Dan Walters
In the four months since the legislature and Gov. Gavin Newsom enacted a new state budget, revenues — primarily from personal income taxes — have outstripped expectations by several billion dollars.
The uptick has buoyed hopes within the Capitol that California’s chronic budget deficits might disappear if the revenue surge continues. That would spare Newsom and legislators from having to dream up more accounting gimmicks, deferrals and loans to cover the gap between income and outgo.
However, the legislature’s fiscal advisor, Legislative Analyst Gabe Petek, threw cold water on those rosy scenarios Wednesday. He sees recent revenue gains as a spike driven by an artificial intelligence boomlet in Silicon Valley that’s likely to implode, as have previous tech-related bubbles.
“With so much exuberance surrounding AI, it now appears time to take seriously the notion that the stock market has become overheated,” Petek says in his annual fiscal overview, which predates the governor’s introduction of a new budget. “History suggests that the stock market is prone to overreact to major technological advances, even if the technology itself turns out to be revolutionary.”
Instead of savoring a surge in revenues that would erase what officials are calling a “structural deficit” that is somewhere in the $10 billion-$20 billion range, officials should anticipate a larger gap, Petek said.
“Under our revenue and spending estimates, the legislature faces an almost $18 billion budget problem in 2026‑27,” Petek said. “This is about $5 billion larger than the budget problem anticipated by the administration in June, despite improvements in revenue.”
The analyst notes that California’s constitution requires the state put money toward public schools and reserves, which will “almost entirely offset revenue gains,” and toward other spending that’s running about $6 billion over the current budget’s estimates.
“Starting in 2027‑28, we estimate structural deficits to grow to about $35 billion annually due to spending growth continuing to outstrip revenue growth,” Petek said.
It should be noted, not for the first time, that California’s chronic deficit is not caused by an economic downturn, which has occurred in the past, but rather by an enormous error by Newsom and his budget advisors three years ago.
In 2022, they projected a permanent increase in revenues, based on a one-time spike, leading Newsom to declare a $97.5 billion budget surplus, boasting “No other state in American history has ever experienced a surplus as large as this.”
Confident that the money would be there, Newsom and lawmakers fattened up the spending side of the budget, only to learn that the supposed surplus was based on what was later acknowledged to be a $165 billion overstatement of revenues over four years.
Ever since, revenues have failed to cover the elevated spending, and Newsom and lawmakers have covered the gaps with the aforementioned gimmicks. They have incurred more than $20 billion in internal loans from special funds that must be repaid. They also have drawn down reserves that were supposed to cover genuine emergencies, not political shortsightedness.
Newsom and his staff are now in the final throes of drafting an initial 2026-27 budget that will be his last as governor and will be unveiled in January. The question is whether he will face the fiscal music and finally write a truly balanced budget or employ more short-term fixes and dump the problem on his successor.
That would mean either making real cuts in spending or raising taxes, both of which would take some courage. The past has not been encouraging.
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.
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(12) comments
Maybe the state government should stop doing everything they can to push out and destroy Silicon Valley and capitalism?
"Capitalism" doesn't exist, it never has. It's a "philosophy" like Marxism, that has never worked in practice. And if someone thinks Capitalism works, I want to give a few examples how often it already failed in America:
- Great Depression
- Black Monday
- Dot.Com crash
- Great Recession and Financial Crisis
- Pandemic
- bailing out banks, airlines, and soon silicon valley companies when the AI bubble bursts.
- each time you hear "Too Big To Fail"
- Car-Centric infrastructure
easygerd - all systems come with risks but I dare you to mention one that has performed better than capitalism for the general good. Capitalism has proven to have an internal recovery feature as well. It has also allowed you to veer off your expertise which seems restricted to bicycle paths.
TBot, the "stock market" isn't Capitalism, the Stock Market is a Casino, where unregulated hedge fund managers are running one con job after another. The new one is called "AI Bubble", where the tech-bros created a circular economy to drive up each other's stock price until the bubble burst and they have to move into their bunkers in New Zealand.
Dirk, whenever you try to insult someone your are already admitting you ran out of arguments.
The US is currently run by a man that went 6 times bankrupt. If this was real capitalism, he would be paying for his debt. Instead he is allowed to stiff his debtors - society basically paid his debt ("socialism"). The government just bought stakes in various private companies - so now the proletariat is owning Intel.
Each time the government has to interfere to bail out some oligarchs and his toys - the system failed.
Which systems work better?
Government is for the people, so clearly European and Asian countries with a solid mix of regulated Capitalism and affordable Socialism win this one.
