AI windfall helps California narrow projected $3-billion budget deficit

SACRAMENTO — California and its state-funded programs are heading into a period of volatile fiscal uncertainty, driven largely by events in Washington and on Wall Street.

Gov. Gavin Newsom’s budget chief warned Friday that surging revenues tied to the artificial intelligence boom are being offset by rising costs and federal funding cuts. The result: a projected $3-billion state deficit for the next fiscal year despite no major new spending initiatives.

The Newsom administration on Friday released its proposed $348.9-billion budget for the fiscal year that begins July 1, formally launching negotiations with the Legislature over spending priorities and policy goals.

“This budget reflects both confidence and caution,” Newsom said in a statement. “California’s economy is strong, revenues are outperforming expectations, and our fiscal position is stable because of years of prudent fiscal management — but we remain disciplined and focused on sustaining progress, not overextending it.”

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Newsom’s proposed budget did not include funding to backfill the massive cuts to Medicaid and other public assistance programs by President Trump and the Republican-led Congress, changes expected to lead to millions of low-income Californians losing healthcare coverage and other benefits.

“If the state doesn’t step up, communities across California will crumble,” California State Assn. of Counties Chief Executive Graham Knaus said in a statement.

The governor is expected to revise the plan in May using updated revenue projections after the income tax filing deadline, with lawmakers required to approve a final budget by June 15.

Newsom did not attend the budget presentation Friday, which was out of the ordinary, instead opting to have California Director of Finance Joe Stephenshaw field questions about the governor’s spending plan.

“Without having significant increases of spending, there also are no significant reductions or cuts to programs in the budget,” Stephenshaw said, noting that the proposal is a work in progress.

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California has an unusually volatile revenue system — one that relies heavily on personal income taxes from high-earning residents whose capital gains rise and fall sharply with the stock market.

Entering state budget negotiations, many expected to see significant belt tightening after the nonpartisan Legislative Analyst’s Office warned in November that California faces a nearly $18-billion budget shortfall. The governor’s office and Department of Finance do not always agree, or use the LAO’s estimates.

On Friday, the Newsom administration said it is projecting a much smaller deficit — about $3 billion — after assuming higher revenues over the next three fiscal years than were forecast last year. The gap between the governor’s estimate and the LAO’s projection largely reflects differing assumptions about risk: The LAO factored in the possibility of a major stock market downturn.

“We do not do that,” Stephenshaw said.

Among the key areas in the budget:

The emergency room sign outside Harbor-UCLA Medical Center in Torrance.

(Ashley Landis / Associated Press)

Newsom’s spending plan allocates $222.4 billion for Medi-Cal, California’s version of the federal Medicaid program providing healthcare coverage to low-income Americans, an increase of about $25 billion compared with the current fiscal year. The program covers about 14 million people, or one-third of the state’s population.

Budget officials attribute the jump in costs in part to President Trump’s One Big Beautiful Bill Act, which lowered the amount of federal money that California receives. The state also loaned itself money last year to pay for higher Medi-Cal costs, but has depleted that funding.

Newsom’s budget proposal ends Medi-Cal coverage, except in cases of emergencies and pregnancies, for a group of immigrants that includes refugees, asylees and others. The move follows federal changes to the assistance.

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The proposal drew immediate condemnation on Friday.

“It’s shockingly cruel for Gov. Newsom to propose to balance the state budget on the backs of those who have survived extreme hardship,” said Kiran Savage-Sangwan, executive director of the California Pan-Ethnic Health Network.

At the same time, many undocumented immigrants will still be eligible to receive state-funded healthcare in California, raising questions about why the state is covering one group of immigrants while ending Medi-Cal coverage for another.

California became the first state in the nation in 2024 to offer healthcare to all low-income undocumented immigrants, an expansion spearheaded by Newsom. Last year, Newsom and the Democratic-led Legislature reduced the expansion of state-sponsored healthcare to additional immigrants due to the high cost.

Students attend the first day of classes at Alliance Judy Ivie Burton Technology Academy High School in Los Angeles in August.

(Juliana Yamada / Los Angeles Times)

The governor’s proposed budget for public schools maintains significant recent investments and initiatives but takes on no new major financial obligations. The total proposed state funding for education in transitional kindergarten through 12th grade is about $90 billion, which includes proceeds from voter-approved school construction bonds and contributions to the employee pension fund.

The funding level is mostly locked in by state law, but the governor and Legislature have significant discretion on how the money will be used. Transitional kindergarten 4-year-olds became fully phased-in last year. Its ongoing cost this year is estimated at $1.9 billion over and above what state law requires California officials to use for K-12 education.

Also, the state would put $1 billion in ongoing funding this coming fiscal year into community schools, which partner with education, county and nonprofit entities to provide health, mental health and other social services, extra academic help to students and programs that encourage family involvement in their child’s school.

The goal of the funding is “to expand the community school model to more school sites that have large concentrations of students from low-income families, English learners, and youth in foster care.” To date approximately 2,500 schools in California have received community schools grants. The extra funding should allow this effort to reach a total of 1 in 4 state public schools.

