just a year left in his final term to deliver on all his promises. So buckle up and visit latimes.com early and often.
An $18-billion problem
The California Legislature returns to work Monday for the 2026 session, and a major financial headache awaits.
The Legislative Analyst’s Office estimates that the state will have an $18 billion budget shortfall in the upcoming fiscal year – $5 billion higher than what the Newsom administration predicted in June.
As Times reporter Katie King reported earlier, state revenue has been improving, but a shortfall is still expected. That’s because mandatory spending requirements under Proposition 98, which sets minimum annual funding for public schools, and Proposition 2, which specifies reserve deposits and debt payments, almost entirely offset any gains, according to the legislative analysis.
And it gets worse. The LAO said that, starting in 2027-28, California’s structural deficits are expected to grow to about $35 billion annually “due to spending growth continuing to outstrip revenue growth.”
The solution? Cut spending and/or increase revenue, the LAO report says.
But cut what, and raise money how? That’s up to Newsom and the Legislature to decide, and their difficult task will begin later this week when the governor releases his proposed budget.
Poking the billionaire
One controversial idea — outside of the legislative process — already is being kicked around.
A November ballot measure proposed by a labor organization, the Service Employees International Union-United Healthcare Workers West, would impose a one-time 5% wealth tax on billionaires that could raise $100 billion for healthcare programs. Opponents say it will drive wealthy, taxpaying, job-creating, economy-driving Californians out of the state.
The measure has yet to qualify for the November ballot but will receive ample attention regardless.
Supporters say the revenue is needed to backfill the massive federal funding cuts to healthcare that President Trump signed this summer under what’s known as the “Big Beautiful Bill,” according to a report by The Times’ Seema Mehta and Caroline Petrow-Cohen.
The California Budget & Policy Center estimates that as many as 3.4 million Californians could lose Medi-Cal coverage, more rural hospitals could close and other healthcare services would be slashed unless a new funding source is found.
Federal cuts to healthcare
If California does not backfill those federal cuts by raising taxes, or other creative means, costs for the state will still increase, according to the Legislative Analyst’s Office. That seems counterintuitive, since millions of Californians may lose coverage. But under the “Big Beautiful Bill,” cuts to federal cost sharing and a drop in health provider tax revenue will far outpace any potential cost savings for the state.
Newsom’s possible White House run will ensure that California’s budget shortfall and liberal policies it spends money on will whip up the nation’s caustic partisan divide. Near the top of the list will be California’s decision to extend state-sponsored healthcare coverage to low-income, undocumented immigrants. The expansion has cost the state billions and drawn sharp criticism from Republicans and, last year, Newsom and the Democratic-led Legislature reduced the expansion of state-sponsored healthcare to those immigrants due to the high cost.
On top of that, the monthly premiums for federally subsidized plans available on the Covered California exchange — often referred to as Obamacare — will soar by 97% on average for 2026. That’s due to decisions by the Republican-led Congress and Trump not to extend federal subsidies for that coverage. State officials estimate that roughly 400,000 Californians will drop their coverage under the program because of the higher cost. And California counties are ill prepared to step into the breach, as KFF Health News recently reported.
Needless to say, the healthcare situation will be extremely volatile in 2026, which will make the state’s upcoming high-stakes budget process even more unpredictable.
What else you should be reading
The must-read: Billionaire tax proposal sparks soul-searching for Californians
CA vs. Trump: Trump pulls back National Guard from L.A. and other cities, Newsom claims win
The L.A. Times Special: California rolls out sweeping new laws for 2026, from cellphone limits in schools to a ban on cat declawing
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Ideas expressed in the piece
The article presents California’s fiscal situation as a serious and worsening crisis heading into 2026. The state faces an $18 billion budget deficit for fiscal year 2026-27, which is $5 billion larger than the Newsom administration anticipated in June, despite revenue improvements[1][3]. The core problem stems from constitutional spending mandates under Proposition 98 for school funding and Proposition 2 for reserve deposits and debt payments, which consume nearly all revenue gains[1][3][4]. The outlook deteriorates further with structural deficits—the ongoing imbalance between revenues and spending—projected to reach approximately $35 billion annually starting in 2027-28 due to spending growth outpacing revenue growth[1][3][4]. The federal healthcare cuts under the Trump administration’s budget bill compound California’s challenges, as the state must pay more to cover Medi-Cal benefits and will lose housing and homelessness funding, adding roughly $6 billion in unexpected costs[2]. The article notes that while a one-time 5% wealth tax on billionaires could potentially raise $100 billion for healthcare programs, it remains controversial, with opponents arguing it could drive wealthy, job-creating residents from the state. Additionally, federal subsidies for Obamacare coverage are being eliminated, forcing monthly premiums on the Covered California exchange to surge by 97% on average, potentially causing approximately 400,000 Californians to lose coverage.
Different views on the topic
Revenue collections have been performing better than recent projections suggested, with collections running $8.6 billion ahead of expectations in the current budget, raising the possibility that the 2026-27 deficit may be significantly less severe than currently forecast[4][5]. However, even under optimistic revenue scenarios, any improvement faces structural constraints: constitutional requirements under Propositions 98 and 2 mean that revenue gains need to be nearly double the size of the deficit to achieve meaningful budget balance, making substantial deficit reduction through revenue alone unlikely[3]. While some acknowledge that stronger-than-expected revenue collections could provide temporary relief, the underlying structural problem remains persistent, with outyear deficits of approximately $20 billion per year likely to continue through at least 2028-29 even if 2026-27 improves[5]. The fundamental challenge is that addressing California’s budget problems requires ongoing solutions involving spending reductions and revenue increases, as temporary tools like budgetary borrowing and reserve withdrawals have been largely exhausted[3].
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