Legislature’s fiscal analyst says California ‘ill‑prepared’ under Newsom budget
The state Legislature’s nonpartisan and independent fiscal analysts threw some cold water on Gov. Gavin Newsom’s celebratory announcement last week that he’d closed California’s structural deficits in his final budget proposal as governor.
Newsom’s budget relies on spending reserves and borrowing $4 billion in constitutionally mandated funding for public schools and community colleges, the Legislative Analyst Office found. Newsom would use that $4 billion this year to cover general government spending, and the state will have to pay it next year — or cover an even bigger gap if revenue collections drop off.
And though a sudden surge in tax gains from artificial intelligence companies’ booming stock prices allowed Newsom to balance the budget for the next two years and lower projected structural deficit going forward, fiscal analysts emphasized Monday the gap between spending and tax revenues persist.
Last week, Newsom said he was “cutting deficits, not corners,” and leaving the state’s books in good shape for the next governor. He also proposed new investments in public education, and funds to bolster wildfire recovery and soften the impact of federal cuts to healthcare and social services.
But during a moment of booming revenues, California should be socking money away for the next downturn, not dipping further into its reserves, LAO officials wrote in their first response to Newsom’s May revisions to his budget, which he made public on Thursday, May 14. Instead, they calculated he is burning $20 billion in savings, both through withdrawing from reserve accounts and again pausing some deposits back into savings.
“The underlying budget condition is not sound,” the report read. “First, the existence of any operating deficits during a revenue boom of this magnitude is itself a warning sign. Further, given the state’s diminished reserves and already accumulated wall of debt, California is ill‑prepared for even a slip up in revenues.”
Republican lawmakers pointed quickly to the report as backing their contention that Newsom and lawmakers have been balancing the budget using accounting gimmicks.
“Assembly Republicans have been warning for years that Sacramento is addicted to spending money it does not have,” Assembly Republican Leader Heath Flora, R-Ripon, said in a statement Monday. “Democrats spent every surplus dollar they could get their hands on, drained reserves, and left California dangerously exposed when the economy slows down.”
The Legislature’s fiscal analysts have been warning all year that the current AI boom appears to be an unsustainable bubble that could be followed by a significant stock price drop off.
Comparing the AI investment boom to the dot-com bubble in the 1990s when stockbrokers inflated the value of technology stocks, the analysts predicted a comparable market crash could quickly leave the state in a $100 billion revenue hole.
“Using this year’s budget to build resilience would allow the state to weather this kind of shock without immediately needing to turn to tax hikes or cuts to ongoing services,” the fiscal analysts wrote.
They recommended the Legislature deposit $20 billion back into reserves and reject Newsom’s $4 billion deferral from education funding.
They also said lawmakers should reject Newsom’s new discretionary spending proposals.
Lawmakers could find $10 billion by rejecting a Newsom proposal to deposit around that amount in a unique reserve account for just one year. Newsom then proposes spending that $10 billion in the next year’s budget, according to the LAO report — in essence, making a quick deposit to carry some of this year’s surplus over for next year’s budget.
Instead, the LAO report proposed lawmakers put that amount into longer lasting reserve accounts, and account for the $10 billion in spending when they do next year’s budget.
Both those moves — rejecting the spending cuts and saving away the $10 billion — would leave lawmakers looking for $10 billion more if they don’t want to draw down reserves this year.
That is a challenging task, politically. Lawmakers have indicated little willingness to find deep spending cuts themselves, and progressive lawmakers as well as Senate leadership have expressed an interest in spending more than Newsom did to protect the state’s social safety net from President Donald Trump and congressional Republicans’ One Big Beautiful Bill Act.
