97.5 billion surplus.

Three years later, a $68 billion deficit.

California just experienced the biggest budget swing in American state history.

And what happened is both fascinating and terrifying.

In May 2022, Governor Gavin Newsome stood in front of cameras announcing California had more money than any state had ever seen.

The state was so flush with cash they were literally sending $400 checks to people who owned cars.

The legislature approved a $300 billion spending package, the biggest in state history.

Then the money vanished.

By late 2023, California was staring down a 68 billion hole.

By 2024, they were cutting programs, raiding reserve funds, and scrambling to balance the books.

I break down economics and policy into clear, honest analysis.

No hype, no partisan spin, just research and what the numbers actually show.

And today we’re dissecting one of the most spectacular budget collapses any American state has ever experienced.

By the end of this video, you’ll understand exactly what happened, who made the critical mistakes, why California’s finances imploded, and what this means for the country’s biggest state economy going forward.

This matters even if you’re nowhere near California.

This is the world’s fifth largest economy we’re talking about.

Bigger than India, bigger than the UK.

When California’s budget crashes this hard, it affects tech jobs, housing markets, and economic policy nationwide.

Plus, the mistakes California made, other states are making them right now.

If you want analysis that actually explains what’s happening, subscribe and hit that like button.

This story needs to reach more people.

Let me walk you through the timeline with the actual numbers because this collapse happened fast.

May 13th, 2022, Governor Nuome holds a press conference in Sacramento.

He announces that California collected $55 billion more in taxes than they’d projected just 5 months earlier.

Total surplus 97.5 billion.

Newsome literally said no other state in American history has ever experienced a surplus as large as this.

And he wasn’t exaggerating.

The surplus alone was bigger than the entire annual budgets of all but a handful of states.

Of that windfall, $49.2 billion could be spent.

however lawmakers wanted, so they spent it.

The legislature passed a $300.7 billion budget, up from $215 billion just three years earlier in 2019.

That’s a 40% increase in three years.

Here’s what they funded.

11.5 billion in rebate checks to vehicle owners, billions more for homelessness programs, climate initiatives, healthc care expansion, education increases.

The state was building a financial safety net that assumed this money would keep flowing.

But then something changed.

Within weeks of passing that budget in June 2022, tax revenues started falling below projections.

Not by a little, by a lot.

According to the legislative analyst’s office, 2022 23 revenue came in 26 billion below budget estimates.

That’s unprecedented.

Usually when a fiscal year ends, the revenue numbers are pretty close to what was projected.

You might be off by a few hundred million, maybe a billion or two, but $26 billion, that’s a massive miss.

By January 2024, when Nuome released his next budget proposal, everything had flipped.

The projected deficit, $ 37.9 billion.

The legislative analyst office said it was actually worse, 68 billion.

Then in May 2024, Newsome revised those numbers again.

The deficit had grown to 44.9 billion and they needed to solve budget problems totaling 46.8 billion across multiple years.

So what happened? How do you go from the biggest surplus in American history to one of the biggest deficits in less than 24 months? The answer is actually pretty straightforward and it reveals something critical about how California funds its government.

To understand this collapse, you need to understand who’s involved and what they were thinking.

first Governor Gavin Nuome and the California legislature.

In 2022, they were riding high.

Democrats controlled supermajorities in both chambers.

They had more money than they knew what to do with, and they believed the good times would continue.

Joe Stevenshaw, director of California’s Department of Finance, explained the difference between their projections and reality as Newsome having a more optimistic view of the short term.

That’s bureaucrats speak for they bet on revenues that never materialized.

On the other side, you have the legislative analyst’s office, California’s nonpartisan fiscal adviser.

This is the office that kept warning the numbers didn’t add up.

Gabriel PC, the legislative analyst, has been sounding alarm since late 2023.

In November 2024, PC told reporters, “The revenues are up, but the outlook ahead on that is a little more precarious.

There’s really no capacity for new commitments because we do estimate there to be these pretty significant operating deficits in the subsequent years.

Then there’s the business community.

Companies have been leaving California throughout this period.

According to data from real estate firm CBRE, more than 465 corporations moved their headquarters within the US since 2018, with Texas welcoming 209 of them.

Meanwhile, 79 companies left California’s Bay Area during that same period.

These aren’t small companies.

Oracle moved its headquarters from Redwood City to Austin in 2020.

Tesla relocated from California to Texas.

Huelet Packard Enterprise made the same move.

