Last week Gov. Gavin Newsom proposed a revised version of his eighth and final state budget, which he said would not only be balanced for the 2026-27 fiscal year but also for his successor’s first year.
“I’m not trying to get out of Dodge,” Newsom said. “This is a balanced budget structurally for the next 18 months after I’m gone.”
On Monday, the Legislature’s budget analyst, Gabe Petek, said Newsom accomplished that with the use of one-time resources, such as reserves, and other budgetary maneuvers that will continue the “structural deficit” that has plagued the state for the last four years.
“A budget is structurally balanced when revenues collected in a given fiscal year are sufficient to cover expenditures planned for that same year,” Petek’s analysis says. “On this basis, the administration’s estimates show operating deficits of roughly $10 billion annually from 2026‑27 through 2029‑30 (and) beginning in 2027-28 these deficits represent the ongoing gap that would need to be addressed in future budgets.”
In other words, if Newsom’s final budget is enacted, he could walk out the door next January — and presumably begin his 2028 campaign for president — while claiming to have solved the problem that he caused in 2022.
However, in reality California’s fiscal dilemma will continue.
For those who don’t recall, Newsom loudly proclaimed in 2022 that the state had a $97.5 billion surplus based on an expansive, multi-year revenue projection that turned out to be a mirage. The administration later acknowledged it had overestimated revenues by $165 billion, but by then Newsom and the Legislature had ramped up spending that could not be covered by real revenues.
The structural deficit — an ongoing gap between income and outgo — has existed ever since, totaling $125 billion, according to Petek. While the newly revised budget would be balanced on paper, Petek is saying, the maneuvers to achieve that are temporary rather than permanent, so the underlying imbalance continues, albeit somewhat smaller than previous estimates.
Petek also notes that one way Newsom achieves short-term balance is by tapping into the state’s emergency reserves, both through transfers from the current reserve funds and deferrals of mandatory deposits into those funds — thus contributing to what Petek terms “a wall of debt” that has been amassed during the years of deficit spending.
Reserves, under Newsom’s revised budget, would shrink from $47.2 billion a year ago to $19.5 billion by June 2027.
The term “wall of debt” harkens back to Newsom’s predecessor, Jerry Brown, who used it to describe what he confronted as he began his second stint as governor in 2011. Brown cleaned up that debt and left Newsom a healthy balance sheet eight years later. Newsom wants to end his governorship on the same fiscal high note, but Petek is saying, in essence, that’s an illusion.
Petek suggests a series of amendments that would truly put the state’s finances in order but says they would cost $24 billion in either reduced spending or increased revenues and concludes, “The state’s current fiscal situation is genuinely unprecedented. Despite booming revenues, the budget position is overextended, reflecting: a structurally higher spending base, diminished reserves, an already accumulated wall of debt, and an operating deficit.”
He also warns that “a revenue shock could be coming, as the state’s revenue outlook rests disproportionately on AI‑driven equity valuations that are trading at highs last seen at the peak of the dot‑com bubble.”
There’s still another aspect to the analyst’s somewhat gloomy scenario — legislators are being besieged by demands from advocacy groups that they reject the spending reductions in Newsom’s budget, especially in healthcare, and increase outlays, even if that requires increasing taxes.
It is, to use another phrase from the inimitable Jerry Brown, a “yeasty situation.”
