ADVOCATING FOR THE INDUSTRY


Despite the state’s fiscal challenges, California’s construction sector stands to play a stabilizing — and potentially revitalizing — role in the years ahead.


California Faces Challenging 2026-27 Budget Outlook


BY FELIPE FUENTES C


alifornia’s next fiscal year is on track to be a tough one, according to an assessment issued by the


state’s Legislative Analyst’s Office (LAO) in November 2025. The new fiscal year will start in July, but until then the state has the difficult task of filling an $18 billion deficit. Artificial intelligence (AI) generates


much excitement regarding its potential for generating profit. Te fervor surround- ing AI development and its capacity for revenue generation drive California’s economy higher each day, but the LAO remains skeptical about its sustainability. Previous examples, like the dot-com


boom, display both a meteoric rise and subsequent fall in the face of similar technologically exciting advances — even when those advances are revolutionary in the long term. Te LAO is unsure if AI can avoid that same financial downfall. Compounding AI’s potential unreli- ability is its role in the stock market’s over-exuberance.


The Market’s Impact In the wake of AI’s development, the stock market reached a new height, prompting suspicion that it may be


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CALIFORNIA CONSTRUCTOR JANUARY/FEBRUARY 2026


due for a crash. Today’s market displays multiple signs of overheated stock: prices are historically high, more is borrowed by investors to buy stocks, and more households are investing than in the last 70 years. All of which have an impact on California’s state budget. Potentially insulating California in the case of an economic downturn is this year’s revenue increase. Te state estimates an additional $11 billion in tax revenues than previously expected, but the mileage on it varies as that revenue cannot be used to reduce the deficit. Tat money will be used almost entirely to address constitutional requirements — primarily school and education funding guarantees such as Proposition 98 and Proposition 2. Te recently passed H.R. 1 (a.k.a. One


Big Beautiful Bill), if unchanged, also pos- es budget challenges to the state coffers. Proposition 98’s formulated payment goes to schools and community colleges, this year coming out to $7 billion, representing most of the estimated revenue increase. H.R. 1’s repeal of Supplemental Nu-


tritional Assistance Program (SNAP) and Medicaid federal funding causes California to make up for this shortfall


independently, costing the state an ad- ditional $1.3 billion to continue funding CalFresh and MediCal. In addition, Proposition 2 designates


about $3.4 billion to address reserve deposits and debt payments on school capital funding projects. In the wake of these requirements, the revenue increase is almost negligible in the aid it can pro- vide the state’s budget; the governor and lawmakers must find other funding sources to address this shortfall.


Tapping the State’s Rainy Day Fund Te $18 billion deficit must be covered somehow, and Californians must pay attention to where the state picks up the slack. So far, the plan of action takes billions of dollars from California’s rainy- day fund, delays projects years down the road, and borrows money from other unexpected sources in the state’s budget, weakening the state’s budget reserves. If no change is enacted, these financial


problems will snowball over time. To echo LAO chief Gabe Patek in the Sacramento Bee: this shortfall is in the context of a healthy, even successful, economy. What will it look like if we enter a recession? In truth, the state anticipated a deficit


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