Newsom's California: From $100B Surplus to Deficit Disaster

Paul Riverbank, 1/8/2026California’s $100B surplus vanished—now faces deficit, tough choices, and scrutiny in Newsom’s final address.

The mood in the capital has curdled. Gone are the days of confidence and expansion; now there’s a certain edge to conversations that’s hard to miss. State analysts warn of a possible $35 billion hole not too far down the road if current trends hold. Sorting out how this happened has fostered a swirl of blame and anxiety.

Some point to the parade of new spending initiatives over the past several years—ambitious programs targeting homelessness, education, and healthcare drew billions from state coffers, often with little follow-up to check on their impact. Lanhee Chen, who watches policy trends at Stanford, has voiced frustration over this absence of scrutiny. His worry is echoed in recent audits: massive outlays for homelessness, for instance, have produced little recognizable progress. Instead, questions about accountability now seem to follow almost every major policy conversation.

Pandemic-era decisions only complicated matters. Newsom and his team—intent on cushioning social fallout—deployed federal rescue money and borrowed state funds at a striking pace. Not all bets paid off. Billions were funneled into bolstering schools and expanding public health coverage, including $3.4 billion to extend Medi-Cal to undocumented immigrants. The latter, in particular, ended up costing far more than the administration had planned and was eventually scaled back.

Scrutiny isn’t only coming from policy wonks and state auditors. Visible frustration brews among lawmakers. Assemblymember David Tangipa, not known to mince words, recently called out the governor for what he described as a pattern of distraction—highlighting high-profile feuds with Washington, especially during the Trump years, but skirting around the economic grind many Californians experience daily. “People want to know if life is getting easier. I’m not sure they’ll find that answer in another speech,” Tangipa told reporters, hinting at the high bar set for Newsom’s final State of the State address.

Another pressure point comes from Washington, D.C. Shifts in federal policy—reduced funding for social services, stricter oversight, and, most recently, a freeze on childcare and aid dollars due to fraud concerns—have particularly stung a state like California, where the safety net sprawls wide and deep. Even as the state confronts a shrinking population and an uptick in unemployment—the highest rate in the country, at 5.5 percent—state employment has risen sharply since Newsom’s first term. Salaries have followed suit, further bloating the state payroll.

For Californians trying to stretch paychecks amid worsening inflation, all this is more than abstract bookkeeping. As costs for rent, food, and gasoline remain stubbornly high, many wonder why past promises never quite seem to pan out. Headlines about government waste—$30 billion lost to fraudulent unemployment payments, for example, or unusual budget earmarks for exclusive projects—have only added to the malaise.

Political stakes are ratcheting up as Newsom readies his last State of the State, his first in-person address since the pandemic’s onset. With a potential 2028 presidential run in the offing, how he frames this moment could shape not just his legacy but his broader ambitions. He finds himself needing to celebrate achievements—progress on housing, climate initiatives, rights for workers—while also candidly addressing fiscal strains and public skepticism.

There’s no shortage of critics waiting in the wings. Senate Republican Leader Brian Jones, for one, predicts that Newsom’s remarks will focus on “claimed wins,” obscuring a daily reality of struggle and dashed expectations. Conversely, within the governor’s own party, progressives press for bolder steps against inequality—Assemblymember Alex Lee, for example, wants Newsom to finally clamp down on tax loopholes favoring corporations and the ultra-wealthy.

It would be naïve to expect an easy fix. California’s dilemmas are the product of years, if not decades, of political choices, economic cycles, and demographic shifts. Each State of the State address acts as a kind of snapshot: once, it captured the optimism of early statehood; now, it marks a crossroads between the rosy assurances of years past and the less forgiving arithmetic ahead.

Ultimately, whether or not Newsom can navigate these tightropes—balancing vision with candor, state pride with acknowledgment of its headaches—will shape not only the months ahead but the decade to come. These kinds of problems don’t vanish with a speech, but the choices made now will reverberate long after the applause fades from the Capitol rotunda.

