Newsom’s budget shows a revenue gain. is it real

from Dan WaltersCalMatters

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When Governor Gavin Newsom announced today that the state will likely receive an additional $42.3 billion in tax revenue over the next three years, easing a stubborn budget deficit, a famous observation by the inimitable Yogi Berra came to mind.

“It’s like déjà vu all over again,” Berra quipped in 1961 after watching Mickey Mantle and Roger Maris, the New York Yankees’ star players, hit back-to-back home runs.

Four years ago, as the state’s economy recovered from a pandemic-induced downturn, state revenues saw a brief upward spike. Someone in the administration, perhaps Newsom himself, decided that the surge in revenue would be permanent and that this means a surplus of $97.5 billion over several years.

“No other state in American history has had a surplus as large as this one,” Newsom boasted as he unveiled a budget for fiscal year 2022-23 that topped $300 billion.

Newsom’s announcement sparked a spending spree that increased spending by $14 billion. But revenue never reached the projected level, and his finance department eventually — and very quietly — admitted that the administration had overstated revenue by a whopping $165 billion over four years.

The extra spending that outpaced real revenue created what has been called a “structural deficit” in the $20 billion annual range since then, covered by an array of accounting gimmicks, spending deferrals and raids on special funds and emergency reserves.

A few weeks ago, the Legislature’s budget adviser, Gabe Petek, projected an $18 billion deficit for the 2026-27 fiscal year, which would later grow to $35 billion.

The draft budget that Newsom CFO Joe Stevenshaw outlined today would increase spending by $27 billion in the current year to $321 billion, including a $248.3 billion general fund, an increase of $20 billion.

The revenue increase projection that Newsom mentioned in his State of the State address Thursday would cover all but $2.9 billion of the new spending plan, Stephenshaw said.

Put simply, if the projected $42.3 billion increase in budget revenue is real, Newsom could end his term as governor — and possibly move on to a presidential campaign — with the state’s finances no longer plagued by deficits.

Balancing the budget would also strengthen Newsom’s opposition to calls from left-wing lawmakers and activists in his own party for tax increases to cover the shortfall and President Donald Trump’s cuts to federal health and welfare support.

However, we have seen the corrosive effects of overestimating earnings in 2022, so the new forecast should be viewed with skepticism.

Newsom hedged his bets by presenting the budget as a container that covers little more than spending increases driven by the law, inflation and workloads until more revenue data is available.

“Although the budget is balanced in fiscal year 2026-27, with a discretionary reserve of $4.5 billion, it projects a deficit of approximately $22 billion in fiscal year 2027-28 and shortfalls in the following two years,” the draft states. “The administration intends to build on this budget proposal in May with a revised plan — reflecting updated revenue and spending data — that balances the budget in both fiscal years 2026-27 and 2027-28 with adequate budget reserves.”

Having been badly burned by his phantom surplus in 2022, Newsom is clearly aware that a repeat would be politically poisonous. His more cautious approach was symbolized by the way the budget was presented.

In years past, Newsom personally reviewed the budget, almost line by line, in presentations that sometimes lasted three hours. This time, he sent Stephenshaw to face reporters and characterize the budget as a draft that will be updated in May as Newsom and the Legislature face a June 15 constitutional deadline for it to take effect.

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