Overall Budget Picture

California’s overall economic picture has performed better than projected compared to the Budget Act of 2025. The Governor’s Budget proposes a $348.9 billion balanced budget with
General Fund expenditures of $248.3 billion. The stronger-than-anticipated performance of the economy, stock market, and cash receipts have contributed to an upgraded revenue
forecast, with General Fund (GF) revenues coming in higher by approximately $42.3 billion, or 6.7 percent, across the budget window (FYs 2024-25, 2025-26, and 2026-27). The revenue
surge is noted as largely fueled by the artificial intelligence boom and investor enthusiasm.

Despite the significantly increased projected revenues, the State projects a modest shortfall of $2.9 billion-attributable to constitutional funding requirements, the need for a sufficient
discretionary budget reserve, and higher baseline program costs that all ultimately offset the increased revenue growth. The shortfall is almost fully addressed through suspending a required $2.8 billion “true-up” deposit into the Budget Stabilization Account (BSA, or
commonly known as the state’s Rainy Day Fund). However, the Budget does include a BSA deposit in FY 2026-27 of approximately $3 billion. After accounting for these actions, the
BSA balance in FY 2026-27 is $14.4 billion, or $3.2 billion higher than the Budget Act of 2025.

The Budget also includes $4.5 billion in the Special Fund for Economic Uncertainties, bringing the combined amount of reserves in FY 2026-27 to roughly $23 billion, or $7 billion higher than the Budget Act of 2025. The Governor’s proposed budget makes relatively few new, discretionary spending commitments, but also does not propose significant cuts or reductions, including for core
health and human services programs. New investments were largely concentrated in early childhood education and K – 12. Of note, the Budget scores projected caseload reductions attributable to H.R. 1 eligibility changes as savings but holds action and defers estimates of many H.R. 1 impacts to the May Revision (including for county administration), with exception of some direct impacts to the State for a total of $1.4 billion General Fund in FY 2026 -27.

These direct state impacts include but are not limited: to the SNAP/CalFresh administrative cost shift; costs to Medi – Cal for loss of Federal Medical Assistance Percentage [FMAP] for individuals with Unsatisfactory Immigration Status who were previously eligible for the 90% Affordable Care Act expansion FMAP; and savings to Medi – Cal assistance/benefits for expected disenrollment due to work and community engagement requirements.
Regarding the multi – year outlook, the Governor’s Budget reflects a deficit of roughly $22billion in FY 2027 – 28 and shortfalls in the two years following. In its budget summary, the Administration states its intent to provide a revised plan at May Revision that balances the
Budget in both the 2026 -27 and 2027 – 28 fiscal years with adequate budget reserves.
Notably, the Governor’s Budget does not factor in the potential or probability for economic downturn. In contrast, the Legislative Analyst’s Office (LAO)’s fiscal outlook in November 2025 incorporated significant risk of stock market downturn, with projected structural deficits of $35 billion annually starting in FY 2027 -28. Instead, the Administration’s Governor’s Budget acknowledges some key risks to the State’s budget outlook, including a tax system heavily reliant on high -income earners and therefore sensitive to changes in the stock market, unpredictable federal policies, and continued uncertainty around tariffs, inflation, and immigration. The Administration notes that were a significant market downturn comparable to that of 2022 sustained throughout 2026, revenue could be $25 billion to $30 billion below forecast within the budget window. If coupled with an economic recession, the revenue impact could be even more severe.
Consistent with last year’s Governor’s Budget, the initial FY 2026 -27 Budget takes a measured approach in proposing changes, with the Administration emphasizing that the January budget reflects a point – in -time assessment and that substantial changes to address
the ongoing structural deficit are anticipated in the May Revision.