In February 2025, Realtor.

com announced they were moving their headquarters from Santa Clara to Austin.

Here’s what’s important.

When these companies move, they often keep employees in California.

Oracle still has about 6,900 workers in California versus 2,500 in Texas.

But the headquarters move signals something.

These businesses see better opportunities elsewhere.

Republican State Senator Roger Neello attributed California’s problems to what he called Democrats unstoppable spending problems.

Democratic Assembly Budget Chair Jesse Gabriel countered that the committee remains committed to crafting a responsible budget that prioritizes essential services, uplifts working families, and protects our most vulnerable communities.

And here’s where regular Californians come in.

According to US Census data, more than 135,000 more people left California than moved in during 2020, the third largest net migration loss ever recorded for the state.

One survey found that two out of every three Bay Area workers would leave the area permanently if they could continue to work remotely.

The perspectives break down like this.

The governor’s position, the deficit resulted from external factors, Federal Reserve interest rate hikes, stock market volatility, and post-pandemic economic adjustment.

The solution involves temporary revenue increases, and strategic use of reserves.

The business view, California’s high taxes, expensive regulations, and cost of living make it increasingly difficult to operate profitably.

The budget crisis proves the state’s fiscal model is unsustainable.

The progressive position, the state should tap more into reserves and increase taxes on corporations rather than cutting social services.

The deficit is manageable if California maintains its progressive tax system.

The fiscal conservative argument.

California spent recklessly during boom times and now faces inevitable consequences.

Spending increased 63% in 5 years while the population actually declined.

All of these perspectives contain some truth and that’s what makes this situation so complicated.

Let me break down how this actually works.

Because California’s budget system creates unique vulnerabilities.

Think of California’s revenue like a three-legged stool.

Personal income tax provides about 50% of general fund revenue.

Corporate income tax adds another chunk.

Sales tax rounds it out.

But here’s the critical part.

California doesn’t just rely on income taxes.

It relies heavily on income taxes from the wealthy.

The state has a progressive tax system where the top rate hits 14.4%.

That means when wealthy Californians do well, the state does really well.

And when they don’t, the state crashes hard.

During the pandemic, something unusual happened.

While millions of Californians lost jobs and businesses shut down, California’s wealthiest residents made extraordinary gains.

Tech stocks soared.

People who owned assets saw massive appreciation.

Capital gains taxes poured into state coffers.

In 2021-22, state tax revenues rose about 55%, roughly $70 billion more than the previous year.

That’s an insane increase.

But the Newsome administration made a critical assumption.

They believed these revenue levels would largely continue.

They projected that California would keep collecting close to those amounts going forward.

Spending increased about 63% over 5 years, reaching over $320 billion in the current fiscal year.

By comparison, when Jerry Brown was governor eight years earlier in 2011, the budget was $98 billion.

If that 196465 budget had grown just with population and inflation, it would only be $ 38.6 billion today.

So, what went wrong with the revenue projections? First, the stock market.

In 2022, the market declined steeply after significant growth in 2020 and 2021.

This directly impacted income tax collections from high-income Californians who receive significant compensation in stock.

The legislative analyst office noted that in the first half of 2024, stock pay alone at four major tech companies accounted for almost 10% of the state’s total income tax withholding.

When stock prices drop, this revenue vanishes.

Second, the Federal Reserve raised interest rates aggressively to combat inflation.

This made borrowing expensive and reduced investment.

The number of California companies that went public in 2022 and 2023 dropped over 80% compared to 2021.

Investment in California startups and tech companies fell significantly.

Third, California’s economy hit a prolonged slowdown.

Outside of government and healthcare, the state added essentially no jobs for a year and a half.

The unemployment rate rose from a record low of 3.

8% in 2022 to 4.9% by late 2023.

Consumer spending measured by retail sales continued declining throughout 2024.

But there’s another factor many people miss.

Proposition 98.

This is California’s constitutional formula that governs school and community college funding.

When general fund revenue declines, the minimum required spending under Prop 98 usually declines too, but not automatically for money already spent.

The legislative analyst estimated that the decline in general fund revenue reduced the minimum required spending under Prop 98 by $21 billion from 2022 23 through 2024 to25.

Here’s what this means in practice.

When revenues collapsed, California couldn’t just cut spending proportionally.

Much of the spending was already committed either through legal requirements, multi-year plans, or contracted obligations.

Think of it like this.

