What We’re Hearing: Budget Fire Drills Underway

The state’s fiscal situation has departments looking for potential cuts through quiet budgetary fire drills behind the scenes and ahead of Gov. Gavin Newsom’s May budget revision, according to several insiders.

While it’s to be expected that some belt-tightening would occur amid concern of a budget deficit driven by decreased revenues and cuts to federal funding, we now have a slightly clearer picture of the sort of trimming expected of the departments.

Three inside sources in leadership positions both inside and outside state government told Industry Insider — California that departments are being asked to find opportunities to cut between eight and 10 percent from their operating budgets. These sources spoke anonymously to allow for more candid discussion.

At least one other department was asked to plan for a more significant reduction to account for withering cash flows from the state and federal governments.

Russ Nichols, who previously served as acting state CIO and deputy CIO for the California Department of Technology and now serves as a senior fellow with the Center for Digital Government*, explained that these sorts of budget exercises are commonplace, especially during times of fiscal uncertainty.

“Unless we know that we’re going to have a surplus, it’s pretty normal — even if things look pretty much even — because the increases, or the requested increases, will often outpace what the actual income is going to be,” he said. “And so, they run drills.”

Nichols added that these exercises add a lot of work to the already busy departments, and the context behind them is not always clear, which can be frustrating.

“Ultimately, it’s providing the due diligence necessary for the administration to make difficult budgeting choices with the best possible information from each department,” he explained.

While the governor’s proposed budget is being presented in its current form as balanced, Nichols noted that projections will fluctuate as multiple variables come into play. Tax and other revenue streams could outperform or underperform expectations, for example.

January revenue projections came in higher than expected — largely attributed to higher than expected income, corporate and sales tax revenue projections. April’s tax filing deadline will tell just how on the mark some of those figures were.

The January draft also cited that while the budget is balanced, it “projects a deficit of roughly $22 billion in the 2027-28 fiscal year and shortfalls in the two years following.”

When cuts are necessary, departments are often given authority over the program areas and projects that get deprioritized to avoid severe operational disruptions.

“If you’ve got multiple business areas, you can say, ‘I can handle that here better than there, and so I’ll take that, the department’s taking a $10 million hit, but I’ll take $8 million of that from one program area and $2 million from another,’” he explained.

Nichols added that the final spending plan reached by the governor and Legislature could include other priorities completely, using the example of money to fund gasoline for California Highway Patrol vehicles over another less critical program area.

Generally speaking, the support for and understanding of the need for IT funding has increased, though Nichols said, so have the expectations of the projects.

“I think that there is more support, but support might be the wrong word, more pressure to do it now and do it right,” he said.

If we’ve learned anything from previous budget cycles, anything can and will happen between now and the signing of the final spending package. It’s quite possible that these cuts never materialize, and alternatively, it’s also possible that they are all realized as part of a sweeping austerity package.

In January, Newsom unveiled his initial budget proposal that almost immediately raised eyebrows in the Legislative Analyst’s Office (LAO) for being overly optimistic with an over-reliance on a volatile stock market for revenue. What’s more, the revenue gap between the governor’s office and the LAO was a staggering difference of $31.5 billion.

That budget showed an increase in spending over the previous year — from $342.4 billion in 2025-26 to $348.9 billion. In addition to the difference between revenue figures, the governor’s office and LAO were also miles apart on the projected deficit figures — $2.9 billion per the governor; $17.7 billion per the LAO. The LAO has since said that the budget is “roughly balanced” because of higher revenues.

For those unfamiliar with the budget process, the administration and LAO are often not aligned on their revenue and deficit predictions for several reasons. For example, they may use different risk tolerances and revenue projections and measure the deficit against different baselines.

As always, May will offer a clearer picture of where state finances stand for better or worse, but all of the current signs point to more deliberate spending.

For industry, we could see departments spending less on non-critical IT projects and giving more scrutiny to the ones that are already in flight. The approval of department budget change proposals will be a temperature check on priorities and where we might see future investment.

The governor’s office did not respond to a request for comment as of press time Thursday.

*Note: The Center for Digital Government is part of e.Republic, Industry Insider — California’s parent company.