With Newsom’s rosy budget proposal, lawmakers weigh two starkly different projections

The California Legislature has been presented two starkly different versions of the state’s fiscal outlook, and it remains to be seen if lawmakers will choose to operate under their own analyst’s projections of an $18 billion deficit or the far rosier version offered by the governor as they craft the state’s budget.

Gov. Gavin Newsom’s budget director, Joe Stephenshaw, introduced a budget that projected just a $2.9 billion shortfall, which the governor proposes plugging by halting a $2.8 billion deposit into the state’s rainy day savings account.

Under the governor’s proposal, lawmakers could largely duck major revenue and spending questions this year — though they would still be staring down an estimated $22 billion deficit in the following fiscal year. Given the wild swings in tax revenue collections over the last few years, it’s anyone’s guess how that number will evolve.

If lawmakers operate under the Legislative Analyst’s Office’s projection of an $18 billion deficit, however, they would need to take more difficult steps. The LAO analysis takes in the significant risk of a downturn in a stock market, which has been riding the highs of artificial intelligence companies, and predicts a decline in state revenues over the coming years, in contrast to the slight uptick projected by Newsom’s office.

Chamber leaders on Friday didn’t offer any concrete clues as to which path they will go down over the coming months.

Top Assembly Democrats said caution should lead the day, and stressed the importance of maintaining funding reserves.

“California’s budget calls for caution,” Assembly Speaker Robert Rivas, D-Hollister, and Assembly Budget Chair Jesse Gabriel, D-Encino, said in a joint statement published just after Stephenshaw’s presentation. “Today’s roaring tax revenues may not last, so this moment also should be used to strengthen schools and accelerate much-needed housing construction. Building more reserves now is key for the future, along with doubling-down on budget oversight to ensure responsible spending. That is Assembly Democrats’ commitment: affordability, equity and accountability.”

On the other side of the Capitol, Senate Budget Committee Chair John Laird, D-Santa Cruz said lawmakers will draw from both sets of projections. As his committee begins to mark up the governor’s budget, they will be keeping the LAO projections in mind, he told The Sacramento Bee.

“Our challenge is to ground truth every part of the governor’s proposed budget for next year and try to put us in a better position for the future years,” he said. At the same time, he said the governor’s estimates of higher revenues were good if unexpected news.

Some progressive lawmakers came into the legislative session indicating they want to shore up the budget with new tax measures, largely aimed at corporations. Newsom’s budget proposal won’t slow that effort’s momentum, Assemblymember Alex Lee, D-San Jose, who chairs the Progressive Caucus, told The Bee. “The governor historically always paints a very bright budget picture, no matter what,” Lee said. In the executive branch, “they have different accounting and different incentives to project different outcomes. In the Legislature, we’re in a different world.”

Over the last few days, Newsom had touted a number of initiatives and investments that aligned with progressive values, Lee said, but his budget also didn’t provide funding to back up pieces of the state’s safety net in the face of federal funding cuts. To meet the state’s ambitions, Lee said, “we do need to explore if the ultra-rich and corporations who have benefitted tremendously from the Trump tax cut are paying their share.”

Republicans called the governor’s budget proposal unrealistic for other reasons.

Newsom’s projections were “dangerously more optimistic than the LAO,” Senate Budget Committee Vice Chairman Roger Niello, R-Fair Oaks, said after Stephenshaw’s presentation. If policymakers sidestep projections of a growing deficit down the line by failing to cut spending, the pain will be worst for Californians in the future, he cautioned.

Niello and other Republicans worried their Democrat colleagues would use the projections offered by the governor as an excuse to avoid hard choices. “I hope that our leadership is in the business of policy this year and not in the business of politics,” Assemblywoman Alexandra Macedo, R-Tulare, said to The Bee, “and I would hope that we are realistic with what we are dealing with in the Legislature.”

Niello worried lawmakers would instead continue the precedent set in recent budget cycles, when they have balanced the budget “by internal borrowing gimmicks and deferrals,” he said. Newsom’s budget uses such a move, Niello charged, by deferring a savings deposit to plug the $2.9 billion hole.

“If they’re accurate with regard to that $2.9 billion, it’s a lot of money, but in the context of the total budget, it’s not much,” he said. “But the problem is that number’s wrong, at least in my opinion, and also in the opinion of the LAO.”

The Bee Capitol Bureau’s Kate Wolffe contributed to this story.

This story was originally published January 9, 2026 at 1:30 PM.