And though a sudden surge in tax gains from artificial intelligence companies\u2019 booming stock prices allowed Newsom to balance the budget for the next two years and lower projected structural deficit going forward, fiscal analysts emphasized Monday the gap between spending and tax revenues persist.<\/p>\n
Last week, Newsom said he was \u201ccutting deficits, not corners,\u201d and leaving the state\u2019s books in good shape for the next governor<\/a>. He also proposed new investments in public education, and funds to bolster wildfire recovery and soften the impact of federal cuts to healthcare and social services.<\/p>\n But during a moment of booming revenues, California should be socking money away for the next downturn, not dipping further into its reserves, LAO officials wrote in their first response to Newsom\u2019s May revisions to his budget, which he made public on Thursday, May 14. Instead, they calculated he is burning $20 billion in savings, both through withdrawing from reserve accounts and again pausing some deposits back into savings.<\/p>\n \u201cThe underlying budget condition is not sound,\u201d the report read. \u201cFirst, the existence of any operating deficits during a revenue boom of this magnitude is itself a warning sign. Further, given the state\u2019s diminished reserves and already accumulated wall of debt, California is ill\u2011prepared for even a slip up in revenues.\u201d<\/p>\n Republican lawmakers pointed quickly to the report as backing their contention that Newsom and lawmakers have been balancing the budget using accounting gimmicks.<\/p>\n \u201cAssembly Republicans have been warning for years that Sacramento is addicted to spending money it does not have,\u201d Assembly Republican Leader Heath Flora, R-Ripon, said in a statement Monday. \u201cDemocrats spent every surplus dollar they could get their hands on, drained reserves, and left California dangerously exposed when the economy slows down.\u201d<\/p>\n Newsom\u2019s plan banks money from the sudden revenue boom to avoid cuts, avoids significant new spending and does put money into reserves, a spokesperson for the governor said.<\/p>\n Legislative analysts, meanwhile \u201cfailed to articulate and explain for the Legislature the significant policy implications of either the higher taxes or deep cuts that would necessarily be required,\u201d to put money into reserve accounts in the amount they recommended, Newsom spokesperson H.D. Palmer said.<\/p>\n The Legislature\u2019s fiscal analysts have been warning all year that the current AI boom appears to be an unsustainable bubble<\/a> that could be followed by a significant stock price drop off.<\/p>\n Comparing the AI investment boom to the dot-com bubble in the 1990s when stockbrokers inflated the value of technology stocks, the analysts predicted a comparable market crash could quickly leave the state in a $100 billion revenue hole.<\/p>\n \u201cUsing this year\u2019s budget to build resilience would allow the state to weather this kind of shock without immediately needing to turn to tax hikes or cuts to ongoing services,\u201d the fiscal analysts wrote.<\/p>\n They recommended the Legislature deposit $20 billion back into reserves and reject Newsom\u2019s $4 billion deferral from education funding.<\/p>\n They also said lawmakers should reject Newsom\u2019s new discretionary spending proposals.<\/p>\n Lawmakers could find $10 billion by rejecting a Newsom proposal to deposit around that amount in a unique reserve account for just one year. Newsom then proposes spending that $10 billion in the next year\u2019s budget, according to the LAO report \u2014 in essence, making a quick deposit to carry some of this year\u2019s surplus over for next year\u2019s budget.<\/p>\n Instead, the LAO report proposed lawmakers put that amount into longer lasting reserve accounts, and account for the $10 billion in spending when they do next year\u2019s budget.<\/p>\n Both those moves \u2014 rejecting the spending cuts and saving away the $10 billion \u2014 would leave lawmakers looking for $10 billion more if they don\u2019t want to draw down reserves this year.<\/p>\n That is a challenging task, politically. Lawmakers have indicated little willingness to find deep spending cuts themselves, and progressive lawmakers<\/a> as well as Senate leadership<\/a> have expressed an interest in spending more than Newsom did to protect the state\u2019s social safety net from President Donald Trump and congressional Republicans\u2019 One Big Beautiful Bill Act.<\/p>\n This story was originally published May 18, 2026 at 5:28 PM.<\/p>\n Related Stories from Sacramento Bee<\/p>\n