Overview
- The projected shortfall for 2026–27 is about $17.7 billion, roughly $5 billion larger than the state’s June estimate.
- Constitutional requirements under Propositions 98 and 2 will steer most recent revenue gains to schools, community colleges, reserves and debt, limiting flexibility elsewhere.
- Program costs are running about $6 billion higher than expected, with federal policy changes adding roughly $1.3 billion next year for Medi‑Cal and CalFresh.
- Recent tax receipts benefited from AI‑driven stock and income gains, but the LAO warns the market looks overheated and revenue tied to it could prove volatile.
- Structural deficits could swell to about $35 billion in 2027–28, and the LAO recommends ongoing spending reductions and/or revenue increases as Gov. Gavin Newsom readies his January budget proposal.