SACRAMENTO - California is facing a projected state budget deficit of $18 billion for the 2026-27 fiscal year, according to a new report released by the Legislative Analyst’s Office (LAO).This figure represents a $5 billion increase from previous estimates made in June 2025.
The LAO, the nonpartisan fiscal and policy advisor to the California Legislature, detailed its findings in the 2026-27 Fiscal Outlook publication. While revenue estimates are $11 billion higher than those used in the 2025 Budget Act, the LAO explains that these gains are largely absorbed by constitutional spending requirements outlined in proposition 98 – dedicated to school and community college funding – and Proposition 2, which mandates reserve deposits and debt repayments. Additionally, costs in other programs are estimated to be approximately $6 billion higher than previously anticipated.
The report further projects that structural deficits will escalate to around $35 billion annually beginning in 2027-28, driven by continued spending growth exceeding revenue growth. The LAO highlights the lack of a recession assumption in prior estimates and the depletion of many budget resiliency tools used to address past deficits as key factors contributing to the current situation.
The LAO advises the Legislature to address the budget challenges thru a combination of ongoing solutions, specifically achievable spending reductions and/or revenue increases.
Given that state and federal funds comprise nearly half of average county revenue, these fiscal forecasts are crucial for county budget planning. Governor Newsom is expected to release his proposed state budget and updated revenue forecast for 2026-27 by January 10, 2026. The California State Association of Counties (CSAC) will continue to monitor the state’s economic condition and provide updates to counties.
For questions or feedback,contact Emma Jungwirth at ejungwirth@counties.org or Julissa Ceja Cardenas at jcejacardenas@counties.org.
