‘Reaching bubble territory’: California’s Capitol watchdog advises fiscal prudence
A new report from California’s nonpartisan Legislative Analyst’s Office acknowledges the state’s sky-high revenues due to artificial intelligence enthusiasm. But it warns legislators to be aware of a potential “bubble” when drafting next year’s budget.
The updated forecast comes one week before Gov. Gavin Newsom is expected to release his updated budget proposal, called the May Revision. Newsom’s January proposal was far rosier than the LAO’s November forecast, mostly due to the LAO accounting for an anticipated stock downturn.
In the months since, as enthusiasm around AI has grown, the stock market and expectations about income tax collections have continued to climb. The LAO said in its Thursday report that revenues would be $25 billion higher than the governor had proposed in his January budget. However, an expectation of a downturn is still built into their advice, according to the LAO’s office, which warned legislators in its report that there is a “high risk of reversal.”
“It is now hard to ignore that the stock market appears, on its face, to be in a speculative bubble, rivaled only by the dot-com boom and the Roaring Twenties,” the report said. “Such speculative episodes almost always end in dramatic reversals.”
Plus, the $25 billion number can’t just be tacked on to the “money coming in” column, since a fair bit of it will have to go to K-14 education due to constitutional budget requirements. That might leave around $12 billion of additional flexibility for the governor and lawmakers to work with, according to the report.
The LAO has continued to advise the Legislature to take steps to address an imbalance between California’s government spending and its reliable revenue supply. The office recommended the state be prepared for revenues to be tens of billions lower within one to two years.
“Given how strong the stock market is now — and likely upcoming big initial public offerings (IPOs) — my personal view is that LAO’s revenue assumptions are quite conservative in 2026-27,” wrote Assembly budget advisor Jason Sisney in a newsletter distributed Thursday.
Assembly Speaker Robert Rivas is expected to release a plan outlining the Assembly’s priorities this week.
Senate President Pro Tem Monique Limón and her budget team released their proposal in April, a plan that would restore billions of dollars for programs that Newsom proposed cutting in his plan, including for K-12 schools, climate programs, childcare slots and homelessness assistance funding. Leaders did not propose any cuts, simply saying that “specifics of the spending reductions will be developed through the budget process.”
The public will likely get a better understanding of what those cuts may be next week, in the May Revision.
Newsom, Limón and Rivas will continue working toward a budget agreement in the following weeks. A final, balanced budget needs to be passed by June 15.
