California has a budget deficit, not a surplus. The Legislative Analyst’s Office projected an $18 billion shortfall for 2026-27, and while Governor Newsom’s May 2026 revision claims to have wiped that gap out entirely, the balanced-budget math leans on optimistic revenue assumptions and a federal policy picture that keeps shifting.1Legislative Analyst’s Office. The 2026-27 Budget: California’s Fiscal Outlook This is the fourth consecutive year the state has had to solve a budget problem, following combined shortfalls well over $100 billion across the prior three cycles.
Where the 2026-27 Numbers Stand
The LAO released its fiscal outlook in November 2025 and pegged the 2026-27 budget problem at $18 billion. That was $5 billion worse than what lawmakers had expected only a few months earlier.1Legislative Analyst’s Office. The 2026-27 Budget: California’s Fiscal Outlook
The Governor’s January budget proposal narrowed the projected deficit to roughly $3 billion by folding in about $9 billion in proposed solutions: suspending a required deposit into the rainy day fund, shifting a large school-funding obligation, and cutting costs in Medi-Cal and other health programs.2Legislative Analyst’s Office. The 2026-27 Budget: Overview of the Governor’s Budget By May 2026, the revised budget went further, claiming no shortfall for the current year, the next year, or through July 2028, achieved partly through $1.8 billion in General Fund spending reductions.3Office of Governor Gavin Newsom. Governor Newsom Announces Revised Budget That Eliminates Deficit
Whether “zero deficit” actually holds depends on whether tax collections match the administration’s projections. California has struggled with that in recent years. The LAO and the Department of Finance routinely disagree on revenue forecasts, and the gap can be enormous. For 2026-27 the difference between the two projections was roughly $15 billion.
How the State Went From Surplus to Four Straight Deficits
The reversal happened fast. In 2021-22, California had an estimated $47 billion General Fund surplus. In 2022-23, that grew to about $55 billion, the largest surpluses in state history. Lawmakers directed the money into one-time spending, new programs, and reserve deposits.4Legislative Analyst’s Office. The 2023-24 Budget: Multiyear Assessment Governor Newsom publicly cited an even larger $97.5 billion figure at one point, though that number blended different accounting measures and time periods.5CalMatters. California’s Budget Whiplash Showed the Pitfalls of Forecasting Revenue
Then the deficits started. The Legislature closed a $27 billion gap in 2023-24, a $46.8 billion gap in 2024-25, and a $15 billion gap in 2025-26, on top of roughly $28 billion in proactive balancing actions taken the year before that.6Legislative Analyst’s Office. The 2026-27 Budget: California’s Fiscal Outlook Much of the earlier surplus had come from a temporary spike in capital gains and stock-based compensation, particularly in tech. When the stock market cooled, that revenue vanished. The spending commitments made during the boom didn’t.
Why California’s Revenue Swings So Wildly
Personal income tax generates nearly 60 percent of California’s General Fund revenue, and a huge share of that comes from capital gains: the profits people realize when they sell stocks, real estate, or business interests. In a strong stock market year, capital gains alone can add tens of billions to the treasury. The 2026-27 revenue forecast, for example, credited $21.2 billion in upgraded revenue projections primarily to higher capital gains realizations and wage growth in technology-heavy sectors.7California Department of Finance. 2026-27 Governor’s Budget Summary: Revenue Estimates
The concentration is extreme. Fewer than 10,000 households earning over $5 million accounted for roughly 20 percent of all income taxes paid in recent years. When those households sell assets in a boom year, the budget overflows. When they hold or lose money in a downturn, the budget craters. Revenue fluctuations have run higher in every state over the last five years than in the prior fifteen, but states like California that lean on income taxes from high earners feel it most.8The Pew Charitable Trusts. State Tax Revenue Volatility Remains High as Long-Term Trends Moderate That volatility is baked in. Nothing in the current tax structure is close to changing it.
What “Balanced” Actually Means
The state constitution requires a balanced budget, so when revenue drops, California can’t just run a deficit the way the federal government does. Lawmakers use a mix of tools that has become familiar over the past four deficit cycles. The 2024-25 budget, which addressed a $46.8 billion shortfall, shows how the arithmetic typically breaks down:9California Department of Finance. 2024-25 Enacted Budget Summary: Introduction
- Spending reductions: $16 billion in direct program cuts.
- Revenue increases and internal borrowing from special funds: $13.6 billion.
