California’s $125 Billion Budget Deficit: What ‘Zero Deficit’ Hides?

Sacramento says California’s budget is balanced. The state’s own nonpartisan fiscal analyst says that’s not quite true. The gap between those two claims involves $125 billion, four years of “creative bookkeeping,” and a bill that keeps getting passed to the next governor, and the next taxpayer, to pay.

A budget balanced on paper isn’t the same as a budget balanced in fact.
That’s the core dispute now playing out in Sacramento. In late June, Governor Gavin Newsom, Senate President pro Tempore Monique Limón, and Assembly Speaker Robert Rivas jointly announced a 2026-27 state budget agreement they described as “a balanced spending plan with zero deficit.” The budget totals roughly $351 billion, with a $251 billion general fund. It’s Newsom’s final budget as governor, and by his own account, it leaves California’s finances in good shape.
What Does “Zero Deficit” Actually Mean Here?
On paper, the state’s revenues for the coming fiscal year are projected to cover its planned spending. That’s the technical basis for the “zero deficit” claim, and it isn’t false. But it isn’t the whole story either. To get there, the budget relies on tools that go beyond ordinary tax collection: drawing down emergency reserves, using one-time resources, and delaying payments the state is otherwise required to make.
One example is stark. The agreement includes delaying $3.9 billion in constitutionally required state aid to schools and community colleges. That money is still owed. It has simply been pushed into a future budget year, where it will need to be paid regardless of what revenues look like then. A bill delayed is not a bill eliminated.
Who Says the Real Number Is Different?
Gabe Petek, the Legislature’s nonpartisan Legislative Analyst, has been tracking this gap for years, and his numbers tell a less tidy story than the press release. In his review of the budget, Petek noted the state’s general fund would spend as much as $20 billion more than it expects to collect in revenue this fiscal year alone. That $20 billion is the difference between one-time accounting maneuvers and money the state actually has coming in.
Petek’s office has also tallied the bigger picture. Since 2022, California has run deficits totaling $125 billion, according to his analysis, covered by what he calls a “wall of debt”: a combination of on- and off-the-books loans, spending deferrals, reserve draws, and other maneuvers. Petek has been explicit that this is not a cyclical dip tied to a bad economic year. He’s called it a structural problem, meaning it persists even when state revenues are healthy, which they currently are.
How Did California Get Here?
The roots of this trace back to 2022, when Newsom announced California had a $97.5 billion budget surplus, calling it larger than any state surplus in American history. That announcement fueled a wave of new spending commitments. The surplus, it turned out, was built on revenue projections that were badly wrong. The state later acknowledged it had overestimated revenues by $165 billion over four years. By then, the spending increases tied to the phantom surplus were already locked in, and the state has been running structural deficits ever since.
The Legislative Analyst’s Office and Newsom’s own Department of Finance have both independently estimated the state faces ongoing deficits in the range of $20 billion to $35 billion annually in the coming years. A government that overestimates its own income by $165 billion doesn’t get to call the resulting mess a surprise. Those aren’t rival partisan estimates. They’re the state’s two official fiscal bodies largely agreeing with each other, even as elected leaders describe the budget in far rosier terms.
What Happens After Newsom Leaves Office?
Newsom has said this budget is “structurally balanced” not just for this year but for his successor’s first 18 months in office. The Assembly’s own budget advisor, Jason Sisney, offers a more measured forecast, projecting an operating deficit that continues through the next governor’s entire four-year term, though it’s projected to shrink to roughly $8.4 billion by 2029-30. If the deficit is really gone, why do the state’s own budget advisors still see one for the next four years?
That means whoever succeeds Newsom, widely expected to be Xavier Becerra, inherits a budget that is balanced by press release but not, according to the state’s own analysts, balanced by actual revenue collection. The reserves that made this year’s numbers work are finite. California currently holds close to $30 billion in combined reserves, which is a meaningful cushion but not one that can be redeployed every year without eventually running dry.
20. That’s the number of billions in real, unaddressed budget gap this year alone, according to the Legislature’s own nonpartisan analyst, tucked inside a budget publicly described as having zero deficit. How many more budget cycles can that gap get “solved” with reserves and deferrals before something has to give?

A budget is structurally balanced when revenues collected in a given fiscal year are sufficient to cover expenditures planned for that same year.

What Do Supporters of This Budget Actually Believe?
State leaders make a case worth taking seriously: California’s revenues have been genuinely strong this year, boosted by tech-sector gains, and using reserves during a good year is exactly what reserves are for. Delaying a payment by one fiscal year, they’d argue, isn’t fiscal mismanagement, it’s basic cash-flow management that governments and businesses use routinely. On that narrow point, they aren’t wrong.
The harder question is whether “balanced” is the right word for a budget that leans this heavily on one-time fixes to get there, especially after four consecutive years of doing the same thing. Reserves that get drawn down to hit a “zero deficit” headline aren’t available to cushion the next actual emergency, whether that’s a recession, a stock market pullback, or further federal funding cuts. Calling the underlying structural gap solved, when the state’s own analysts say it isn’t, sets up taxpayers to be surprised again the next time revenues dip.

Key Questions This Story Raises

• Why does the Legislature’s own analyst dispute the “zero deficit” framing state leaders are using publicly?
• What happens to California’s finances if reserves run low before revenues catch up to spending?
• Who inherits responsibility for the $125 billion wall of debt once Newsom leaves office?

Is Sacramento Setting Up the Next Governor to Fail?
Every dollar of delayed payment or reserve draw used to balance this year’s books is a dollar that has to come from somewhere next year. That is simple arithmetic, not partisanship. If revenues stay strong, the gap may keep shrinking on its own, as Sisney’s own projections suggest. If they don’t, the next governor inherits both the structural gap and the exhausted maneuvers that have been used to paper over it for four years running.
Taxpayers are being told, repeatedly, that the deficit is handled. The Legislature’s own fiscal analyst keeps saying, just as repeatedly, that it isn’t, not fully. When the people whose job is to count the money disagree with the people who spend it, whose number should taxpayers trust?
So the real question isn’t whether this year’s budget adds up on paper. It’s whether “zero deficit” will still be true once the one-time fixes run out and an actual bill comes due.

What do you think? Is drawing down reserves and delaying payments a responsible way to balance a budget, or is it kicking the problem down the road? Share this story and let us know.
Want to track how your state dollars are really being spent? Stay informed with our daily coverage of California fiscal policy. Think your neighbors should see the real numbers behind the “zero deficit” headline? Share the article. Want your voice to count? Contact your state legislator and ask whether they’ll support closing the structural gap instead of deferring it again next year.