California faces $12 billion budget deficit. What Gavin Newsom wants to cut

Nicole Nixon and Kate Wolffe, The Sacramento Bee on May 14, 2025

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SACRAMENTO, Calif. — 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.

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.

“No state will continue to do more than the state of California by a long shot, and that’s a point of pride,” Newsom said of providing care to undocumented immigrants. “We’re not cutting or rolling back ... we’re going to freeze enrollment.”

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, which are used for weigh loss and to treat Type 2 diabetes.

Newsom’s budget includes more than $450 million in “trigger cuts” to food assistance and foster care programs beginning in 2027 “contingent upon sufficient resources.”

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 Proposition 36 as an “unfunded mandate” while citing shrinking Proposition 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.”

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