Imagine you get a huge bonus at work and immediately sign a lease on a luxury apartment, buy a new car on a payment plan, and commit to expensive subscriptions.

Then your bonus disappears, but you still owe all that money.

That’s essentially what California did at the state level.

The state allocated large shares of the surplus to temporary purposes, but according to the legislative analyst, much of that spending had already been dispersed or encumbered by the time they realized revenues were falling.

Grants had been awarded, funds transferred, contracts signed.

So, what actually happens when a state faces a $68 billion budget hole? Let’s look at the immediate impacts, the ripple effects, and who wins and loses.

Immediate impacts hit first in 2024.

The state withdrew $4.9 billion from the budget stabilization account, the rainy day fund, in 2024 25 with plans to pull another 7.1 billion in 202526.

That would leave only $10.5 billion available for future emergencies.

They completely drained the safety net reserve.

all $900 million, leaving no dedicated funds to support Cal Works and Medic in future downturns.

The budget included $13.6 billion from a combination of temporary revenue increases and internal borrowing from state special funds.

Another $6 billion came from fund shifts, transferring certain costs from the general fund to other state funds.

Spending got delayed.

California postponed expanding food assistance to undocumented immigrants for two years.

They delayed a wage increase for people who provide services to Californians with intellectual and developmental disabilities by six months.

They even shifted one month of state employee payroll costs from June 2025 to July 2025.

Literally just pushing the payment to the next fiscal year to make the numbers look better.

Program cuts hit specific areas.

Broadband internet projects for poor communities.

Cut programs for foster kids reduced.

Climate initiatives that were supposed to get billions scaled back or delayed.

Public health infrastructure lost $300 million in ongoing funding.

Health enrollment navigator programs saw an $18 million reduction.

Counties faced frozen increases in medical administration funding through 2027 to 28.

But the deeper consequences are still unfolding.

California spent roughly $ 24 billion on homelessness during Nuome’s governorship.

The number of homeless individuals rose from about 150,000 in early 2019 to about 180,000 in early 2024.

That’s $160,000 spent for each person who was homeless in 2019.

Yet homelessness increased by 20%.

Education funding hit record highs, 128.3 billion.

Yet chronic absenteeism among K12 students jumped from around 11% before COVID to 25 30% over recent school years.

The highspeed rail project continues consuming billions.

Originally pitched in 2008 as a $34 billion system connecting Los Angeles to San Francisco by 2020, it’s now projected to cost $35 billion just for the Bakersfield to Merced section, which won’t be completed for another decade.

For businesses, the calculations changed.

Texas and Florida offer zero state corporate income tax.

Nevada has no personal income tax.

Arizona provides 30% cost advantages compared to California according to the Greater Phoenix Economic Council.

When Huelet Packard Enterprise moved to Texas, company spokesperson Adam Bower noted they still had about 3,700 employees in Texas and 3,600 in California.

But the headquarters move sent a signal about where they see future growth.

For high-income individuals, the math got brutal.

California’s top tax rate of 14.4% 4% compared to Texas’s 0% means that someone making $10 million annually saves $144 million by moving to Texas.

Bloomberg calculated that Elon Musk alone saved $500 million in personal taxes by moving to Texas.

The average California worker faces different consequences.

With inflation driving up costs and the state economy sluggish, real wages haven’t kept pace.

The unemployment rate of 4.9% in late 2023 was 25% higher than during the strong labor markets of 2019 and 2022.

State employees faced an 8% cut to operation spending plus elimination of 10,000 vacant positions.

While this avoided furls, it meant fewer services and slower processing of everything from permits to benefits.

Here’s what the trade-offs look like.

California maintained medical expansion to all residents regardless of immigration status.

A 3.

4 4 billion annual commitment.

They protected cow works and core social services, but they did it by draining reserves, delaying infrastructure, and betting that revenues will improve.

And that’s the gamble California is now taking.

This isn’t just a California story.

It’s a case study in what happens when government finances rely too heavily on volatile revenue sources.

Let’s look at historical comparisons.

During the 200708 financial crisis, California faced about a $40 billion deficit that led to state worker furlows, layoffs, IUS instead of tax refunds, and temporary tax increases.

The state sales tax went up temporarily and came back down.

But the top income tax rate also raised temporarily, never came back down.

It went from 10.

3% to 13.

3% and is now at 14.

4%.

Illinois offers another comparison.

When Illinois faced severe budget problems in recent years, they also relied heavily on one-time fixes and internal borrowing.

