Why It Matters
California’s state budget has grown so opaque that the Legislature’s own fiscal experts cannot readily explain what the spending plan actually contains. The shift toward accounting complexity and off-the-books maneuvers obscures the state’s true financial condition and makes it harder for lawmakers and the public to understand whether the state is living within its means.
What Happened
The state enacted its 2026-27 budget in June with a stated size of $351.7 billion in state funds, plus $188 billion in federal money. However, the budget document masks a substantial fiscal gap through a series of accounting mechanisms that have become routine during Governor Gavin Newsom’s tenure.
The budget relies on approximately $14 billion in “solutions”—primarily reserve withdrawals and borrowing—to bridge the gap between revenues and planned spending. Even with those maneuvers, the state’s own administration estimated an operating deficit of $18.5 billion during the fiscal year, meaning the proposed solutions fall short of the actual shortfall by about $4.5 billion.
One mechanism involves withholding $3.9 billion in state-constitutionally mandated aid to local school districts, with a promise to repay the funds later. This accounting practice reduces the apparent gap in the current budget while deferring the obligation to future years.
Gabe Petek, the Legislative Analyst overseeing the Legislature’s fiscal office, told Cal Matters that the budget’s structure defies conventional description. “In most years, we would describe the size of the budget problem (or budget surplus),” Petek told the CalMatters. “This year, neither framing fits the budget package as neatly.” He added that “taken altogether, this makes the budget condition difficult to describe concisely.”
By the Numbers
$351.7 billion — size of the 2026-27 state budget
$14 billion — budget solutions included to close the spending gap
$18.5 billion — estimated operating deficit during the fiscal year
$3.9 billion — school aid withheld from local districts
$29.2 billion — accumulated “wall of debt” from five consecutive years of operational deficits
$165 billion — amount by which the Newsom administration overestimated revenues over a four-year period
Zoom Out
California’s budgeting opacity represents a departure from its historical practice. The process was once relatively transparent and straightforward, with clear lines between revenues and expenditures. Over the past several years, phantom revenues, accounting gimmicks, and off-the-books borrowing have become standard features of the annual budget.
The shift has intensified during a period of one-party legislative dominance, which has reduced pressure on state leadership to justify fiscal choices to opposition lawmakers. In 2022, Governor Newsom declared the state had a $97.5 billion surplus. The administration later acknowledged it had overestimated revenues by $165 billion over four years—a correction that revealed how far the initial projection had diverged from reality.
The accumulated effect of five straight years of deficit spending has created what fiscal analysts describe as a wall of debt totaling $29.2 billion. That figure reflects the cumulative gap between what the state spends and what it actually collects in revenue, rolled forward year after year.
What’s Next
The structural imbalance between revenues and spending is expected to persist. Without either significant revenue increases or spending reductions, the state will likely continue to rely on reserve drawdowns and accounting adjustments to present balanced budgets, even as the underlying fiscal position deteriorates. Lawmakers and the administration will face pressure to address the deficit through either tax increases, spending cuts, or both—choices that have proven politically difficult in recent years. Meanwhile, the opacity of the current budget process makes it harder for the public and legislative members to assess whether proposed solutions address the core problem or merely defer it to future budgets.