Overview: Governor Gavin Newsom’s proposed budget for 2026-27 includes a “modest” budget shortfall of $2.9 billion, which is significantly lower than the $18 billion deficit estimated by the Legislative Analyst’s Office in November. The governor’s budget estimates $42 billion in revenue from increased income tax collections across technology sectors, particularly from artificial intelligence, and a strong stock market. However, the proposed budget does not include any new state funds for affordable housing and proposes reductions to the state’s In-Home Supportive Services (IHSS) Program.
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Gov. Gavin Newsom projects a “modest” budget shortfall of $2.9 billion, according to the governor’s proposed 2026-27 budget.
The nearly $3 billion deficit, while steep, is significantly down from a November fiscal analysis conducted by the Legislative Analyst’s Office (LAO) which estimated an $18 billion deficit.
According to the LAO’s recent analysis of the proposal for the coming fiscal year, the governor’s budget estimates $42 billion in revenue from increased income tax collections across technology sectors, specifically from artificial intelligence, and a strong stock market.
“Now it’s not unusual for the Governor’s team and the LAO to have different forecasts,” said Scott Graves, budget director at the nonpartisan research organization, California Budget & Policy Center, during a virtual briefing. “Everyone is trying their best, but they make different assumptions about the future of the economy, and as we know, no one has a crystal ball. We also know that the state’s fiscal picture may change in the coming months.”
While the budget’s numbers may change leading up to the May revision, the Center’s examination of the proposed budget focused on addressing if the governor’s budget answered the following: “What kind of California do we want to live in? And this year, we’re also asking another question, how are we protecting Californians from a uniquely harmful federal administration?” Graves asked.
Addressing health, housing in the governor’s proposed budget
According to experts at the California Budget & Policy Center who examined the budget’s economic outlook, health and affordability challenges and housing, the governor’s budget proposal falls short.
The budget proposes a roughly $2 billion increase in General Fund spending compared to the previous year’s budget, which is a result of changes at the federal level and normal increased Medicare costs, according to the Center’s analysis. This fiscal response comes as a result of President Donald Trump’s budget bill, which includes severe cuts to Medicare over 10 years, and threats to reduce funding to states like California.
While the proposed budget includes strengthening existing health care infrastructure such as allotting $60 million to provide grants to reproductive health care providers, there was no mention of allocating funds for Covered CA, following the expiration of enhanced tax credits that benefited millions of Californians.
Regarding housing and homelessness, the budget does not include any new state funds for affordable housing, with the exception of maintaining $500 million for the Homeless Housing, Assistance and Prevention Grant program (HHAP). However, no new funding has been allocated in the budget for additional housing programs, instead the governor sets to build on what was previously implemented. No funding was allocated to fill in potential gaps as a result of federal cuts or funding shortfalls to housing programs like Continuums of Care, which local organizations benefit from.
“While I am continuing to review the details of the Governor’s proposed budget, I am disappointed that it does not go far enough to meet the basic needs of Californians,” Assemblymember Dr. Corey A. Jackson said in a press release. “At a time when families are struggling, we must be more aggressive in addressing food insecurity, getting unhoused residents into stable housing, and significantly increasing the supply of affordable housing.”
Proposed budget falls short for aging population
The governor’s proposed budget does maintain investments in previous programs by continuing to fund programs that support vulnerable Californians.
The proposed budget includes expanding California Food Assistance Program (CFAP) to include undocumented adults age 55 and older beginning in October 2027, and continuing to fund universal school meals programs to every student attending a public school, regardless of income. The budget proposal also allocates an increase of $89.1 million ongoing General
Fund for a cost-of-living adjustment for Department of Social Services administered child care programs.
Notably, the proposed budget includes several reductions to the state’s In-Home Supportive Services (IHSS) Program, though the governor recognized how the program has served over 800,000 recipients and over 800,000 providers statewide.
The 2026-27 proposed budget submitted a reduction of $86 million in General Funds to conform the IHSS Residual Program with the timing of Medi-Cal coverage, beginning in 2026-27. The budget also proposed a reduction of $3.5 million in General Funds to eliminate the IHSS Backup Provider System, beginning in 2026-27, and a reduction of $233.6 million in General Funds to remove the state’s share of cost for IHSS hours per case growth, beginning in 2027‑28.
“We are concerned with the proposed changes to In-Home Supportive Services (IHSS) eligibility, the elimination of the IHSS backup provider system, and most importantly the removal of the state’s share of cost for growth in IHSS hours,” United Domestic Workers Executive Director Doug Moore stated.
“This would shift costs to counties and create greater obstacles for IHSS providers when negotiating with counties for improved wages and benefits. The cost shift could also lead to indirect loss of vital care hours, as counties would be incentivized to reduce the numbers of hours assessed to clients,” Moore continued.
California is home to a rapidly growing aging population, many of whom rely on IHSS services, either as a beneficiary or a provider.
Though the proposed budget is not set in stone and is subject to change, it’s clear that the governor had to make tough fiscal decisions in the face of a large budget deficit, federal funding cuts and increasing state revenue.