California’s next governor walks into a structural budget crisis, not a cyclical dip. The Legislative Analyst’s Office puts the 2026-27 deficit at $18 billion, with that figure climbing to $35 billion by 2027-28. These aren’t surprise shortfalls. They’re baked into spending commitments and revenue patterns that will outlast whoever wins in November.
Five candidates got asked the core question at a recent debate hosted by Jewish California: does California need higher taxes, or does it need to spend smarter? Eric Swalwell and Tom Steyer came down on the tax side. Matt Mahan, Steve Hilton, and Antonio Villaraigosa argued the state can’t keep asking residents for more before it demonstrates it’s actually getting value from what it collects. All five acknowledged the crisis. That’s where the agreement stopped.
The raw spending numbers are hard to dismiss. California’s general fund expenditures have climbed roughly 66% over seven years. Inflation explains maybe a third of that growth. The rest is structural, and it happened while the state was simultaneously losing residents. Net population is down 450,000 people. State employees per resident are up 19%. More government, fewer people being governed.
Not great.
The deeper demographic shift is worse. A total of 1.8 million Californians have left the state since the cycle turned, partially offset by immigration and births. Between 2018 and 2022, roughly 57,000 high-net-worth individuals departed, and they didn’t leave their assets behind. Pete Weber and Chris Thornberg, both board members of the New California Coalition, put the wealth exodus at approximately $1.1 trillion in personal wealth.
“California’s revenue system is structurally dependent on a narrow slice of earners who have more options than most people do,” Weber said. Thornberg, who’s also a founding partner at Beacon Economics, has been making this argument for years, and the data don’t push back.
It shows. California carries the highest unemployment rate in the country heading into 2026. Housing affordability is the lowest in the continental United States, with median home prices running at twice the national average. The state has spent $23 billion on homelessness, and the count of unhoused Californians went up 40% anyway. Infrastructure rankings land near the bottom nationally, a fact that’s particularly galling for a state that spent the post-2012 surplus years running surpluses.
The through-line in all of it is the same structural flaw Weber and Thornberg keep coming back to: California’s tax base leans too heavily on high earners and capital gains. When markets run, Sacramento fills up with money it treats as permanent. When markets correct, the bottom falls out. The volatility isn’t bad luck. It’s a design choice, and it keeps producing the same result.
CalMatters first reported on this analysis, which tracks the boom-and-bust pattern across budget cycles going back to 2008. The 2008 collapse and the 2012 recovery illustrated the problem in back-to-back fashion. The state hasn’t fixed the underlying exposure in the years since.
California does have a rainy day fund. The Budget Stabilization Account was created under Proposition 2 in 2014 specifically to address this volatility. The concept was sound: capture surplus revenues in good years, don’t spend them, draw them down when deficits hit. The reality is that reserves have been depleted faster than they accumulate, partly because the legislature tends to treat every up-cycle like the good times won’t end.
Whoever wins the governor’s race in 2026 won’t have the luxury of that assumption. The $35 billion structural deficit projected for 2027 arrives regardless of whether the stock market cooperates. The candidate debate answers suggest we’re heading toward a familiar argument: one side pushing for higher taxes on the wealthy, the other insisting the problem is spending growth that can’t sustain itself when the revenue base shrinks. What’s missing from both camps, at least so far, is a serious accounting for why a state of this size spent the last seven years hiring more employees and expanding commitments while 1.8 million residents voted with their feet.