California’s financial crisis deepens as Governor Newsom faces a growing budget deficit while refineries announce shutdowns that threaten to spike already high gas prices across the state.
At a Glance
- California’s budget deficit has ballooned to nearly $32 billion, requiring significant spending cuts and reserve drawdowns
- Major refineries including Valero’s Benicia facility and Phillips 66’s Los Angeles refinery plan to close by 2026, reducing California’s fuel production capacity
- Oil industry executives describe California as “uninvestable” due to state policies including potential margin caps on refining
- Governor Newsom’s budget proposal focuses on federal policy threats while reducing funding for flood protection, child care expansion, and small business tax relief
- California will soon have only 12 refineries serving 39.4 million people, down from 40 refineries for 25 million people in 1985
California’s Budget Crisis Worsens
The Golden State’s financial outlook has deteriorated significantly as California’s budget deficit has grown to nearly $32 billion, representing an increase of about $10 billion since January. This massive shortfall is part of a proposed $306 billion budget, which stands as the largest state budget in the United States.
Officials attribute the deficit to persistent high inflation and delayed tax filings resulting from severe winter storms that impacted the state. Governor Gavin Newsom’s initial proposal included $9.6 billion in spending cuts, with his latest proposal adding another $1 billion in reductions.
The deficit estimates vary widely between state officials. While Governor Newsom projects a $38 billion shortfall, the nonpartisan Legislative Analyst’s Office (LAO) places the figure much higher at $68 billion.
This discrepancy creates additional uncertainty for state lawmakers as they attempt to address the growing fiscal crisis. Budget experts point to lower-than-expected state revenue collections as the primary cause, influenced by Federal Reserve interest rate hikes and stock market declines that have impacted California’s tax revenue from capital gains.
Refineries Shutting Down as Energy Policies Tighten
Adding to California’s economic woes, major refineries have announced plans to cease operations in the state. Valero intends to shut down its Benicia refinery by April 2026, while Phillips 66’s Los Angeles refinery is scheduled to go idle in October 2025. These closures will significantly reduce California’s oil production capacity at a time when residents already face some of the highest gas prices in the nation.
The declining number of refineries represents a striking trend: California had 40 refineries in 1985 serving a population of 25 million, but will soon have only 12 facilities for its current 39.4 million residents.
“What happens down the road, I have no idea, I won’t speculate on that . . . We want to stay here; the problem is the policies of California are making it uninvestable,” said Mike Vomund
Industry executives have been blunt about the reasons behind these closures. Chevron executive Mike Vomund described California as “uninvestable” due to its regulatory environment. Of particular concern is SB 12, legislation that creates the possibility of margin caps on refining businesses. The law threatens to limit profits in an industry that requires substantial capital investment, creating uncertainty that deters companies from maintaining or expanding operations in California.
Budget Priorities Draw Criticism
Governor Newsom’s 2025-26 budget proposal projects a small positive balance of $363 million, but relies heavily on $16.5 billion in additional revenue and plans to draw down $7.1 billion from reserves. The $229 billion General Fund spending plan aims to protect prior investments but includes few new initiatives to address California’s affordability challenges. Notable cuts target flood protection programs, child care expansion, and small business tax relief, while maintaining $17 billion in reserves.
According to the California Budget & Policy Center: “The Governor’s budget notes that policies expected from the incoming federal administration pose the most immediate threat to California’s economic outlook.”
Critics argue that Newsom’s budget priorities do not adequately address the state’s immediate economic concerns. Republican Assembly Leader James Gallagher called the governor’s cuts to drought programs “dangerous” and his fiscal approach “shortsighted.”
The budget has drawn fire from both sides of the aisle, with Assembly Majority Leader Eloise Gomez-Reyes suggesting that legislators would need to pressure the Governor to ensure he supports their priorities. Meanwhile, Newsom’s response to the refinery shutdowns has been largely reactive, with promises to address “market disruption” rather than addressing the underlying policy issues driving energy producers from the state.
Economic Impact on Californians
The combined impact of budget cuts and refinery closures threatens to further strain California residents who already face some of the highest living costs in the nation. The potential fuel shortages and price spikes resulting from reduced refining capacity will disproportionately affect working-class Californians. Well-paying refinery jobs will be lost, and the ripple effects could impact related industries throughout the state economy. As California continues to lose energy production capacity, its dependence on fuel imports will increase, potentially leading to supply disruptions and greater price volatility.
“There’s a bill that was passed last year, SB 12, that has a margin cap possibility on the refining business. You can’t make investments when there’s this looming threat that we’re gonna come in and tell you what we believe was an acceptable amount of money for you to make. So it makes it difficult to impossible to invest in that environment. So the margin cap needs to go away,” added Vomund.
As the state navigates these challenges, the budget picture may change further. Revenue estimates will be updated in May, potentially altering the scope of the budget gap. However, the long-term trends of declining energy production capacity and persistent budget shortfalls suggest California faces significant economic headwinds that will continue to challenge state leadership and impact residents across economic classes.
