CA deficit looms as Newsom prepares latest state budget

from Dan WaltersCalMatters

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It appears yesterday that Governor Gavin Newsom and state lawmakers passed a state budget that closes the $20 billion gap between revenue and spending, while blaming President Donald Trump about their fiscal dilemma.

In fact, less than four months ago, Newsom signed $321 trillion, 2025-26 budgetsaying, “As we confront Donald Trump’s economic sabotage, this budget deal proves that California won’t just hold the line — we’ll go even further. It’s balanced, holds significant reserves, and is focused on supporting Californians — cutting red tape and catapulting housing and infrastructure development, preserving essential health services, funding universal advance medical care and tax cuts for veterans.”

But Trump has nothing to do with what government officials have described as a “structural deficit,” meaning spending covered by current law exceeds revenue expectations. Rather, it derives from what the official authorities later admitted to A $165 billion error in revenue estimates in 2022, fueling Newsom’s boast of a $97.5 billion surplus. This, in turn, led to a sharp increase in costs.

When the surplus was exposed as a phantom, the state was stuck with a chronic revenue-expenditure gap that continues. to cover it this year Newsom and lawmakers used emergency reserves, borrowed money from the state treasury’s special funds, deferred some spending and engaged in some accounting gimmicks.

On Thursday, the Office of Legislative Analysis fixes the total borrowing of the budget – on and off the books – at $21 billion.

Although this budget is less than 4 months old, the annual budget cycle will soon begin anew.

The Legislature’s budget analyst, Gabe Petek, will release his annual review of the state’s finances in a few weeks, followed in December by finalizing parameters from the Treasury Department and Newsom’s decisions on how to spend the money he assumes the state will have, and in January by unveiling the first draft of the 2026-27 plan.

It will be Newsom’s final budget before his second and final term as governor ends in 14 months, and he will very likely launch a campaign for the White House.

All indications point to another year of dealing with a multi-billion dollar deficit. Core revenues are several billion dollars ahead of projections in the current budget, but not enough to significantly shrink the structural deficit.

“Despite recent revenue increases, California’s budget condition remains fragile,” State Assembly Chief Budget Counsel Jason Sisney said. says a note this week. “There are many indications that an investment bubble in the so-called ‘artificial intelligence’ industry is fueling the recent gains in tax revenue.”

Sisney rightly added that “bubbles can lead to dramatic declines in government tax revenues when they burst.” This happened about a quarter of a century ago when the dot com bubble burst, creating a large budget deficit.

After reducing the state’s chronic deficit for the past three years, Newsom and lawmakers have built up billions of dollars in debt by using special funds and must also account for deferred spending and other maneuvers as they write his final budget. They must also contend with the effects of a heavy reliance on emergency funds — including $7.1 billion in the current budget — to cover the shortfall.

“Most of the state’s rainy day fund has been used to balance the last two budgets, and the state’s large cash balances are largely unavailable to help correct a structural deficit in the General Fund,” Sisney notes.

The bottom line is that if revenues don’t increase quickly and sharply, Newsom and lawmakers will face the same chronic deficit, plus additional pressure to make up cuts to federal funds for education, social and medical services that make Trump and Congress. What they do or don’t do will accompany Newsom as he dives into national politics.

This article was originally published on CalMatters and is republished under Creative Commons Attribution-NonCommercial-No Derivatives license.