California’s chronic deficit looms again as Newsom prepares his last state budget

Trump, however, had nothing to do with what state officials have described as a “structural deficit,” meaning that spending encased in current law outstrips revenue expectations. Rather, it stems from what officialdom later acknowledged as a $165 billion error in revenue projections in 2022 that fueled Newsom’s boast of having a $97.5 billion surplus. That, in turn, resulted in a sharp increase in spending.

When the surplus was exposed as a phantom, the state was stuck with a chronic income/outgo gap that persists. To cover it this year, Newsom and legislators tapped emergency reserves, borrowed money from the state treasury’s special funds, postponed some spending and engaged in some accounting gimmickry.

On Thursday, the Legislative Analyst Office pegged the budget’s total borrowing — on and off the books — at $21 billion.

Although this budget is less than 4 months old, the annual budgetary cycle will soon begin anew.

The Legislature’s budget analyst, Gabe Petek, will issue his annual overview of the state’s finances in a few weeks, followed in December by the Department of Finance’s finalization of parameters and Newsom’s decisions on how to spend what money he assumes the state will have, and in January by the introduction of the first draft of a 2026-27 plan.

It will be Newsom’s final budget before his second and final term as governor ends 14 months hence and he very likely embarks on a campaign for the White House.

All indications point to another year of coping with a multibillion-dollar deficit. Major revenues have been running a few billion dollars ahead of estimates in the current budget, but not nearly enough to markedly shrink the structural deficit.

“Despite the recent revenue strength, California’s budget condition remains fragile,” the state Assembly’s top budget advisor, Jason Sisney, said in a memo last week. “There are many indications that an investment bubble from the so-called ‘artificial intelligence’ industry is fueling recent tax revenue gains.”

Sisney correctly added that “Bubbles can lead to dramatic state tax revenue declines when they burst.” That’s what happened about a quarter-century ago when the “dot com” bubble burst, creating a large state budget deficit.

Having finessed the state’s chronic deficit over the last three years, Newsom and legislators have run up billions of dollars in debt by tapping special funds and must also account for spending deferrals and other maneuvers as they write his final budget. They also must contend with the effects of depending heavily on emergency funds — including $7.1 billion in the current budget — to cover shortfalls.

“Most of the state’s rainy day fund has been used to balance the last two budgets, and the state’s large cash balances largely are unavailable to help fix a structural deficit in the General Fund,” Sisney observes.

The bottom line is that if revenues don’t increase quickly and sharply, Newsom and legislators will face the same chronic deficit, plus added pressure to offset cuts in federal funds for education, social and medical services that Trump and Congress are making. What they do, or don’t do, will accompany Newsom as he plunges into national politics.

Dan Walters has been a journalist for more than 60 years, spending all but a few of those years working for California newspapers. He began his professional career in 1960, at age 16, at the Humboldt Times. CalMatters.org is a nonprofit, nonpartisan media venture explaining California policies and politics. He can be reached at dan@calmatters.org.