Gavin Newsom’s California spending plan is overly optimistic, budget analyst says. Here’s why

California’s independent budget analyst believes Gov. Gavin Newsom’s proposed spending plan includes overly-rosy revenue estimates and may lead to unsustainable financial conditions in future years.

The Legislative Analyst’s Office report released over the weekend analyzed Newsom’s $291 billion budget, comparing it to the economic forecast the organization made in December.

It took a skeptical view of the governor’s spending plan, especially his revenue estimates, calling them “optimistic but plausible.”

The LAO report was critical of Newsom’s $8 billion reduction in school and community college funding, saying he “has not explained how its proposal could achieve $8 billion in savings, given the administration also indicates the proposal would not impact school and community college budgets.”

“The Legislature will need significantly more information before it can assess the proposal — including its potential effects on the state budget after 2024‑25,” the LAO report said.

The Newsom administration’s decision to delay some budget items and add spending “compound” future projected shortfalls, making it “likely unsustainable in future years.” The governor estimates the state will face ongoing budget gaps of $37 billion to $28 billion from fiscal years 2025-2026 through 2027-2028.

“State revenues in the (future) years would need to exceed the administration’s forecast by roughly $50 billion per year in order to sustain the spending proposed by the governor’s budget,” the LAO reported.

Newsom during his Jan. 10 budget presentation estimated California will face a $38 billion budget gap in the next fiscal year, which was significantly smaller than the LAO’s $68 billion revenue projection late last year. Newsom insisted his lower deficit estimate should guide the view of the Legislature and of constituents as the budget process moves forward.

“Those of you who have been writing about a different number, I hope you’re immediately correcting it,” the governor said of the LAO’s larger figure. “We have been pretty damn transparent with you. But I’m making the point publicly, not just privately, that that number was not the number that seems to be reported as gospel.”

Newsom said the differing deficit numbers were the result of his administration being “a little less pessimistic than they are about next year.”

LAO versus Newsom

Department of Finance director Joe Stephenshaw said the key reason for the widely differing estimates was his agency assuming higher revenues this year and in future years.

Newsom spokesman Brandon Richards said Tuesday the LAO’s report represents “one perspective on California’s budget shortfall and revenue projections,” and the governor believes the state can produce a balanced budget “without a ‘wealth tax’ or any other broad-based revenue increases.” Assemblyman Alex Lee, D-San Jose, has proposed a net worth tax for the wealthiest Californians, a plan the Legislature has all but killed.

“What is consistent is that the governor and LAO have repeatedly noted the state’s revenues are somewhat difficult to predict and that the budget is often subject to wild swings in revenue year to year,” Richards said.

Overall, the LAO now suggested there is a $10 billion net difference between their estimate of the budget gap and the one Newsom’s office projects.

The organization in their report agreed with Stephenshaw’s assessment of the conflicting shortfall numbers. The LAO said California entered a “revenue and economic downturn” last fiscal year, causing tax revenues to drop by 20%. But Newsom’s administration estimates tax revenue will increase 8% this fiscal year, the 12-month period that ends June 30.

“While possible, we think this assumption is optimistic,” the report said. “Halfway through the current year, we are yet to see clear signs of such a rebound.”

To close the state’s spending gap, Newsom wants to use about $13 billion in reserve funds, which will require him to declare a fiscal emergency.

The LAO in December also suggested the governor make use of reserve dollars, and the organization called his decision to maintain a healthy fund balance “prudent given the continued budget problems likely for future years.”