Schools also are supposed to get a general cost-of-operations increase of 2.41% — helpful, although local school district leaders say they need more.

The UCLA campus in October.

(Al Seib / For The Times)

Higher education was among the areas that received more funding in Newsom’s proposal.

Last year, the University of California and California State University put austerity measures in place after previous state budget and federal funding reductions. Instead of cuts, UC would receive an increase of $350 million and CSU $365 million, Newsom has proposed.

UC’s core budget is about $11 billion, and more than 40% comes from the state, with tuition and fees covering most of the rest.

CSU is more reliant on Sacramento, with about 60% of its $9-billion core budget coming from the state.

“State support is more important than ever, as we face tremendous financial pressures stemming from rising costs and unprecedented federal actions,” UC President James B. Milliken said in a statement.

The funding proposals for both systems include partially fulfilling payments under multi-year agreements that called for UC and CSU to receive more state funding in exchange for reaching certain goals, including increasing enrollment of Californians. In previous years, those annual payments have been deferred.

For the state’s community college system of 116 campuses — the largest in the country — the budget proposal increases funding by about 9%. Under state law, it budgets $14.1 billion for community colleges, up from $12.9 billion a year ago. The budget also continues to support the system’s premier initiative: Vision 2030, which aims to broaden access to education for first-generation students and underserved populations.

An aerial view of properties that were destroyed in the Eaton fire in Altadena in July.

(Allen J. Schaben / Los Angeles Times)

With wildfire risk and suppression costs heightened after the L.A. fires last year, the budget proposal includes $314 million to continue wildfire and forest-resilience programs.

Data collected by the California Department of Forestry and Fire Protection showed more than 80% of fuels-reduction projects showed a positive impact on slowing the spread of fires last year. Still, the administration acknowledged that recent disasters — including last year’s Eaton and Palisades fires that killed 31 people and destroyed more than 16,000 structures — highlighted the need to further protect communities.

The governor’s budget includes $58 million for local fire-prevention grants in wildfire-threatened communities, $19.6 million to help homeowners create defensible space around structures and $15.2 million for fuel-reduction work near electricity transmission lines aimed at reducing ignition risks.

When Newsom took office, the budget for Cal Fire totaled about $2.4 billion in 2018-19, compared with a proposed $5 billion in 2026-27 — more than doubling overall support even as recent General Fund figures are partly understated by a one-time shift to cap-and-trade funds approved in prior budgets.

Enzo Muniz, left, 20 months, eats while Rey Reyes, 16 months, pushes a toy car at Zoila Carolina Toma’s family child-care center in Lakewood in 2023.

(Allen J. Schaben / Los Angeles Times)

The budget proposal has disappointed some in the child-care industry. It does not continue to expand child-care spaces to meet a 2021 goal of opening approximately 200,000 additional state-subsidized slots.

A 2024 trailer bill had promised to open an additional 44,000 child-care slots in the 2026-27 fiscal year. So far, about 125,000 slots are funded.

Although child-care workers under the Department of Social Services would receive a pool of $89.1 million for a cost-of-living adjustment, the individual payout is not yet known. State preschool staff would receive a 2.41% adjustment.

The proposed budget does not include startup funding for a union-backed initiative to overhaul how child-care providers are paid so that their salaries better reflect the actual cost of running a day-care home or center.

“The state has just not been delivering on their promises to child-care programs,” said Laura Pryor, research director at the California Budget & Policy Center. She expressed frustration over the decision to not expand the number of subsidized slots.

Newom’s budget proposal allocates $11.5 million in one-time funding to support child-care facilities affected by recent fires.

Skid Row is home to almost 4,000 homeless people and has the largest concentrate of homeless in Los Angeles County.

(Gina Ferazzi/Los Angeles Times)

The governor’s budget proposal provides another round of $500 million for California’s Homeless Housing, Assistance, and Prevention program. This initiative provides grants to cities, counties and continuums of care to help prevent and end homelessness in their regions.

Legislators, housing advocates and local governments said it’s not enough.

“The governor’s budget proposal falls short on investing in housing and I definitely hope we can address that in further negotiations,” said Assemblymember Matt Haney (D-San Francisco), chair of the Housing and Community Development Committee. “I was happy to see he included dollars for cities to confront homelessness — in his State of the State he talked about how we are finally seeing a drop in people living in our streets and that’s because of the investments we have made.”

Assemblymember Joe Patterson (R-Rocklin) said he didn’t see anything in the proposal that involved new funding or support for housing or homelessness.

“The last two years he proposed totally zeroing that out and it was the Legislature that put that back in and now he’s taking credit,” said Patterson, vice chair of the housing committee.

Nearly a quarter of the nation’s homeless population live in California, according to the Public Policy Institute of California. The Los Angeles area has seen some recent successes, with data showing homeless people in the city are being more quickly placed into permanent supportive housing, but concerns remain about whether this progress is sustainable due to federal cuts and a potential economic downturn looming.

A large-scale study released in 2023 by UC San Francisco concluded that the state’s high cost of housing and housing shortages were the primary reason for homelessness in California.

Times staff writers Jaweed Kaleem, Daniel Miller and Kate Sequeira contributed to this report.