Costly health care expansion worsens California’s chronic budget deficit

When Gov. Gavin Newsom two months ago proposed a $322 billion state budget for the 2025-26 fiscal year, he projected what was depicted as a “modest surplus” of $363 million.

Anyone who knows anything about state budgeting knows that it’s impossible to accurately pinpoint such a tiny figure, amounting to scarcely one-tenth of 1% of the overall budget. It could have been a number plucked from the air to make the budget appear balanced.

In fact, the budget’s own numbers revealed that the administration’s projected revenues would fall many billions of dollars short of covering its projected spending. The shortfall would be covered by a raft of on- and off-budget loans, dips into the state’s emergency reserves and accounting gimmicks, such as pushing the June 2026 state payroll back a month later in the 2026-27 fiscal year, thus reducing 2025-26 spending by several billion dollars.

All-in-all, the $363 million surplus cited in January is just a smaller version of the $97.5 billion surplus that Newsom bragged of having in 2022 but that turned out to be a mirage due to extremely inaccurate multi-year revenue projections. Ultimately the administration acknowledged that the state would be receiving $165 billion less over four years than it had assumed.

As the administration now concedes, the harsh reality is that the state faces multibillion-dollar gaps indefinitely — at least $10 billion a year — between income and outgo, thanks largely to the flurry of spending Newsom and Legislature embraced on the $97.5 billion surplus presumption.

One of those big spending increases — expanding Medi-Cal coverage to all 1.6 million undocumented residents — is already being felt.

Expansion is costing $2.8 billion more than budgeted. When combined with other cost factors,  Medi-Cal has a $3.4 billion shortfall, which will be temporarily covered with a loan from other state funds.

Meanwhile, Newsom and legislators also approved spending $2.5 billion on costs related to the Los Angeles wildfires — money that they hope will be reimbursed by President Donald Trump, with no guarantees that it will be.

Although revenues are running over 2024-25 expectations so far, this flurry of numbers suggests that when Newsom revises his 2025-26 budget in May, that “modest surplus” will morph into a substantial additional deficit — on top of the deficit that he and the Legislature papered over with $11 billion in various so-called “solutions.”

Sensing an opening, Republicans are hammering Newsom for the rising costs of providing Medi-Cal coverage to undocumented immigrants. 

“Democrats and the governor are picking priorities, and they’re prioritizing people that have come into our country illegally over people who immigrated here legally, people that are citizens,” Senate Republican leader Brian Jones said.

Political zingers aside, this multi-year saga indicates that Newsom and his budget staff are not very competent when it comes to estimating both revenues and spending. That phantom $97.5 billion surplus stemmed from an assumption that a spike in revenues as the state’s economy emerged from the COVID-19 pandemic would be a permanent increase of about $40 billion a year over pre-pandemic levels.

Read More: California’s budget whiplash: From a record-setting surplus to a massive shortfall in one year

Why they made such an erroneous assumption remains a mystery. The administration blames the volatility of the state’s revenue system — particularly its lopsided dependence on very high-income taxpayers — for the error.

That long-standing factor should have made Newsom, et al, more cautious about making long-term revenue projections, but instead they threw caution to the wind in his rush to brag that “no other state in American history has ever experienced a surplus as large as this.”

It’s a boast that will continue to plague California’s fiscal planning long after Newsom has ceded the governorship to someone else.