The result, continued structural deficits and a credit rating that made borrowing more expensive, creating a vicious cycle.

But here’s where California’s situation is unique and more precarious.

The state’s reliance on highincome earners for revenue creates what economists call revenue volatility.

In November 2024, the legislative analyst noted that despite softness in the labor market and consumer spending, earnings of highincome Californians surged in recent months, driven entirely by a stock market rally.

Legislative analyst PC warned that this recovery calls into question its sustainability in the absence of improvements to the state’s broader economy.

In other words, California is getting a temporary revenue boost from stock market gains, but the underlying economy remains weak.

The incentive structure reveals why this happened.

Politically, spending a surplus is popular.

Cutting programs is not.

When California had that 97.

5 billion surplus, the political incentive was to use it for priorities Democrats cared about.

Healthcare expansion, climate programs, education increases.

Saving it all would have been politically difficult.

Newsome himself faced pressure from the left to spend more on progressive priorities and from the center to provide tax relief.

The rebate checks were a compromise, give some back while spending the rest, but there was no strong political incentive to assume the worst case scenario.

Nuome’s finance team projected optimistically.

The legislative analysts warnings got less attention than the governor’s rosy forecasts.

Here’s what we don’t know yet.

whether the recent stock market rally will continue propping up California’s revenues.

If tech stocks keep climbing, California might muddle through.

If they fall, the structural deficit becomes a crisis.

We also don’t know whether remote work permanently changes California’s economic model.

If high earners can live anywhere and choose not to live in California, the state’s tax base could shrink permanently.

Economists disagree about the solution.

Some argue California needs to diversify its revenue sources, perhaps with a more balanced tax system that relies less on volatile income from the wealthy.

Others say the state simply spends too much, and needs to fundamentally restructure its commitments.

Critics of my analysis would point out that California still has the strongest economy of any state, the most Fortune 500 companies, and continues to lead in innovation.

They’d argue this is a temporary adjustment, not a fundamental crisis.

The strongest argument for California’s approach is that maintaining social services during a downturn is exactly when they’re most needed.

Cutting health care, education, and safety net programs during tough economic times makes the problem worse for millions of people.

But here’s the counter.

California now projects annual deficits of around $20 billion through 2028-29, according to the legislative analyst.

That’s not sustainable without either significant spending cuts, major revenue increases, or continued draining of reserves.

And they’ve already used half their rainy day fund.

The state faces a structural deficit, meaning ongoing spending exceeds ongoing revenue.

One-time fixes only delay the reckoning.

So, here’s what we know.

First, California went from a $97.

5 billion surplus to a $68 billion deficit in under three years, the biggest and fastest budget swing in American state history.

Second, this happened because the state increased spending by 63% based on revenue assumptions that proved wildly optimistic, particularly regarding taxes from wealthy residents and capital gains.

Third, California is now managing the crisis through a combination of reserve withdrawals, internal borrowing, spending delays, and betting on continued stock market gains to prop up revenues.

What happens next depends on factors largely outside California’s control.

If the stock market continues rallying, particularly in tech, California gets breathing room.

If markets correct or the economy weakens, the deficit could balloon beyond what reserves and accounting tricks can cover.

Watch for these indicators in the coming months.

California’s monthly revenue reports, particularly from personal income taxes, employment numbers in tech and finance sectors, and most importantly, the 202526 budget negotiations, which will show whether lawmakers are ready to make structural changes or continue with temporary fixes.

The bigger question this raises is fundamental.

Can a state government sustainably fund itself by relying so heavily on wealth taxes and capital gains from its richest residents? when those residents can work remotely from anywhere and companies can relocate to states with zero income tax.

Does California’s model still work? California is betting it does.

They’re betting that tech companies need Silicon Valley, that wealthy people will pay the premium to live in California, and that revenues will bounce back.

But they’re also facing annual 20 billion deficits.

As far as the eye can see, half their rainy day fund is gone.

And they’ve used every accounting trick available.

Is California’s high tax, high service model sustainable in an era of remote work and interstate competition? That’s what we’re all about to find out.

Let me hear your perspective.

Comment below.

If you run a state and saw a huge revenue windfall, what would you do? Save it all, spend it, increase permanent programs, or stick to one-time investments? And have you seen similar budget whiplash in your state? If you want more analysis that actually breaks down what’s happening with economics and policy, subscribe.

I do deep dives like this every week.

Next up, I’m covering why companies are leaving blue states for red states and whether the trend is real or overblown.

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