A few years ago, it would’ve been difficult to imagine California’s fortunes unraveling so abruptly. Back then, the state government sat atop an enormous surplus—the kind of fiscal windfall that spurred breezy optimism in Sacramento’s corridors. Fast forward, and the scene has changed entirely. These days, Governor Gavin Newsom stands before a daunting $18 billion deficit, a number that feels more like a warning than an accounting entry.The mood in the capital has curdled. Gone are the days of confidence and expansion; now there’s a certain edge to conversations that’s hard to miss. State analysts warn of a possible $35 billion hole not too far down the road if current trends hold. Sorting out how this happened has fostered a swirl of blame and anxiety.Some point to the parade of new spending initiatives over the past several years—ambitious programs targeting homelessness, education, and healthcare drew billions from state coffers, often with little follow-up to check on their impact. Lanhee Chen, who watches policy trends at Stanford, has voiced frustration over this absence of scrutiny. His worry is echoed in recent audits: massive outlays for homelessness, for instance, have produced little recognizable progress. Instead, questions about accountability now seem to follow almost every major policy conversation.Pandemic-era decisions only complicated matters. Newsom and his team—intent on cushioning social fallout—deployed federal rescue money and borrowed state funds at a striking pace. Not all bets paid off. Billions were funneled into bolstering schools and expanding public health coverage, including $3.4 billion to extend Medi-Cal to undocumented immigrants. The latter, in particular, ended up costing far more than the administration had planned and was eventually scaled back.Scrutiny isn’t only coming from policy wonks and state auditors. Visible frustration brews among lawmakers. Assemblymember David Tangipa, not known to mince words, recently called out the governor for what he described as a pattern of distraction—highlighting high-profile feuds with Washington, especially during the Trump years, but skirting around the economic grind many Californians experience daily. “People want to know if life is getting easier. I’m not sure they’ll find that answer in another speech,” Tangipa told reporters, hinting at the high bar set for Newsom’s final State of the State address.Another pressure point comes from Washington, D.C. Shifts in federal policy—reduced funding for social services, stricter oversight, and, most recently, a freeze on childcare and aid dollars due to fraud concerns—have particularly stung a state like California, where the safety net sprawls wide and deep. Even as the state confronts a shrinking population and an uptick in unemployment—the highest rate in the country, at 5.5 percent—state employment has risen sharply since Newsom’s first term. Salaries have followed suit, further bloating the state payroll.For Californians trying to stretch paychecks amid worsening inflation, all this is more than abstract bookkeeping. As costs for rent, food, and gasoline remain stubbornly high, many wonder why past promises never quite seem to pan out. Headlines about government waste—$30 billion lost to fraudulent unemployment payments, for example, or unusual budget earmarks for exclusive projects—have only added to the malaise.Political stakes are ratcheting up as Newsom readies his last State of the State, his first in-person address since the pandemic’s onset. With a potential 2028 presidential run in the offing, how he frames this moment could shape not just his legacy but his broader ambitions. He finds himself needing to celebrate achievements—progress on housing, climate initiatives, rights for workers—while also candidly addressing fiscal strains and public skepticism.There’s no shortage of critics waiting in the wings. Senate Republican Leader Brian Jones, for one, predicts that Newsom’s remarks will focus on “claimed wins,” obscuring a daily reality of struggle and dashed expectations. Conversely, within the governor’s own party, progressives press for bolder steps against inequality—Assemblymember Alex Lee, for example, wants Newsom to finally clamp down on tax loopholes favoring corporations and the ultra-wealthy.It would be naïve to expect an easy fix. California’s dilemmas are the product of years, if not decades, of political choices, economic cycles, and demographic shifts. Each State of the State address acts as a kind of snapshot: once, it captured the optimism of early statehood; now, it marks a crossroads between the rosy assurances of years past and the less forgiving arithmetic ahead.Ultimately, whether or not Newsom can navigate these tightropes—balancing vision with candor, state pride with acknowledgment of its headaches—will shape not only the months ahead but the decade to come. These kinds of problems don’t vanish with a speech, but the choices made now will reverberate long after the applause fades from the Capitol rotunda.