California faces an $18 billion budget deficit amid a structural crisis

California used to be the place where people chased dreams. Today it is the place where budgetary discipline breaks down. The Golden State, home to Hollywood glitz, Silicon Valley billionaires and the highest state taxes in America, is bankrupt again. The country points to a new multi-billion dollar deficit that exposes how unstable and dysfunctional its financial model has become. In short, the Golden State is no longer so golden.

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

The warning signs flash red

This year, California’s nonpartisan Legislative Analyst’s Office (LAO) dropped a bombshell: The state is now expected to face an $18 billion deficit in 2026-2027, a deficit $5 billion larger than what lawmakers admitted just months earlier. Even more troubling, the LAO says California faces structural deficits of $15 billion to $25 billion annually through at least 2029.

This is not a one-time crisis for California. It’s a multi-year budget mess that continues to deepen. And this is happening during strong stock market years, when tax revenues from capital gains are already at record levels. Imagine what happens if the market cools or we enter a mild recession.

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How did the state with the most millionaires end up going bankrupt?

California’s problem is simple:

• When the money comes in, politicians spend it.
• When money decreases, they spend even more.

Instead of tightening our belts or prioritizing necessities, lawmakers have rolled out new programs, expanded benefits, and made long-term promises based on temporary revenue spikes. Newsom and legislative leaders have touted these expansions as “investments,” but the truth is they are liabilities that don’t disappear when the economy slumps.

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Some of the biggest causes of the budget crisis are:

• Huge increases in Medi-Cal and safety net programs, especially expansions to undocumented residents, which analysts warn are growing faster than the revenue base.
• Billions are spent annually on homelessness programs, with little measurable progress as homelessness soars in major California cities.
• A dependence on tax revenue from Silicon Valley, which fluctuates wildly depending on the valuations of technology stocks, and some of these companies are moving to more tax-friendly states.

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

• Costly replenishment of shrinking federal funds, forcing California to take on more of its entitlement programs.

Instead of addressing these realities, politicians have for years used accounting tricks, cash transfers, deferred payments and loans from special accounts to mask the red ink. The LAO now warns that these ‘one-off solutions’ have largely been exhausted.

Newsom’s budget fantasy has become a reality

For years, Governor Newsom has portrayed California as a progressive utopia that should be a “model for America” and proves that big government can work. But you can’t call yourself the model if you:

Instead of tightening our belts or prioritizing necessities, lawmakers have rolled out new programs, expanded benefits, and made long-term promises based on temporary revenue spikes.

• Drain your reserves.
• Cannot control expenses.
• Being dependent on a small group of wealthy taxpayers.
• Have the highest poverty rate, adjusted for cost of living.

Ironically, California is now living paycheck to paycheck, just like millions of Californians who can’t keep up with the state’s affordability crisis.

Meanwhile, other states are struggling with surpluses

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

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

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

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This is not a one-time crisis for California. It’s a multi-year budget mess that continues to deepen.

The California model is fool’s gold

One states:

• The largest population loss in the country.
• The largest homeless population.
• The highest taxes.

• And one of the largest structural deficits in America

…shouldn’t be the model.

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A functioning state must be able to finance its obligations responsibly, prepare for recessions and apply the brakes when expenditure exceeds revenue. California has failed to do so.

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

CLICK HERE TO FROM TED JENKIN