Newsom’s latest budget still leaves state finances shaky

from Dan WaltersCalMatters

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Last week, Gov. Gavin Newsom proposed a revised version of its eighth and final state budgetwhich he said not only to be balanced for 2026-27 the fiscal year, but also for the first year of his successor.

“I’m not trying to get out of Dodge,” Newsome said. “This is a structurally balanced budget for the next 18 months after I’m gone.”

On Monday, the Legislature’s budget analyst, Gabe Petek, said Newsom accomplished that by using one-time resources, such as reserves, and other budget maneuvers that will continuation of the “structural deficit”, which has been plaguing the state for the past four years.

“The budget is structurally balanced when the revenues collected in a given fiscal year are sufficient to cover the expenditures planned for that year,” Petek’s analysis says. “Based on this, the administration’s estimates show operating deficits of approximately $10 billion annually from 2026-27 through 2029-30 (and) beginning in 2027-28, these deficits represent a continuing gap that will need to be addressed in future budgets.”

In other words, if Newsom’s final budget passes, he could walk out the door next January — and possibly start his 2028 presidential campaign — while claiming to have solved the problem he caused in 2022.

In reality, however, California’s fiscal dilemma will continue.

For those who don’t remember, Newsom loudly announced in 2022 that the state had a surplus of $97.5 billion based on a broad, multi-year revenue forecast that turned out to be a mirage. The administration later admitted it had overstated revenue by $165 billion, but by then Newsom and the Legislature had increased spending that could not be covered by actual revenue.

The structural deficit — a continuing gap between revenue and spending — has existed ever since, totaling $125 billion, according to Petek. While the newly revised budget will be balanced on paper, Petek says, the maneuvers to achieve this are temporary, not permanent, so the underlying imbalance remains, albeit somewhat smaller than previously estimated.

Petek also notes that one of the ways Newsom achieves short-term balance is by tapping into the state’s emergency reserves, both through transfers from current reserve funds and by deferring required deposits into those funds — thereby contributing to what Petek calls a “wall of debt” that has built up over years of deficit spending.

Reserves, according to Newsom’s revised budget, would shrink from $47.2 billion a year ago to $19.5 billion by June 2027.

The term “wall of debt” goes back to Newsom’s predecessor, Jerry Brown, who used it to describe what he faced when he began his second stint as governor in 2011. Brown cleared that debt and left Newsom with a healthy balance sheet eight years later. Newsom wants to end his governorship on the same fiscal note, but Petek says that’s essentially an illusion.

Petek proposed a series of amendments that would really straighten out the state’s finances, but said they would cost $24 billion in either reduced spending or increased revenue, and concluded, “The state’s current fiscal situation is truly unprecedented. Despite booming revenues, the budget position is overstretched, reflecting: a structurally higher cost basereduced reserves, an already built-up wall of debt and an operating deficit.”

He also warned that “a revenue shock could occur as the state’s revenue outlook is based disproportionately on AI-driven equity valuations, which are trading at highs last seen at the peak of the dot-com bubble.”

There is another aspect to the analyst’s somewhat bleak scenario – the legislators besieged by requests from advocacy groups that they reject spending cuts in Newsom’s budget, especially in health care, and increase spending even if it requires raising taxes.

It is, to use another phrase from the inimitable Jerry Brown, a “yeast situation.”

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