California faces $18 billion budget deficit amid structural crisis

California used to be the place where people followed their dreams. Today, this is where financial discipline dies. The Golden State, home to Hollywood glamor, Silicon Valley billionaires and the highest state taxes in America, is bankrupt again. It is staring at another multi-billion dollar deficit that reveals just how unstable and dysfunctional its financial model has become. In short, Golden State is not so golden anymore.

For years, politicians like Democratic Gov. Gavin Newsom have insisted that California is the shining example of fiscal sensibility that America should follow. But when you peel back the layers, what you actually find is a state government that can’t stop spending, can’t plan for the future, and is now caught in a structural budget crisis of its own making.

Warning signs flashing red

This year, California’s nonpartisan Legislative Analyst Office (LAO) dropped a bombshell: the state is now projected to face an $18 billion deficit in 2026-27; That’s a $5 billion deficit worse than what lawmakers agreed to a few months ago. Even more troubling, the LAO says California will face a structural deficit of $15 to $25 billion each year until at least 2029.

This is not a one-time crisis for California. This is a deepening multi-year budget mess. And this is happening in strong stock market years, when capital gains tax revenues are already at record levels. Imagine what happens when the market cools down or we enter a mild recession.

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How did the state with the most millionaires break down?

California’s problem is simple:

• When money comes in, politicians spend it.
• When money slows down, they spend even more.

Instead of tightening belts or prioritizing needs, lawmakers pushed for new programs, expanded benefits, and made long-term promises based on temporary revenue increases. Newsom and legislative leaders have hailed these expansions as “investments,” but the reality is that they are liabilities that don’t go away when the economy collapses.

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Some of the biggest factors of the financial crisis are:

• Large increases in Medi-Cal and safety net programs, especially expansions to undocumented residents, are growing faster than the income base, analysts warn.
• As homelessness skyrockets in California’s major cities, billions of dollars are spent annually on homelessness programs and little measurable progress is made.
• Silicon Valley’s dependence on tax revenue fluctuates wildly based on tech stock valuations, and some of these companies are relocating to more tax-favorable states.

San Francisco city workers remove a homeless encampment in San Francisco’s Bayview neighborhood on August 1, 2024. (David Paul Morris/Bloomberg via Getty Images)

• Costly replenishing shrinking federal funds is forcing California to undertake more of its entitlement programs.

Instead of addressing these facts, politicians have spent years using accounting gimmicks, fund transfers, delayed payments, and borrowing from private accounts to mask the red ink. The LAO now warns that these “one-off solutions” are largely exhausted.

Newsom’s budget fantasy becomes reality

Governor Newsom has spent years painting California as a progressive Utopia that should be “a model for America” proving that big government can work. However, you cannot call yourself a model if:

Instead of tightening belts or prioritizing needs, lawmakers pushed for new programs, expanded benefits, and made long-term promises based on temporary revenue increases.

• Empty your reserves.
• I can’t control expenses.
• You are beholden to a small group of wealthy taxpayers.
• It has the highest poverty rate when adjusted for cost of living.

California is now ironically living paycheck to paycheck, as are millions of Californians who have failed to keep up with the state’s affordability crisis.

Meanwhile, other states are running surpluses

As California sinks deeper into red ink, fiscally disciplined states across the country are posting surpluses, refunding taxpayers or increasing reserves.

• Texas, Florida and North Carolina all projected strong surpluses or cash cushions.
• States with lower taxes and smaller budgets, such as Utah, Tennessee and Idaho, continue to exceed revenue expectations.

In other words, the states that California politicians love to criticize are the states that balance their checkbooks.

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This is not a one-time crisis for California. This is a deepening multi-year budget mess.

California’s model is fool’s gold

A state with:

• The largest population loss in the country.
• Largest homeless population.
• Highest taxes.

• And one of the largest structural deficits in America

…shouldn’t be a model.

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A functioning state must be able to finance its commitments responsibly, plan for crises, and put on the brakes when expenditures exceed revenue. California couldn’t do any of this.

California is not the model for America. It’s a cautionary tale for other states and our country.

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