The Legislative Analyst’s Office is raising an eyebrow and questioning the long-term wisdom of Gov. Gavin Newsom’s proposed 2026-27 budget package in an analysis of the plan released this week.
In essence, the LAO highlighted the state’s reliance on the “overheated” stock market as a significant fiscal staple of the proposal, while raising concerns about overspending and the failure to address what it called “alarming” and “chronic” multiyear deficits.
The LAO notes that the administration’s $3 billion deficit prediction for the upcoming budget year is rosier than its own November predictions that put the state’s financial shortfall at around $18 billion. This, the report notes, is due to the administration’s high revenue projections.
Under the budget proposal and revenue assumptions, LAO said California would run operating deficits between $22 billion and $27 billion from 2027-30. LAO projections put those same deficits in excess of $35 billion annually.
The proposed budget package, which is likely to face a bit of a reality check during the May revision, relies too heavily on an AI-driven and “overheated” stock market for tax revenue generation, the LAO warned, noting that the market’s current trajectory is likely not sustainable over the coming years.
“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 analysis reads.
While the office noted the administration’s acknowledgement of budget challenges, the actions the governor suggests to counter them are insufficient. Newsom’s proposals to counter the downside revenue risk include a “settle-up proposal,” which would only cover the 2025-26 budget year, and a review of the budget conditions during the May revision process.
“On an ongoing basis, the governor’s budget proposes about $5 billion in spending solutions. However, these fall well short of the amount needed to substantially address future deficits,” the report reads.
As far as the LAO is concerned, the administration needs to take more conservative steps to avoid the repetition of financial crises like the ones that faced the state after the dot-com bubble popped and following the Great Recession. The office recommended adoption of its revenue outlook, balancing the budget against that projection and taking steps to address the identified multiyear deficits, which could include spending reductions and revenue increases.
“Today, without action to realign ongoing expenditures with ongoing revenues, the risk of repeating history looms large,” the LAO said.
LAO Pumps the Brakes on Newsom’s Rosy Budget Outlook
Gov. Gavin Newsom's proposed budget is getting a concerned look from the Legislative Analyst's Office in a report that outlines deficit trends and over-reliance on what it called an "overheated" stock market for revenue.
