- “These services are not optional. They are lifelines for families, seniors, and individuals facing economic hardship.” – California State Association of Counties
SACRAMENTO — California is facing another year of significant budget strain, according to the Legislative Analyst’s Office, which released its annual fiscal outlook for the 2026-27 state budget this week. The report outlines an increasingly difficult financial environment and warns that the state’s ability to manage spending shortfalls is more limited than in previous years.
The LAO described the situation as one in which California is “undeniably less prepared for downturns,” even as portions of the economy continue to perform strongly. While personal income tax revenue remains high due to stock market gains and the growth of artificial intelligence and technology sectors, the report notes weaker performance in sales and corporate tax categories, raising concerns about the reliability of the state’s revenue base.
The overall picture points to sustained deficits and fewer tools left to close them. The LAO report indicates that even with growth in revenue, the structure of the state budget is mismatched to long-term spending obligations, especially in areas tied to the social safety net.
The California State Association of Counties responded to the outlook with its own warning about potential impacts on local government and essential public services.
“The LAO’s report is grim, and county budget forecasts are even grimmer,” CSAC stated. “The only way through this crisis is for the state to partner with counties to preserve California’s safety net: Medi-Cal, CalFresh, indigent care and homelessness funding. Otherwise, the pain will hit the millions of Californians whose very survival depends on hospitals, shelters and schools.”
Counties administer safety-net programs including Medi-Cal, CalFresh, child welfare services, behavioral health systems and most homelessness programs. County leaders say they are already struggling with budget gaps caused by rising caseloads, staffing demands, inflation and new requirements tied to federal legislation such as H.R. 1.
CSAC emphasized the stakes, writing, “These services are not optional. They are lifelines for families, seniors, and individuals facing economic hardship.”
One of the most concerning trends in the LAO report is continued cost escalation in Medi-Cal, the state’s health insurance program for low-income Californians. In a supplemental fiscal analysis, the LAO projects that General Fund support for Medi-Cal will rise from roughly $44.9 billion in the 2025-26 fiscal year to about $47.3 billion in 2026-27 and eventually to approximately $51.6 billion by 2029-30. The report attributes the projected $6.7 billion increase to a combination of higher baseline program costs, new policy obligations and financial impacts related to federal changes.
Although Medi-Cal spending is expected to decline slightly as a share of the General Fund over time, the dollar amount continues to rise. The LAO notes that rising per-patient costs and long-term care pressures are major drivers, even though enrollment is expected to decrease from nearly 15 million people in 2024-25 to about 12 million by 2029-30. The average monthly cost per enrollee is projected to grow from $298 in 2025-26 to $355 by 2029-30.
Counties say these growth pressures are arriving at a time when the structure of state-county cost sharing is shifting, leaving local governments more exposed. They point to the elimination of a key funding source — the $1 billion-per-year Homeless Housing, Prevention and Assistance Program — in the current 2025-26 budget as a major destabilizing factor for local homelessness response systems.
Several counties are now publicly warning that the combination of reduced state support, increased regulatory mandates and rising program costs could result in service cuts, longer wait times or delayed implementation of state-required programs.
The LAO report also highlights that while income tax revenue continues to rise, the volatility of California’s revenue system remains a vulnerability. Much of the recent tax growth is tied to high-wealth households, investment behavior and a small portion of the state economy. The LAO cautioned that these trends are susceptible to rapid reversal, especially in the event of stock market declines or technological sector contraction.
Counties say that volatility translates into real-world uncertainty for the millions of Californians who rely on safety-net services every month.
The report marks the fourth consecutive year that California enters its budget planning cycle in deficit conditions. In earlier deficit years, the state relied on one-time strategies, reserve withdrawals, deferrals, internal borrowing and temporary cost shifts to close the gap. The LAO warns that many of those tools have now been used or exhausted, limiting the state’s options heading into the next budget cycle.
The administration and Legislature will now face choices that include spending reductions, revenue increases, policy redesign, longer-term structural reforms or new forms of local-state cost sharing.
County officials say they are preparing for difficult budget decisions. Some counties have already initiated hiring freezes, paused capital projects or warned of potential program reductions. Others say their primary concern is the potential erosion of behavioral health, homelessness response and child welfare capacity — systems that have already been strained by workforce shortages and post-pandemic demand.
CSAC wrote that counties cannot absorb new unfunded mandates or additional cost shifts and reiterated that the state must protect the programs residents depend on, stating that without shared responsibility, “the pain will hit the millions of Californians whose very survival depends on hospitals, shelters and schools.”
The LAO report does not make policy recommendations but outlines scenarios lawmakers may consider. Those include slowing spending growth, restructuring funding formulas, adjusting constitutional spending requirements and evaluating whether major state programs remain financially sustainable under current conditions.
For now, the report’s findings and the immediate reaction from county officials make clear that the coming budget cycle will present difficult decisions that affect core social service systems. Lawmakers are expected to begin formal negotiations when the governor’s draft budget is released in January.
The final budget must be adopted by June.
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