California leaders project future deficits despite 'roaring' tax revenues

SACRAMENTO, Calif. (CN) — California’s top financial officer on Friday said the governor’s proposed budget has filled a deficit of almost $3 billion, a stark contrast to the legislative analyst’s forecast of an $18 billion shortfall.

Governor Gavin Newsom’s fiscal year 2026-27 budget calls for $248.3 billion in general fund expenditures. Constitutionally required spending for public schools and community colleges is much of the reason for a $10 billion increase over last year’s budget.

Joe Stephenshaw, director of the state’s Finance Department, said there are no new taxes in the proposed budget.

Pointing to what’s called a modest shortfall, financial officers said the budget contains no new significant spending proposals. Instead, it’s focused on funding existing programs.

That’s despite tax revenues being some $42.3 billion higher than initially forecast, a point Newsom highlighted in his State of the State address Thursday.

“This budget really is about an eye toward ensuring we have a sustainable fiscal plan going forward,” Stephenshaw added.

Stephenshaw delivered the formal budget presentation a day before Newsom’s administration is required to reveal it. At this early stage, the budget serves as a blueprint and is certain to change once lawmakers begin working on it and updated financial numbers become available.

An updated budget, called the May revise, is released each year in late spring after tax revenues are received by the state.

“[We] really want to wait and monitor the change in revenues and spending over the next few months,” Stephenshaw said.

“There’s going to be changes between now and May,” he added later.

The governor’s office in a statement highlighted $500 million in spending for the Homeless Housing, Assistance and Prevention program. It’s a program that local leaders have praised and called essential to fixing the state’s homelessness issue.

It also pointed to depositing $3 billion into the state’s rainy day fund, bringing its total to $23 billion.

“This budget reflects both confidence and caution,” Newsom said in a statement. “California’s economy is strong, revenues are outperforming expectations, and our fiscal position is stable because of years of prudent fiscal management — but we remain disciplined and focused on sustaining progress, not overextending it.”

According to Stephenshaw, his office has a different view of economic growth than the Legislative Analyst’s Office. He sees modest growth in the future while the analyst’s office assumes declining revenues over the next fiscal year.

Gabriel Petek, the state legislative analyst, said in November that he saw signs of a potential market downturn — people borrowing money to buy stock and a stock market at a 70-year high. However, he said he wasn’t predicting a downturn.

Despite that caveat, both Petek and Newsom’s finance department foresee larger deficits in future years.

Petek said the state could face deficits of between $30 billion and $35 billion in later fiscal years. Finance officials estimated around a $22 billion deficit in 2027-28, with deficits in the following two years as well.

Praise for the budget came from California Supreme Court Chief Justice Patricia Guerrero.

“The governor’s budget proposal includes much-needed investments to keep up with the rising costs of trial court operations, to increase funding for court-appointed appellate counsel representing indigent defendants, to reduce case backlogs and workload pressures in our appellate courts, and to advance critically needed new courthouse projects,” she said in a statement.

The budget calls for $5.3 billion for the judiciary in 2026-27.

Assembly Speaker Robert Rivas, a Salinas Democrat, and Assemblymember Jesse Gabriel, an Encino Democrat and chair of his chamber’s Budget Committee, expressed caution in a joint statement.

“Today’s roaring tax revenues may not last, so this moment also should be used to strengthen schools and accelerate much-needed housing construction,” they said. “Building more reserves now is key for the future, along with doubling-down on budget oversight to ensure responsible spending.”

Republicans roundly denounced Newsom’s proposal. State Senator Roger Niello, a Fair Oaks Republican and vice chair of his chamber’s Budget and Fiscal Review Committee, called it “dangerously optimistic” in a phone interview with Courthouse News.

Niello pointed to the large difference in deficit estimates between Petek and Newsom. He also pointed to rising expenses happening alongside rising revenues.

“To me, it seems like we’re running in place,” Niello said.

The senator chided Newsom for failing to include any dollars to fund Proposition 36, a voter-approved measure calling for tougher sentences in certain drug and theft cases.

The budget also has no money to pay back billions of dollars to the federal government on an unemployment insurance loan. That’s a debt Niello said falls on employers to repay.