The No-Hassles-While-I'm-in-Office State Budget Proposal

As blog readers will know, Gov. Newsom decided his big final speech should be the State of the State address and left the budget presentation yesterday to his finance director Joe Stephenshaw.

You will read in news coverage that the budget is "balanced." That is California budget-speak. Budgets that pull down reserves are not balanced in common English usage and the proposal pulls down reserves. It essentially relies on the extra revenue (compared with estimates made when the current budget was enacted) that has accumulated as added reserves in the general fund (GF).

It pulls down that reserve in the general fund by around $21 billion and puts about $3 billion in the "rainy day" fund (Budget Stabilization Account or BSA). The Public School reserve is also largely drained. The bottom line is a deficit of about $18 billion. All of these estimates are based on underlying economic forecasts which verbally acknowledge that the added revenue is coming largely from capital gains in the stock market associated with the AI boom, but don't directly reflect what might happen if the boom becomes a bust. 

In addition, the current year - when you sum up all the reserves associated with the general fund - shows a deficit of over $5 billion. Total spending next year rises over 5%, i.e., more than inflation is likely to be. We show these results on the table below:

Source: https://ebudget.ca.gov/2026-27/pdf/BudgetSummary/SummaryCharts.pdf. To estimate surpluses and deficits in the Public School, Safety Net, and BSA, I used estimates from the enacted budget of the current year (2025-26) from https://ebudget.ca.gov/2025-26/pdf/Enacted/BudgetSummary/SummaryCharts.pdf. Those estimates may differ from what the Dept. of Finance now has by a bit, but not enough to matter for the general story.

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During the presentation news conference, Finance Director Stephenshaw repeatedly emphasized that the Legislative Analyst's Office (LAO) is using more cautious revenue estimates and that, if revenue problems arise from the stock market, the May Revise budget will take account of them.

What about UC's allocation? The official numbers show a general fund allocation this year of about $4.9 billion rising to $5.4 billion in the coming fiscal year. So it was unlikely there would be complaints from UC. There is a verbiage about the "loans" to UC that were made to avoid actual cuts and that the loans seem to roll over next year. It's hard to disentangle the details from the fuzzy description. But, again, UC was unlikely to squawk (as it did last year when cuts were on the agenda). Instead, there was the more usual thank-you for UC President Milliken:

UC statement on Gov. Newsom’s 2026–27 state budget proposal

UC Office of the President, January 9, 2026

I am deeply grateful to Governor Newsom and our legislative leaders for their steadfast support of the University of California. Despite ongoing financial challenges for the state, they have remained committed to California’s students. Working together, we’ve kept a UC education affordable and accessible, advancing opportunity across the state. We’ve enrolled a record-breaking 200,000 California undergraduates and provided the financial support that allows 64 percent of California students to graduate with no student debt. Our total student enrollment of 301,093 for fall 2025 is also a new record.

The budget introduced today by Governor Newsom continues to provide critical support for the University and our students. State support is more important than ever, as we face tremendous financial pressures stemming from rising costs and unprecedented federal actions. UC campuses rely on funding stability to serve students and maintain the academic and research excellence that has made UC the world’s greatest research university. An investment in UC is an investment in California’s future. I look forward to our ongoing partnership with Governor Newsom and the Legislature to ensure that our students have what they need to succeed at UC and beyond.

Source: https://www.universityofcalifornia.edu/press-room/uc-statement-gov-newsoms-2026-27-state-budget-proposal.

The bottom line on the budget proposal is that the governor does not want to deal with complaints and attacks from the legislature and the various state interest groups for the remainder of his term. How kind the gods of the stock market will turn out to be remains to be seen.

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You can see the budget presentation at:

https://ia800106.us.archive.org/0/items/newsom-1-1-2026-new-year/Finance%20Director%20Joe%20Stephenshaw%20presents%20Governor%27s%202026-27%20budget%20proposal%201-9-2026.mp4. (It starts at minute 2.)