California legislative watchdog mostly agrees with governor's budget projections

SACRAMENTO, Calif. (CN) — California’s legislative analyst on Monday signaled that Governor Gavin Newsom’s proposed budget is balanced and his use of fund reserves reasonable, but pointed to dark clouds on the fiscal horizon.

The Legislative Analyst’s Office in its report on the governor’s budget called the fiscal year 2025-26 budget roughly balanced. The differences in its and the governor’s financial estimates are small and don’t affect the analyst’s opinion.

However, the analyst’s office noted that it doesn’t think the budget has a surplus or deficit at this stage. That’s a different take from Newsom’s administration, which on Friday said that the state had a modest surplus of $363 million.

On Friday, state Finance Director Joe Stepenshaw said that the budget calls for $322.2 billion in spending. California has $16.9 billion in reserves.

The current budget is a proposal and will undergo change as it moves through the Legislature. The state must pass a budget by mid-June.

The analyst’s office wrote that while Newsom’s revenue estimates are higher than its own, it considered those estimates reasonable because of collection trends. Newsom has said he anticipates some $16.5 billion in higher tax revenues.

“That being said, we continue to be concerned that recent gains are on shaky ground,” the analyst wrote. “These gains are not tied to improvements in the state’s broader economy, which has been lackluster, with elevated unemployment, a stagnant job market outside of government and health care, and sluggish consumer spending. Instead, the gains appear largely tied to the booming stock market, a situation which can change rapidly and without warning.”

The analyst’s office recommended lawmakers recognize those risks and not rely heavily on a stock market rebound until the state’s broader economy improves.

The governor in his budget has offered some $2.2 billion in general fund savings. He also proposes $570 million in new general fund spending, which would equate to some $300 million in ongoing spending after 2025-26.

Part of that new spending includes partially restoring funding to trial courts, which would lead to a $42 million ongoing cost.

While the governor’s budget is balanced for 2025-26, both the analyst and Newsom’s offices foresee future deficits. Newsom’s office has estimated a $13 billion deficit in 2026-27, $19 billion one in 2027-28 and $15 billion gap in 2028-29. The analyst called Newsom’s projections smaller than its own, but noted they’re comparable.

Last fiscal year, Newsom faced a massive budget gap. That gap was filled, as was an anticipated deficit in the 2025-26 fiscal year budget.

“This is one of the key reasons that the budget remains balanced now,” the analyst wrote.

The analyst’s office called the use of the rainy day fund a reasonable choice, noting that Newsom and lawmakers only used about half of those reserves.

The office recommends lawmakers maintain their momentum for solving future budget problems, which could prove difficult. That’s because state revenues haven’t reached the level of its expenditures, that growing expenditures will exceed growth in revenue, and the fact that the 2025-26 budget is only balanced because lawmakers took action last year.

That action included pulling from reserves and reducing temporary spending.

“This means that, going forward, decisions to balance the budget will involve more difficult trade-offs,” the analyst wrote. “We recommend the Legislature use the next few months to review program performance to develop its own approach to addressing the deficits.”

Republicans have pushed back against Newsom’s budget, saying he and Democratic lawmakers are focusing on a special session to Trump-proof the state instead of the wildfires raging in the Los Angeles area.

Assemblymember Tom Lackey, a Palmdale Republican, said in a Monday statement that Newsom’s budget underfunds essential wildfire prevention and mitigation efforts.

“This budget is yet another disappointing continuation of the governor’s ineffective policies — investing in failed programs that have exacerbated homelessness, energy and housing costs,” Lackey said. “Meanwhile, critical areas like public safety and wildfire prevention remain dangerously underfunded, leaving our communities vulnerable.”

Contacted Monday, the governor’s office pointed to a Friday statement from Newsom.

“In the months ahead, California is facing a new federal administration that has expressed unreserved and uninformed hostility toward Californians, threatening the funding of essential services for political stunts,” the governor said. “Continued global instability and the prospect of another downturn in the financial markets, as well as additional pressure on state expenditures, are warning signs to remain vigilant and prudent.”