California faces $12 billion budget deficit. What Gavin Newsom wants to cut
Gov. Gavin Newsom said Wednesday morning that California is facing a shortfall of $12 billion for the upcoming budget year.
Newsom’s office blamed the deficit on economic uncertainty caused by President Donald Trump’s policies and likely cuts to Medicaid. The overall budget, if passed by the Legislature by June 15, would top $321 billion.
A memo from the governor’s Department of Finance shared ahead of Newsom’s spending plan presentation said Trump’s tariffs have contributed to $16 billion in lost tax revenue primarily tied to a “weakened” economic outlook and stock market losses. The budget proposal does not account for potential federal cuts to Medicaid, which Newsom said he “expects.”
Newsom’s budget proposal includes $5 billion in spending reductions beginning in the next fiscal year, largely around health care spending. By 2028 the savings are expected to grow to nearly $15 billion. It also maintains a planned reduction of nearly 8% to the University of California and California State University systems.
He wants to continue with a planned $7.1 billion withdrawal from the state’s rainy day fund, which currently holds over $18 billion. Last year, the state withdrew $5.1 billion from the fund.
All told, the Department of Finance anticipates having $15.7 billion in reserves at the end of the 2025-26 fiscal year. That number includes the balances of the Special Fund for Economic Uncertainties and the Public School System Stabilization Account, which supports school districts and community college districts.
Newsom’s spending plan calls for borrowing $5.3 billion from special funds, including $1.3 billion in Proposition 35 funding to pay for Medi-Cal rate increases. Voters approved Prop. 35 last year, which extends a tax on health insurers to pay for Medi-Cal services.
Newsom also proposed shifting $1.5 billion in funds for Cal Fire operations to be paid from the Greenhouse Gas Reduction Fund, which typically pays for climate-related projects such as high-speed rail, transit and affordable housing.
The spending plan includes more than $450 million in “trigger cuts” to food assistance and foster care programs beginning in 2027, “contingent upon sufficient resources.”
Cuts to health programs
The largest spending reductions would come through a pause on Medi-Cal enrollment for undocumented adults and $100 premiums for existing patients who have “unsatisfactory” immigration status. In 2024, the low-income health care program opened to all residents regardless of immigration status but has run over budget due to higher-than-expected enrollment.
Earlier this year, the Department of Finance issued a $3.4 billion loan and lawmakers approved $2.8 billion to bail out the overburdened state program. Together, the premiums and enrollment cap will lead to $5.4 billion in savings by 2028.
Newsom had championed expanding Medi-Cal access to undocumented immigrants, even as it has come under increased fire from Republicans at the state and federal levels. On Wednesday he said his administration was trying to balance a “tough budget” without backing down from its promises on health care.
“No state will continue to do more than the state of California by a long shot, and that’s a point of pride,” he said. “We’re not cutting or rolling back ... we’re going to freeze enrollment.”
He also emphasized that Medi-Cal utilization is up across the board, not just among the undocumented. Spending on the program is projected to reach $44.6 billion in the next fiscal year, compared to $37.4 billion this year.
The governor wants to cap overtime for In-Home Supportive Service providers, cut long-term care benefits for some adults, and eliminate coverage for GLP-1 drugs, such as Ozempic and Wegovy, which treat Type 2 diabetes but are increasingly being prescribed for weight loss.
He wants to cut more than a half billion dollars in state tobacco tax funding from dental, family planning and women’s health providers. The proposal outraged Planned Parenthood Affiliates of California CEO Jodi Hicks, who said in a statement that “Newsom is effectively defunding” the abortion and health care provider in the state.
“With the federal defunding of Planned Parenthood an imminent reality, California needs to continue on its course in investing in reproductive health care, not slashing critical funding. Anything to the contrary will be in direct opposition to our state’s constitutional promise of reproductive freedom,” Hicks said.
When asked about the cuts, Newsom pointed to $200 million given to abortion providers in 2022. That was the year the U.S. Supreme Court overturned the coast-to-coast protections to abortion access and California voters enshrined the right to reproductive freedom in the state Constitution.
‘Modest surplus’ gone
The $12 billion deficit is a stark contrast from the budget Newsom presented in January, which included a “modest surplus” of around $300 million.
The shift underscores California’s volatile tax system, which relies heavily on the state’s highest earners and is vulnerable to dramatic swings in revenue from year to year. To reduce the effects of the inconsistency, Newsom and some Democratic lawmakers want to ask voters in 2026 to raise a cap on how much the state can deposit into its rainy day fund each year.
One thing left out of the revise is funding for Proposition 36, the state’s theft and drug treatment law that was approved by a 3-to-2 margin of voters in November. Republican lawmakers railed against Newsom for not providing any funding in his January budget, and the updated numbers are no different.
Lawmakers in March pegged the costs for fully implementing the law between $250 million and $400 million, beyond any funding for the state’s prison system. They say the money is needed for helping counties to administer the program on the behavioral health, court and probation fronts.
Newsom did not directly respond to the funding request during Wednesday’s presentation. Instead, he referred to Prop. 36 as an “unfunded mandate” while citing shrinking Prop. 47 savings and what he called manageable effects on the California Department of Corrections and Rehabilitation.
As part of his budget proposal, Newsom will also ask lawmakers to fast-track the controversial Delta Conveyance Project, which he said is an essential tool to protect the state’s water supply as the climate warms. The proposed $20 billion, 45-mile tunnel beneath the Sacramento-San Joaquin Delta would capture and move water to Southern California. The governor wants to streamline permitting and limit judicial review for environmental challenges.
“We’re done with barriers — our state needs to complete this project as soon as possible, so that we can better store and manage water to prepare for a hotter, drier future,” Newsom said in a statement Wednesday morning. “Let’s get this built.”
This story was originally published May 14, 2025 at 10:45 AM.
