California lawmakers, officials discuss state's $16.9B deficit

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(The Center Square) – Officials from the Legislative Analyst’s Office told lawmakers on Tuesday that despite California Gov. Gavin Newsom’s latest budget proposal, lawmakers need to consider the “gray cloud in the silver lining” as they work on the final version of the budget this summer.

“I once heard that the job of a budget analyst is to find the gray cloud in every silver lining, so unfortunately, along with the silver linings of revenues, we see quite a bit of gray clouds on the horizon,” said Rachel Ehlers, deputy legislative analyst for the Legislative Analyst’s Office.

The gray clouds come in the form of the LAO's projected deficit of $16.9 billion. That's the operating deficit adjusted for the LAO revenue estimate.

“Despite these booming revenues, the state’s underlying fiscal condition, in our assessment, is not sound. We continue to have a structural deficit, both for the coming budget year, '26-27, as well as forecast for '27-28, even under the governor’s proposals," Ehlers told the Assembly Budget Subcommittee on Climate Crisis, Resources, Energy and Transportation.

In other words, planned expenditures exceed projected revenues, Ehlers said.

“Really, the only way the budget proposal before you is balanced is by relying on reserves,” Ehlers added during the hearing. “Under the governor’s proposal, both withdrawals from reserves, as well as suspended requirements to put money into reserves, totals $20 billion.”

Newsom’s last budget proposal as governor, released on Thursday, aimed to leave the state with a balanced budget in the 2026-27 fiscal year, as well as into 2028, according to previous reporting by The Center Square. The revised budget projects revenues much higher than what Newsom’s original budget predicted in January, which the Legislative Analyst’s Office agreed are much higher than expected.

“Revenues are booming, and they continue to boom,” Ehlers told the committee. “The statistics around this truly blow the mind.”

According to Ehlers, the state’s revenues are $30 billion higher than what the Legislative Analyst’s Office predicted last June, a 30% growth from 2023. Those revenues, paired with the administration’s proposals in the May budget, helped state officials make substantive progress in addressing California’s structural deficit, Ehlers added.

The Legislative Analyst’s Office previously predicted a $20 billion to $30 billion structural gap in prior years, Ehlers said.

“That’s now about in half based on the new, updated revenue forecast,” Ehlers said.

Officials with the state’s Department of Finance said the governor’s May budget proposal leaves $4.5 billion in the state’s rainy day fund during the 2026-27 budget year, which dwindles to $2.1 billion during the 2027-28 fiscal year.

“It takes important steps to address what both the administration and the [Legislative Analyst’s Office] have pointed out is a large out-year operating deficit,” Stephen Benson, assistant program budget manager for the California Department of Finance, said during the budget hearing. “With the May revision, that is cut by more than half. Huge strides in terms of reducing the outgoing operating budget.”

The governor’s May budget proposed changes to the state’s climate bonds authorized under Proposition 4, a $10 million bond measure that California voters passed in November 2024. Approximately $3.5 billion was authorized for the first year of the climate bonds, according to a 2025 report from the Legislative Analyst’s Office.

Department of Finance officials said during the hearing that an additional $2.1 billion in climate bond funds will be used during the 2026-27 fiscal year, and an additional $148.2 billion in 2026-27 to pay for acquiring 161 acres of the now-closed former racing track Golden Gate Fields. State officials plan to use the property to create a shoreline park and “recreational hub” in the San Francisco Bay Area. Some of that money will also be used to pay for creating wildlife refuge and wetlands, Benson told the budget subcommittee.