Gov. Gavin Newsom’s State of the State speech on Thursday tried to make much of a projected $42 billion revenue increase to state coffers. Even so, his budget proposal released Friday had to concede budget deficits would persist for years to come. Now the nonpartisan Legislative Analyst’s Office has weighed in. It’s not a pretty picture.
“Taken together, the administration projects the budget faces a roughly $3 billion deficit,” the LAO notes. “We view this as roughly balanced—that is, neither a clear surplus nor a clear deficit.”
Part of the problem is that while revenue is indeed projected to increase, so is spending across many areas of state government. “Among these, some of the largest drivers of increased costs include Medi-Cal, debt service on general obligation bonds, and employee compensation,” the LAO notes.
There’s also reason for caution on the revenue side. While projections of revenue growth are welcome, the overheated nature of the stock market and California’s reliance on capital gains and income tax as revenues make California state government especially vulnerable to downturns.
While the Newsom administration acknowledges these risks, the LAO reports, the “governor proposes no material actions to address downside risk.”
This is a problem when considering projected forecasts of large budget deficits through the 2029-30 fiscal year.
“Under the administration’s proposed budget and revenue assumptions, the state faces operating deficits of $27 billion in 2027-28, $22 billion in 2028-29, and $23 billion in 2029-30,” the LAO notes. “In November, our office projected the state faced deficits around $35 billion per year, with much of the difference attributable to our lower revenue estimates.”
However one puts it, there are deficits on the horizon.
Meanwhile, the state has continued to draw down on its reserves to make its budgets work. In the 2024-25 fiscal year, the state had $46.4 billion in reserves. By the end of the 2026-27 fiscal year, that total will stand at just under $19 billion.
Of course, reserves are there to be used when needed to mitigate the disruption of severe and abrupt cuts. That is all the more reason the state must get a better handle on its spendthrift ways.
This is even moreso considering the state’s reliance on revenues from the ever-volatile stock market. The LAO reminds us of the major disruptions to state government inflicted by the dot-com bubble and the Great Recession.
“Today, without action to realign ongoing expenditures with ongoing revenues, the risk of repeating history looms large,” they warn.
Hopefully state leaders pay attention to these warnings for a change and get ahead of the problems before it’s too late.