- Reserve withdrawals from the Budget Stabilization Account and Safety Net Reserve: $6 billion.
- Fund shifts moving expenses off the General Fund: $6 billion.
- Delays and pauses on previously approved spending: $3.1 billion.
- Deferrals pushing payments into future fiscal years: $2.1 billion.
Outright cuts covered only about a third of that gap. The rest was financial engineering: borrowing from one pocket to fill another, pushing costs into the future, reclassifying expenses. These moves balance the budget on paper. They also create obligations that make the next year’s budget harder to balance. Deferred infrastructure maintenance, in particular, doesn’t get cheaper with time.
What’s Getting Cut Right Now
The 2026-27 budget targets health and social services for the largest reductions. In Medi-Cal alone, new work requirements for the adult expansion population are projected to save $373 million in 2026-27 and $13.1 billion by 2029-30. Shifting eligibility redeterminations from annual to every six months generates another $463 million in first-year savings, and retroactive coverage periods are being shortened.10California Department of Finance. 2026-27 Governor’s Budget Summary: Health and Human Services
CalFresh benefits face reductions of about $66 million tied to federal policy changes that narrow eligibility, including stricter work requirements and limits for certain noncitizens. In-Home Supportive Services loses $86 million from an eligibility alignment with Medi-Cal, plus the elimination of the IHSS backup provider system.10California Department of Finance. 2026-27 Governor’s Budget Summary: Health and Human Services Those cuts land on roughly 15 million Californians enrolled in Medi-Cal and millions more receiving food assistance or in-home care.
How Much Is in the Rainy Day Fund
California’s Budget Stabilization Account is the primary reserve. Voters strengthened it in 2014 through Proposition 2, which established mandatory deposit rules tied to capital gains tax revenue: when capital gains collections run above their historical average, a portion must flow into the reserve. In strong years those deposits can reach $2 billion or more; in weaker years the required amount drops to around $800 million. Proposition 2 also requires at least 0.75 percent of General Fund revenues each year to go toward paying down pension and retiree health care debts.11Legislative Analyst’s Office. Proposition 2
As of the 2025-26 May Revision, the Budget Stabilization Account held approximately $11.2 billion, with another $4.5 billion in the Special Fund for Economic Uncertainties, bringing total reserves to roughly $15.7 billion.12California Department of Finance. 2025-26 May Revision Budget Summary: Introduction That sounds like a lot until you set it next to the $46.8 billion deficit the state had to close two years ago. Fiscal experts generally recommend states keep at least 16 percent of total spending in reserves; California falls short of that benchmark given the size of its budget and the volatility of its revenue base.
Recent deficit cycles have already drawn the account down. The 2024-25 budget authorized $12.2 billion in BSA withdrawals over two fiscal years.9California Department of Finance. 2024-25 Enacted Budget Summary: Introduction The 2026-27 Governor’s budget proposed suspending the required BSA deposit for 2025-26 as one of its deficit solutions.2Legislative Analyst’s Office. The 2026-27 Budget: Overview of the Governor’s Budget Skipping deposits to solve today’s deficit is a defensible short-term move. It also leaves the fund less prepared for the next downturn.
The Federal Risk That Could Reopen the Gap
For the first time in several cycles, federal policy is a significant new cost driver. The LAO estimates that H.R. 1, the “One Big Beautiful Bill Act,” will increase California’s Medi-Cal costs by about $1 billion and CalFresh costs by roughly $300 million in 2026-27 alone. The federal law tightens Medicaid and food assistance eligibility, which means fewer federal dollars flowing to the state while the cost of residual coverage shifts to Sacramento.1Legislative Analyst’s Office. The 2026-27 Budget: California’s Fiscal Outlook
The LAO’s current projections assume the state can keep levying its existing provider taxes at current levels. Preliminary federal guidance issued shortly before the fiscal outlook report suggested California may need to start adjusting certain provider taxes as early as July 2026.1Legislative Analyst’s Office. The 2026-27 Budget: California’s Fiscal Outlook If that guidance holds, the actual budget impact would be worse than current estimates reflect. That kind of risk doesn’t show up in the Governor’s “zero deficit” headline, but it could reopen a gap mid-year.
The short answer to whether California has a surplus or a deficit is a deficit, papered over. The longer answer is that the state has spent four years in a row solving budget problems, its reserves are thinner than they look, and the current balanced-budget claim depends on revenue forecasts and federal assumptions that have wobbled before.