California Gov. Gavin Newsom unveiled last week the largest budget in state history, citing the state’s dominance — but budget watchdogs continued Monday to flag eerie warnings about the state’s potentially poor financial health.
The Legislative Analyst’s Office posted its initial reaction to Newsom’s revised budget plan of $349.9 billion in total spending, blasting the state for ignoring for several years “structural deficits” and putting the state in a “genuinely unprecedented” situation.
“Despite the current revenue boom, the state now faces a structural budget imbalance—meaning ongoing revenues are insufficient to support ongoing expenditures,” the report said.
It noted the higher-than-expected revenues this year that state Democrats have touted, thanks in part to a 50% growth in personal income taxes. California brought in $16.5 billion more in tax revenues than expected since January, largely because of capital gains tied to the stock market and the state’s booming AI economy.
Despite this positive detail, “when the state should be strengthening its fiscal position,” the budget plan instead relies on $20 billion in reserve withdrawals and suspended deposits plus $4 billion in borrowing, analysts noted.
Analysts gave Newsom credit for figuring out how to cut future deficits in half, when earlier in the year the analyst’s office had predicted future deficits between $20 billion and $30 billion per year.
“Despite this progress, the underlying budget condition is not sound,” the report said.
Any deficit signs during a revenue increase is a major red flag, analysts said. With the lower reserves and more debt, California is “ill prepared” for even a slight hiccup in revenues. Declines in the stock market and the economy could, in a worst-case scenario, land California in a $100 billion revenue hole.
A “revenue shock” could be coming, analysts warned, since a lot of it is now reliant on AI‑driven equity valuations that many economists said could be unstable in the long term.
Analysts recommended depositing billions into a budget stabilization account and ongoing actions to cut spending and increase revenues.
State Republicans called on Newsom and other Democrats to reject nearly $10 billion in discretionary spending commitments in response to the report.
“Families across California are expected to live within their means,” said Assembly Republican Leader Heath Flora. “Those families deserve a government that does the same.”
Newsom in his budget presentation said the budget is fiscally sound, and his office has been trumpeting the administration’s projected lack of a deficit.
Department of Finance spokesperson H.D. Palmer said in a statement that Newsom’s plan helps balance the budget over the next two years.
“The LAO proposes to put substantially more in reserves than even the May Revision — but fails to articulate and explain for the Legislature the significant policy implications of either the higher taxes or deep cuts that would necessarily be required to accomplish it,” Palmer said.
