1. The state budget
In addition to the $18 billion projected shortfall, the Legislative Analyst’s Office (LAO) has warned that California’s revenue base remains overly reliant on high-income earners and capital gains, making it vulnerable during downturns. In December, LAO Director Gabriel Petek said: “Over the next three fiscal years, the LAO projects increased deficits. Perhaps the most sobering thing to me is that in the subsequent three years of the forecast, we are showing even larger deficits. The deficits grow to $35 billion per year.”

With the state already drawing heavily from its Rainy Day Fund, and billions of dollars of federal cuts coming to programs like CalFresh and MediCal, Gov. Gavin Newsom’s final budget decisions may hinge on whether he prioritizes fiscal restraint—or avoids politically costly cuts ahead of potential national ambitions.