Newsom Projects Slight Budget Surplus, With Focus on Saving, Accountability

Bolstered by the rosiest fiscal picture of his second term, Gov. Gavin Newsom on Monday announced a plan to balance the state budget without any spending cuts — prioritizing existing programs and future savings over any ambitious new investments.

As he unveiled his $322.2 billion spending plan for the 2025–26 budget year, Newsom called on the Legislature to approve modest new investments in economic development and funding potential court battles with the incoming Trump administration, along with reforms to allow California to save more money for future budget downturns.

“It’s about more transparency, it’s about reform and it’s about being prepared for uncertainties into the future,” Newsom said of the budget plan.

Officially, the administration is projecting a slight surplus in the spending plan, although the governor did not specify the surplus amount. In November, the Legislative Analyst’s Office had projected a $2 billion shortfall, which it described as leaving the budget “roughly balanced.”

The projected surplus, fueled by higher-than-expected tax revenue, represents a likely turnaround from the budget shortfalls of the last two years, including the $27.6 billion deficit that was closed in the last state budget passed in June.

Speaking at an event in Turlock, Newsom departed from past practice by sharing only highlights from his budget plan, leaving the full release of the spending plan until Friday. The January proposal signals the beginning of the annual state budget process at the Capitol. Newsom will release a revised proposal in May after most Californians file their taxes, and the budget will cover July 2025 through June 2026.

The governor’s most significant new policy announcement was a proposal to allow the state to stash more money in its rainy day fund. Currently, the reserve is capped at 10% of the state’s expected tax revenue — a limit Newsom wants to double. He also proposed exempting the rainy day savings from the state’s limit on spending. Both changes would need approval from California voters.

“We need to create the right political conditions to advance it,” Newsom said. “That’s going to take a Herculean effort, but we’ve been talking about it for long enough — it’s time to move forward.”

Newsom described the moves as a way to temper California’s notorious budget volatility. The state’s progressive tax system relies heavily on revenue from a small share of high-earners, whose incomes and tax liability can fluctuate with the stock market.

Last year’s stock market surge, driven by California-based chip maker Nvidia, has led to income and capital gains tax revenue exceeding the expectations of state budget officials.

However, the current fiscal picture is still a far cry from the record surpluses Newsom enjoyed in the years immediately after the pandemic. Newsom signaled his administration will focus on implementing existing initiatives, such as transitional kindergarten for all 4-year-olds in the state, along with efforts to improve government efficiency.

New spending initiatives announced so far are modest: a $100 million economic plan centered on programs to support workers without a college degree in the job market and a $25 million set-aside for anticipated legal costs as the state gears up to challenge the Trump administration in court.

Newsom proposed the litigation funding as part of a special legislative session focused on the incoming administration, and the governor said Monday he remains confident the funds will be approved prior to President-elect Donald Trump’s inauguration on Jan. 20.

“We’re also walking into headwinds,” Newsom said of the incoming administration, describing a “radically different moment in U.S. history — world history, arguably — and as a consequence, we need to be prepared.”