The Department of Finance said the LAO’s analysis goes a step further than they would agree with.

CALIFORNIA, USA — California’s budget outlook may be more precarious than the governor’s proposed spending plan suggests, according to a new overview released by the Legislative Analyst’s Office.

The analysis follows Gov. Gavin Newsom’s unveiling of his proposed $348.9 billion budget for the 2026-27 fiscal year. The plan projects a roughly $2.9 billion shortfall, which is a smaller gap than the $18 billion shortfall the LAO estimated in its November outlook. The Department of Finance previously said the difference was driven largely by stronger-than-expected revenue estimates.

The governor’s budget assumes higher revenues because it doesn’t factor in what the office views as a strong risk of a stock market downturn, according to the LAO. Those higher revenues, however, are offset by higher spending under the administration’s assumptions and estimates.

The LAO also warned that the stock market could be overheated and at high risk of reversing into a downturn within the next year or so. If that happens, the office said income tax revenues would fall and not accounting for that risk in the budget would put the state on “precarious footing.” Even under the administration’s estimates, the LAO said the budget is only roughly balanced in the near term.

Beyond the current year, the LAO described the state’s multiyear budget outlook as alarming. Both the LAO and the administration expect ongoing deficits ranging from $20 billion to $35 billion annually. The LAO said those deficits are concerning for several reasons, such as the state’s negative fiscal outlook becoming chronic and deficits that have continued despite growth in the economy and revenues.

In response to the report, H.D. Palmer, spokesperson for the Department of Finance, provided the following statement:

The Governor’s Budget is clear: a pullback in the financial markets is a real risk, which is why the proposal is built on modest, below-average revenue growth and a prudent fiscal posture. The LAO goes a step further that we respectfully disagree with – assuming a high-probability market downturn and building that assumption directly into its revenue forecast.  Based on actual revenue receipts and the moderately improved economic conditions since last year’s budget, the Administration does not believe data support that level of pessimism.  Both the Administration and the LAO will revisit their revenue estimates as part of the May Revision, when more complete and current data will be available.

The Governor’s Budget is balanced for the coming fiscal year and includes $23 billion in combined reserves to protect against volatility.  The Administration has also been explicit that additional solutions will be presented in May to address the projected shortfall in the following year.  In the meantime, we look forward to reviewing any meaningful proposals the Analyst puts forward on how to close the multiyear gap and keep the state on a sound fiscal footing.

California budget questions follow Newsom’s State of the State

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