By Lynn La | CALmatters

When Gov. Gavin Newsom released his preliminary $322 billion state budget plan in January, he projected a “modest surplus.” But many things have changed since then: A general economic slowdown in the U.S. economy; an estimated decline in income tax revenue due to the stock market fallout from President Donald Trump’s tariffs; and an unprecedented Medi-Cal budget shortfall to name a few.

Now — as Newsom on Wednesday unveiled his updated budget plan — California is facing a $12 billion budget deficit, writes CalMatters’ Alexei Koseff. 

Newsom’s budget proposal paints an economic outlook that, at best, is unclear, and at worst, is grim. For instance, Trump’s ongoing tariff policies (which Newsom described in the plan as “remarkably inconsistent”) could have “broad-reaching impacts” on nearly all of the state’s imports and could worsen inflation in California. The state’s job growth is also expected to slow through 2026.

In light of the current and upcoming challenges, Newsom plans to close the gap in a few ways. He still needs legislative approval.

  • Walking back Medi-Cal: To save more than $5 billion, Newsom wants to pause new Medi-Cal enrollments for adult immigrants without legal status beginning in 2026 — a rollback Republican legislators have called for. He is also proposing that adults with “certain statuses” (which could still include those with lawful status) pay a $100 monthly premium starting in 2027. Weight loss drugs, such as Ozempic, would no longer be covered as well, which is estimated to save $85 million this year. Read more from CalMatters’ Kristen Hwang and Ana B. Ibarra.
  • Closing prisons: California has closed four prisons in recent years, a trend that was enabled by falling numbers of incarcerated people. Newsom wants to close another yet-to-be-determined prison by October 2026, which would save roughly $150 million annually. One big question mark, however: In November, voters passed Proposition 36 to increase penalties for drug- and theft-related crimes. The measure is expected to increase the prison population, though, “we just don’t know how much,” said Newsom on Wednesday. Read more from CalMatters’ Nigel Duara.
  • Shifting cap-and-trade funds: California’s landmark cap and trade program — which enables companies to buy and trade climate credits — has provided billions of dollars for projects aimed at combating climate change and other environmental issues for more than a decade. Newsom wants to shift some of that money to pay for Cal Fire operations, as well as at least $1 billion a year to fund the High-Speed Rail project.