--- title: "California: A Financial Audit" slug: california-fiscal source: TheBrief — Learn With Me (Social Capital) published_at: 2026-08-21T13:00:00.000Z --- # California: A Financial Audit ## The 60 Second Read In June 2026, Governor Gavin Newsom signed a $351.7B state budget and said California will run a $0 deficit for the next two years. The plan spends roughly $23.2B more than the state expects to collect, a difference closed with reserve withdrawals and carried-over balances, and the annual math leaves out $302.4B in long-term obligations as of 2026. This Deep Dive audits how that position was built. California runs one of the worst operating balances of any large state because its largest revenue line moves with markets: personal income tax supplies about two-thirds of the $226.7B General Fund, the state's main operating account, and the top 1% of earners, roughly 176,000 returns, paid 37% of it in 2023. Their income rides capital gains, which hit a record $349B in 2021 and fell to $156B a year later. The rules that spend the money accumulated across nine decades and have never been reversed, so most of the budget is locked before a downturn starts and cuts land on the small unprotected share. The state's own analyst projects recurring shortfalls near $35B a year starting in 2027-28, and the $35.2B held in reserves covers roughly one of those years. ## Key Takeaways - **California is losing its tax base.** Out of 18M tax filers, **176,000 returns, under 1%, paid 37%** of 2023 personal income tax, and that base is shrinking: about 103,000 millionaires have left since 2018, and in 2023 alone California lost a net 200,547 people and **$11.9B in adjusted gross income** to other states, with filers reporting $200,000 or more taking **58% of the income** lost. - **Revenue rides the market.** California taxes capital gains as ordinary income at rates up to **13.3%**, the highest in the nation, so its tax take swings with asset prices. Realizations climbed **72%** from 2020 to 2021, then fell **55%** in 2022, and the top 1%'s tax liability fell 40% with them in a year when the state economy was flat. - **Every crisis added a lock.** A lock is a budget rule written in a crisis and never undone. The Depression brought the sales tax in 1933 and the income tax in 1935. Proposition 13 capped property tax at **1%** in 1978 and pushed school funding onto the state, and Proposition 98 made that funding a constitutional minimum, roughly **40% of the General Fund**, in 1988. Proposition 2 followed in 2014, requiring annual rainy-day reserve deposits. - **Spending rose as outcomes worsened.** California spent about **$24B** across more than 30 homelessness and housing affordability programs from 2019 to 2023, and the homeless count rose 20% to **181,399**. In the schools, per-student spending rose from about $14,500 in 2003 to roughly $25,900 in 2024, inflation adjusted, while scores on the National Assessment of Educational Progress stayed below the U.S. average throughout. - **Protected spending narrows the options.** California cannot file for bankruptcy, because federal law has no chapter for states. Much of the budget is also hard to cut: the constitution guarantees minimum funding for schools and community colleges, and debt service, under **4 cents of every General Fund dollar**, sits next in line, so stress lands on what remains. From 2008 to 2011 the state furloughed workers and covered bills with **$2.6B** in IOUs while paying every bondholder in full. - **A billionaire tax and a wildfire backstop.** Proposition 40 would levy a one-time **5%** tax on the net worth of roughly 200 billionaire residents. Revenue models disagree, from $40B to $100B, and Polymarket prices passage at 26%. The base can move first: Alphabet's founders left California ahead of the tax's January 1, 2026 residency date. The FAIR Plan, the state's insurer of last resort, holds **$768.4B** in wildfire exposure across approximately 684,000 policies, a count up **152%** since 2022. Its losses are billed to the state's insurers, which can recover part through temporary fees on their policyholders, and that concentration affects property values and local property tax revenue. ## Why This Matters California's output ranks fifth in the world, but its budget flexibility is narrowing. Four claims the state cannot easily cut, schools and community colleges, Medi-Cal, pensions, and debt service, take roughly $150B of the $226.7B General Fund, and only Medi-Cal grows faster than revenue. Versions of this problem are emerging worldwide as governments confront rising healthcare costs, pension promises, mobile wealth, and pressure to maintain public services. California reaches the tension sooner because its wealth and its commitments are unusually concentrated: a small group of taxpayers funds the budget, and their income rises and falls with asset markets. A market downturn can reduce revenue long before the state can reduce its commitments. California tests how long volatile revenue can carry obligations that cannot adjust at the same speed, and the vote on Proposition 40 on November 3, 2026 is the first reading for governments beyond Sacramento. ## Featured Charts & Graphs ![Line chart of operating balance as a percent of general expenditure for California, the nine other largest states, and the 50-state aggregate, 1992 to 2023. California sits below the aggregate for most of the period and dips deepest after the 2001, 2007-09, and 2020 recessions.](https://thebrief.socialcapital.com/images/briefs/california-fiscal/operating-balance-vs-largest-states.png) *California's operating balance sits below the 50-state aggregate for most of three decades and swings about twice as hard, dipping furthest in the fiscal years after each recession since 2001.* ![Grouped bar chart of annual percentage change in California revenue from 2000 to 2009 for capital gains tax, corporate income tax, sales tax, and gasoline tax. Capital gains bars swing past plus and minus 50 percent while the other taxes stay within roughly 25 percent.](https://thebrief.socialcapital.com/images/briefs/california-fiscal/revenue-volatility-2000s.png) *Capital gains tax revenue swung more than 50% in single years across the 2000s, while sales and gasoline taxes moved a fraction as much.* ![Sankey diagram of total state funds expenditure by fund and agency for 2026-27. General Fund spending of $251.5B, special funds of $95.1B, and bond funds of $5.1B flow to agencies, led by Health and Human Services at $145.4B and K-12 education at $92.6B.](https://thebrief.socialcapital.com/images/briefs/california-fiscal/expenditure-sankey.png) *Health and Human Services at $145.4B and K-12 education at $92.6B together take roughly two-thirds of all state-funds spending for 2026-27.* ![Stacked bar chart of FAIR Plan dwelling and commercial exposure at five dates from September 2022 to June 2026, rising from $219.6B to $768.4B.](https://thebrief.socialcapital.com/images/briefs/california-fiscal/fair-plan-exposure.png) *FAIR Plan exposure has more than tripled since September 2022 as private insurers stopped writing new homeowners policies in California.* --- The full Deep Dive is coming soon. This Brief is educational content for Learn With Me subscribers, not investment advice.