Newsom Declares California Budget Victory, But State Legislative Analysts Office Disagrees
- Rex Ballard
- 15 hours ago
- 3 min read
LAO Warns of Reckless Reliance on Volatile Revenues, Reserve Depletion, and Painful Cuts
Governor Gavin Newsom hailed his May Revision to the 2026-27 state budget as a triumph of fiscal discipline, announcing on May 14 that California has eliminated its deficit for the current and next budget years, with the structural gap closed through July 2028. "No deficit this year. No deficit next year," Newsom proclaimed, framing the plan as protecting investments in healthcare, education, and essential services amid economic uncertainty.
Video: Governor Newsom Releases Revised Budget Plan (May 14, 2026)
Yet the state’s own nonpartisan Legislative Analyst’s Office (LAO) paints a far more cautious — and critical — picture. In its May 18 analysis of the May Revision, the LAO warns that the apparent balance rests on optimistic assumptions about AI/stock-driven revenues, heavy use of one-time measures, reserve draws, and targeted spending reductions that shift burdens onto public safety and vulnerable populations.
Boom-and-Bust Budgeting on Full Display
The May Revision benefits from roughly $16–17 billion in higher revenue estimates, largely from personal income taxes tied to stock market and AI gains. Newsom’s plan layers on modest new tax measures (~$1.3 billion in 2026-27, rising to ~$2.5–5 billion ongoing) while using $20 billion in reserve withdrawals/suspensions, $4 billion in new borrowing, and other maneuvers to project balance. With the massive out-migration that the state has been experiencing, coupled with several key businesses exiting the state, these increased revenue estimates are dubious.
General Fund spending has ballooned by over $100 billion since Newsom took office (to ~$248 billion), with massive increases in core areas:
K-14 Education: +$37 billion
Medi-Cal: +$25 billion
Developmental Services & In-Home Supportive Services: +$8 billion each
Child Care & Higher Education: Billions more
The LAO notes ongoing structural deficits of ~$10 billion annually persist despite the boom. “The existence of any operating deficits during a revenue boom of this magnitude is itself a warning sign.”
Spending Growth Charts (LAO Data)
Limited Budget Reductions Come at High Human Cost
While overall spending continues climbing, the few areas of restraint or cuts carry significant trade-offs:
Corrections (CDCR/Prisons): Savings from ongoing prison closures and population management (~$150 million+ per major closure). Critics argue this risks public safety by reducing the capacity to keep criminals locked up amid other justice reforms.
Medi-Cal: Hundreds of millions in reductions via reinstated asset tests for seniors and disabled adults, higher premiums for certain immigrants, benefit limitations (e.g., dental), utilization controls, and eligibility tweaks. These directly reduce benefits for seniors, people with disabilities, and other deserving citizens who are already facing federal pressures.
Child Care: Suspended expansions and COLAs, failing to deliver on promised new slots.
The LAO and advocates highlight that these “efficiencies” trade access to care and services for short-term savings, disproportionately affecting vulnerable Californians.
Underestimating Federal Funding Risks and State Oversight Failures
The budget further underestimates the risks posed by reduced federal matching funds. Federal changes have triggered General Fund backfills, and recent actions — including deferrals of Medicaid funds over fraud concerns in home health programs — highlight how the state’s failure to prevent corruption and waste is now costing taxpayers billions in lost federal support.
Critics contend the administration’s projections do not fully account for these escalating pressures.
Risky Assumptions and the AI Bubble Warning
The LAO urges much larger reserve deposits (~$20 billion) and additional solutions, warning of a potential $100 billion revenue hole in a dot-com-style bust. Newsom’s victory lap relies on temporary windfalls rather than sustainable alignment of revenues and spending.
This pattern of over-optimism echoes prior years. The Legislature must finalize the budget by mid-June 2026. While Democratic supermajorities make major changes unlikely, the LAO’s assessment underscores the risks: without genuine structural fixes, deeper reserves, and better oversight, the next downturn — compounded by federal funding shortfalls — could prove far more painful for Californians. Newsom’s declarations of fiscal discipline, detractors say, mask a budget built on rosy assumptions, depleted cushions, and cuts that hit public safety and the most deserving hardest.
Sources
LAO Report: The 2026-27 Budget: Initial Comments on the Governor's May Revision (May 18, 2026) — PDF | HTML
Governor’s Office May Revision Summary — gov.ca.gov
Additional LAO Spending Growth Analysis and Charts — lao.ca.gov publications
News Coverage: CalMatters, KQED, CapRadio
