Gov. Gavin Newsom’s (D) $322 billion spending plan for next fiscal year anticipates a “modest surplus” of $363 million but little room for new investments as the cost of providing state services grows and long-term deficits loom, his finance director said Friday.
“There are very limited new commitments in this budget,” Department of Finance Director Joe Stephenshaw told reporters during a media briefing. “It really is balanced, but we recognize the need to also remain fiscally prudent and, again, ensure that we’re setting ourselves up for long-term stability.”
California leaders closed an eye-popping three-year deficit last year with a mix of spending cuts, delays and other fiscal maneuvers, as well as by withdrawing money from the state’s rainy-day fund. Some of those changes will continue to be implemented in Fiscal Year 2026, which in California starts on July 1.
The state has collected more tax dollars than budget writers expected when they struck last year’s budget deal, thanks primarily to a stock market rally that has boosted the incomes of the state’s highest earners.
California is set to collect $16.5 billion more across the three-year budget window — last fiscal year, this year and the next — than state leaders projected in 2024, Stephenshaw said.
But the bill for providing many state services has also come in higher than expected.
Newsom’s budget plan would maintain funding for prior commitments, such as free public preschool for all 4-year-olds. He would also set aside almost $17 billion in reserves, including $4.5 billion lawmakers could use to address economic uncertainty.
And Newsom would make a few new investments. He would more than double the state’s film tax credit from $330 million to $750 million annually, for instance, spend $60 million in FY 2026 year on grants for businesses relocating to California and up to $7.4 million to provide a three-month supply of diapers to every baby born in the state.
Stephenshaw noted that there are several risks to California’s economic and budget outlook, from a potential stock market downturn to federal policies under the incoming Trump administration.
The U.S. Treasury also will likely give southern Californians affected by recent devastating wildfires more time to file their taxes, Stephenshaw said. A filing delay could make it more difficult for state officials to track tax collections and estimate future revenue trends.
Republicans criticized the budget proposal for dipping into the rainy-day fund and not pulling back spending enough, especially given the infrastructure spending demands that may come in response to the fires.
“This is not a budget proposal, it is a spending plan,” Senate Minority Leader Brian Jones (R) said in a statement. “The term ‘budget’ implies a careful assessment of what we can and can’t afford, which clearly this proposal did not include.”