And yes, most of these countries to have bike lanes. They make people much happier.
eGerd – TBot here. You’re becoming more hilarious. As time passes, you’re veering off your expertise (if you can call it that), as Mr. van Ulden notes, on your pet issue of bicyle paths and instead, are tossing out lies and unfounded narratives and hoping something sticks. Sorry, eGerd, hypocrisy doesn't stick. To wit, if the “stock market” isn’t capitalism, then why did you list them in your above rant about “capitalism” not existing? I didn’t realize hedge fund managers ran index funds. Oh wait. Nobody runs index funds. The government doesn’t own Intel, only a 10% stake. Trump has never filed for bankruptcy. Which oligarchs and their toys did our government bail out? And really, back to the debunked Russian thing?
Which system works better? We’ve already answered that – capitalism. Almost 250 years thus far. Your false narrative doesn’t convince anyone of any other system. You may want to stick with your bike lane shtick or take the Thanksgiving break to study up on financial markets. Thank you in advance.
TBot - if "Capitalism" was so great, why is the "Leader of the Free World" giving away a free, democratic, capitalistic country to a Russian "Communist"?
Why does he want to help "Make Russia Great Again"?
eGerd – TBot here. You’ll need to clarify. As it is now, your response reminds me of Biden taking two knees (or maybe he slipped because he thought he was going up stairs) and gifting Afghanistan to the Taliban. I didn’t realize the Taliban was filled with Russians. And Russia did become great again after getting the tacit okay from Biden to invade Ukraine. I hope you had a great Thanksgiving break with family and friends.
eGerd – TBot here. You list examples of how you think capitalism doesn’t work but what about the other 58,000+ days the stock market has been open. And how about the almost 250 years of capitalism working. Sorry, but the successes far outweigh your cherry-picked failures. To borrow from FFGig (who we haven’t heard from in a while, I hope he's okay), “End of discussion. Next.” Of course, you’re always welcome to move to another country or buy an island and be master of your island universe. Or send me the gains you’ve achieved through our financial markets. Thank you in advance.
easygerd - I did not intend to insult you but I do not agree with your premises. The European countries were able to finance their social welfare systems at the expense of their own security. That security was provided by you and me through our tax dollars that paid for our military over there. You need to find out that, since Trump is pulling the rug from under those freebies, they are now ramping up their military and cutting the lavish social welfare benefits. Clearly a blend of socialism and capitalism is preferred but when one or the other swings too far, a correction takes place. The Dutch are now facing a hard reality that their entitlement programs are running out of steam. The only way to pull them out of it is growing the economy through capital investment which in turn will provide taxable income streams. BTW, the safety and the tranquility of their bicycle paths are now being jeopardized by the massive proliferation of e-bikes. Even the Dutch youths are now getting fat. It appears that folks prefer capitalism over their boring, predictable and socially engineered lifestyles. To top this off, here is a quote from the Woke's favorite Founding Father, Hamilton; “a dangerous ambition more often lurks behind the specious mask of zeal for the rights of the people than under the forbidding appearance of zeal for the firmness and efficiency of government”. Obama and Biden are quite well identified in his Federalist Paper's warning.
These European countries had a contract with the US. For the longest time these European and Asian countries didn't want a strong Germany, Italy, Japan because of Fascism and such (remember when Fascism was considered bad and being anti-fa was considered good? Good times).
Anyways, so the US promoted NATO as a counterpart to the Soviet Union or rather the Warsaw Pact.
In turn these European countries bought a ton of US military equipment and were forced to buy into US culture (hollywood, chewing gum, Folgers, GM, Ford, Fast Food, etc.). The US made always sure to bully their own products and companies into any contract they had with other countries.
Those contracts usually benefitted both sides until of course the latest Administration laid down and suddenly embraced Fascism themselves AND caters to a communist strongman, who clearly seems to have something on the current Commander in Chief.
Now instead of defending freedom, he wants to give Europe away to the Communists. Very interesting, very weak negotiating skills for an American president and "leader of the free world".
Btw. the Europeans also figured out that they were too depended on the American techworld - maybe creating their own Apps - like China did - will suit them better.
But you are correct, it clearly is time for them to stop looking to an US President who seems to be the puppet of a Russian strongman. Hopefully they see the signs that "Capitalism" is just another word for "Oligarchy" or "Communism for the Rich".
Thanks for your column, Mr. Walters, highlighting the disastrous reign of wannabe dictator Newsom. I’m betting that Newsom will submit another budget which uses accounting tricks to push his trash budget down the road for the next governor, if Democrat, to likely do the same. Rinse and repeat. Fortunately those who have the means will move to better governed states.
Life under Democrat rule. Yes, most of us a plotting our escape from California, and Sacramento's Democrat super majority.
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