California’s Legislative Analyst reacts to Newsom’s budget proposal

Days after Gov. Gavin Newsom’s administration presented his proposed spending plan for the upcoming year, the Legislative Analyst’s Office (LAO) released a scathing response suggesting the governor’s budget could put California in an “alarming” and financially risky situation. The LAO is a nonpartisan state office that advises the California Legislature when it comes to the use of taxpayer dollars and state laws. In November, it forecast a state budget shortfall of $18 billion. The LAO built the projection around the possibility of an economic downturn and a possible cooling of the stock market. California heavily relies on capital gains for a huge bulk of its tax revenue.Gov. Newsom’s administration last week painted a more optimistic picture of California’s financial situation in the coming year, projecting a much smaller $2.9 billion budget deficit with more revenue coming in than expected. The governor’s forecast banks on the stock market continuing to do well with the help of AI and tech and does not include the possibility of a downturn. The LAO also noted part of the reason why the office expects a steeper shortfall than Newsom is because the state has been spending more money than expected over the last six months. The office noted Newsom’s spending plan also includes $600 million in new spending. “Several historically reliable signs suggest the stock market is overheated and at high risk of reversing course into a downturn in the next year or so,” LAO’s report reads. “Should a stock market downturn occur, income tax revenues would fall considerably. These risks are severe enough that not incorporating them into this year’s budget, as the Governor proposes, would put the state on precarious footing.”The LAO’s report went on to call the state’s shortfall situation chronic, stating its November forecast is the most negative one since the COVID-19 pandemic. This is the fourth year in a row that California is facing a projected deficit.The LAO said the trends “raise serious concerns about the state’s fiscal sustainability.” On the topic of a multiyear deficit, the LAO states the Newsom administration acknowledges the deficits but does not actually address how to solve them. The estimates for the multiyear deficits range from $20 billion to $35 billion annually. The LAO called this “alarming” and noted the governor’s budget doesn’t “materially address” the issue. Gov. Newsom announced during his state of the state address that California has brought in $42 billion more than expected in revenue over a three-year period. The LAO said that figure is $30 billion higher than what the LAO’s fiscal outlook suggests. The LAO said the administration’s confidence in the $42 billion estimate is the main driving difference between the two projected shortfalls. Read the full LAO overview here. “We’re going to really dig in on the governor’s budget,” said Assemblyman Jesse Gabriel, D-Encino, who is the chairman of the Assembly’s Budget Committee. “We’re going to do our homework to understand what we need to do to not only balance the budget this year, which we need to do by law, but make sure the state is on firm fiscal footing moving forward.” “I believe the governor could have played in the NFL because he’s a punter and he’s punting all of these issues to the next legislative session to the next governor of this state and we’re going to have some massive issues going into the future,” said Assemblyman David Tangipa, R-Fresno, who is also a member of the budget committee. “It’s one thing I’ve talked to my colleagues about: we should handle this now.” H.D. Palmer, Newsom’s deputy director for external affairs in the state’s Department of Finance, provided KCRA 3 with this lengthy statement in response. 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. See more coverage of top California stories here | Download our app | Subscribe to our morning newsletter | Find us on YouTube here and subscribe to our channel

SACRAMENTO, Calif. —

Days after Gov. Gavin Newsom’s administration presented his proposed spending plan for the upcoming year, the Legislative Analyst’s Office (LAO) released a scathing response suggesting the governor’s budget could put California in an “alarming” and financially risky situation.

The LAO is a nonpartisan state office that advises the California Legislature when it comes to the use of taxpayer dollars and state laws. In November, it forecast a state budget shortfall of $18 billion. The LAO built the projection around the possibility of an economic downturn and a possible cooling of the stock market. California heavily relies on capital gains for a huge bulk of its tax revenue.

Gov. Newsom’s administration last week painted a more optimistic picture of California’s financial situation in the coming year, projecting a much smaller $2.9 billion budget deficit with more revenue coming in than expected. The governor’s forecast banks on the stock market continuing to do well with the help of AI and tech and does not include the possibility of a downturn.

The LAO also noted part of the reason why the office expects a steeper shortfall than Newsom is because the state has been spending more money than expected over the last six months. The office noted Newsom’s spending plan also includes $600 million in new spending.

“Several historically reliable signs suggest the stock market is overheated and at high risk of reversing course into a downturn in the next year or so,” LAO’s report reads. “Should a stock market downturn occur, income tax revenues would fall considerably. These risks are severe enough that not incorporating them into this year’s budget, as the Governor proposes, would put the state on precarious footing.”

The LAO’s report went on to call the state’s shortfall situation chronic, stating its November forecast is the most negative one since the COVID-19 pandemic. This is the fourth year in a row that California is facing a projected deficit.

The LAO said the trends “raise serious concerns about the state’s fiscal sustainability.”

On the topic of a multiyear deficit, the LAO states the Newsom administration acknowledges the deficits but does not actually address how to solve them. The estimates for the multiyear deficits range from $20 billion to $35 billion annually. The LAO called this “alarming” and noted the governor’s budget doesn’t “materially address” the issue.

Gov. Newsom announced during his state of the state address that California has brought in $42 billion more than expected in revenue over a three-year period. The LAO said that figure is $30 billion higher than what the LAO’s fiscal outlook suggests. The LAO said the administration’s confidence in the $42 billion estimate is the main driving difference between the two projected shortfalls.

Read the full LAO overview here.

“We’re going to really dig in on the governor’s budget,” said Assemblyman Jesse Gabriel, D-Encino, who is the chairman of the Assembly’s Budget Committee. “We’re going to do our homework to understand what we need to do to not only balance the budget this year, which we need to do by law, but make sure the state is on firm fiscal footing moving forward.”

“I believe the governor could have played in the NFL because he’s a punter and he’s punting all of these issues to the next legislative session to the next governor of this state and we’re going to have some massive issues going into the future,” said Assemblyman David Tangipa, R-Fresno, who is also a member of the budget committee. “It’s one thing I’ve talked to my colleagues about: we should handle this now.”

H.D. Palmer, Newsom’s deputy director for external affairs in the state’s Department of Finance, provided KCRA 3 with this lengthy statement in response.

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.

See more coverage of top California stories here | Download our app | Subscribe to our morning newsletter | Find us on YouTube here and subscribe to our channel