California Gov. Gavin Newsom unveiled a record-high $350 billion state budget Friday that makes “historic” investments in areas like education — but kicks the can on paying down federal debt, foisting costs onto struggling employers.

Newsom’s budget incorporates a $43 billion windfall tied to the stock market that he touted in his State of the State speech Thursday, bringing his office’s estimated deficit down to $3 billion — the state’s fourth deficit in a row. The budget plows billions into maintaining education, health care, and other programs but ignores a $20 billion federal loan for Covid unemployment payments — a situation one legislator called “alarming.”

Ignoring the loan means small businesses are on the hook for the state’s debt, said state Sen. Roger Niello of Fair Oaks.

“We already have the highest unemployment in the nation and we’re putting this additional burden on our employers. It makes absolutely no sense,” Niello said.

The budget includes $662.2 million in mandatory interest payments, but there is no money going towards the principal.

Since July, the total balance has ballooned to $21.3 billion, and private employers in California pick up the tab under federal rules. Employers pay an $42 extra per employee this year and growing, per KCRA

Every state expect California has paid off the Covid-era loans.

“That is an alarming thing because [Newsom is] basically saying that businesses and employment are not a priority to him and that’s troubling,” Niello added.

At 5.5%, California’s unemployment rate was the highest in the country as of November.

Newsom’s $350 billion budget proposal is about $30 billion higher than this year’s budget, thanks largely to federal healthcare cuts that forced costs onto the state and mandatory set-asides in areas like education.

At a budget briefing Friday, Newsom’s finance director Joe Stephenshaw highlighted record spending on education— amounting to a record $27,418 per K-12 student, $5.3 billion for the University of California system, $15.4 billion to community colleges, and $1 billion to needy schools — along with $500 million towards local homelessness prevention, $195 million in new public safety spending, $3 billion for the state’s rainy day fund and $4 billion for school reserve funds.

The budget includes some cuts to climate-related spending and housing and homelessness, per Calmatters. And it does not include any direct funding for Prop. 36, the anti-crime measure supported by nearly 70% of voters in 2024 — a move Republicans blasted.

But even with Newsom’s unexpected windfall, analysts expect deficits to grow to as high as $35 billion in the coming years as expenditures outpace even optimistic revenue projections.

Newsom and the state Legislative Analyst create separate budget projections, and the governor’s has historically been far rosier on the revenue side. The legislative analyst projected a $18 billion deficit in the coming fiscal year, while the governor calculated $3 billion.

Under Newsom, the state’s general fund spending has increased by 77% partly owing to new programs spun up when the state was flush with cash, according to Republican legislators.

Newsom’s $350 billion budget — the last before he leaves office next year — does little to confront ballooning expenses, dumping the problem on the future governor and Legislature, according to Senate Minority Leader Brian Jones.

“This is more of the same from a lame-duck governor content on leaving the rest of us to pick up the financial pieces when he leaves office,” Jones said in a statement.  

Democrats in the legislature were more measured in their responses.

“During these times of uncertainty, we must craft a responsible budget that prioritizes the safety and fiscal stability of California families,” said State Senate Leader Monique Limón in a statement.

Newsom and legislators will refine the budget in the coming months towards a final proposal in May.

One major unknown is how California will handle a loss of about $1.4 billion in funding due toTrump administration changes to low-income health care and food programs.

Last year, Newsom was force to scale back a controversial plan to provide Medicaid coverage for illegal immigrants after costs spiked, forcing California was forced to borrow $3.4 billion, Politico reported.

Newsom’s budget didn’t fully explain what would happen to immigrant health care under federal cuts, and Stephenshaw struggled to answer detailed questions from reporters — saying Newsom’s office was still awaiting guidance from the feds.

“As we work through the May revision, this is something we’ll be well aware of and we’ll make those decision at that time,” he said.

California Congressman Darrell Issa discusses reports that as many as 20 billionaires could leave the state amid concerns over a proposed new wealth tax which critics say is driving high-net-worth taxpayers out of California on ‘The Evening Edit.’

It isn’t just billionaires leaving California.

Anecdotal data suggest there is also an exodus of regular people who load their belongings into rental trucks and lug them to another state.

U-Haul’s survey of the more than 2.5 million one-way trips using its vehicles in the U.S. last year showed that the gap between the number of people leaving and the number arriving was higher in California than in any other state.

While the Golden State also attracts a large number of newcomers, it has had the biggest net outflow for six years in a row.

Generally, the defectors don’t go far. The top five destinations for the diaspora using U-Haul’s trucks, trailers and boxes last year were Arizona, Nevada, Oregon, Washington and Texas.

California experienced a net outflow of U-Haul users with an in-migration of 49.4%, and those leaving of 50.6%. Massachusetts, New York, New Jersey and Illinois also rank among the bottom five on the index.

U-Haul didn’t speculate on the reasons California continues to top the ranking.

“We continue to find that life circumstances — marriage, children, a death in the family, college, jobs and other events — dictate the need for most moves,” John Taylor, U-Haul International president, said in a press statement.

While California’s exodus was greater than any other state, the silver lining was that the state lost fewer residents to out-of-state migration in 2025 than in 2024.

U-Haul said that broadly the hotly debated issue of blue-to-red state migration, which became more pronounced after the pandemic of 2020, continues to be a discernible trend.

Though U-Haul did not specify the reasons for the exodus, California demographers tracking the trend point to the cost of living and housing affordability as the top reasons for leaving.

“Over the last dozen years or so, on a net basis, the flow out of the state because of housing [affordability] far exceeds other reasons people cite [including] jobs or family,” said Hans Johnson, senior fellow at the Public Policy Institute of California.

“This net out migration from California is a more than two-decade-long trend. And again, we’re a big state, so the net out numbers are big,” he said.

U-Haul data showed that there was a pretty even split between arrivals and departures. While the company declined to share absolute numbers, it said that 50.6% of its one-way customers in California were leaving, while 49.4% were arriving.

U-Haul’s network of 24,000 rental locations across the U.S. provides a near-real-time view of domestic migration dynamics, while official data on population movements often lags.

California’s population grew by a marginal 0.05% in the year ending July 2025, reaching 39.5 million people, according to the California Department of Finance.

After two consecutive years of population decline following the 2020 pandemic, California recorded its third year of population growth in 2025. While international migration has rebounded, the number of California residents moving out increased to 216,000, consistent with levels in 2018 and 2019.

Eric McGhee, senior fellow at the Public Policy Institute of California, who researches the challenges facing California, said there’s growing evidence of political leanings shaping the state’s migration patterns, with those moving out of state more likely to be Republican and those moving in likely to be Democratic.

“Partisanship probably is not the most significant of these considerations, but it may be just the last straw that broke the camel’s back, on top of the other things that are more traditional drivers of migration … cost of living and family and friends and jobs,” McGhee said.

Living in California costs 12.6% more than the national average, according to the U.S. Bureau of Economic Analysis. One of the biggest pain points in the state is housing, which is 57.8% more expensive than what the average American pays.

The U-Haul study across all 50 states found that 7 of the top 10 growth states where people moved to have Republican governors. Nine of the states with the biggest net outflows had Democrat governors.

Texas, Florida and North Carolina were the top three growth states for U-Haul customers, with Dallas, Houston and Austin bagging the top spots for growth in metro regions.

A notable exception in California was San Diego and San Francisco, which were the only California cities in the top 25 metros with a net inflow of one-way U-Haul customers.