The non-partisan budget watchdog released an analysis this week showing that while the state has managed to reduce its budget deficit by a massive amount since last year, the deficit is estimated to climb back up to a staggering $20 billion by 2026. 

“We anticipate the Legislature likely will need to address deficits in the future, for example by reducing spending or increasing taxes. In our view, this year’s budget does not have capacity for new commitments, ongoing ones,” the LAO’s report reads. 

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LAO analyst Gabriel Petek warned that state expenditures are growing by roughly 2.3% more than they have in previous years. He said expenditures are outpacing revenues by nearly 2%, making additional spending by California officials and agencies unwise. 

The LAO’s warnings come as Newsom pledged to do everything in his power to stop President-elect Donald Trump’s Republican agenda from touching California after he won the election earlier this month, signaling that pricy lawsuits are on the horizon.

California sued the Trump administration more than 120 times between 2016 and 2020 during his first term in office. But with lawsuits coming at a heavy expense and the state headed toward a $30 billion budget deficit by 2027, California Republicans are pushing back against Newsom’s anti-Trump agenda.

“California has a $2 billion deficit that’s projected to explode in the next few years, and Newsom’s solution is to spend another $100 million on lawyers to fight President Trump,” the California state assembly’s Republican leader, James Gallagher, told the Washington Examiner. “You can’t lead the ‘resistance’ when you can barely pay the bills. It’s too bad Newsom is more focused on chasing headlines for his 2028 presidential run than actually running the state.”

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Newsom has had a rocky year steering fiscal matters over the past few years. 

During fiscal years 2021 and 2022, California generated unexpectedly high budget surpluses, largely because the “stock market was on fire.”

“California gets a lot of tax revenue from stock market capital gains, and it kind of turbo-charged our revenue growth in those years,” Petek said. 

Lawmakers responded to the revenue gains by funneling expenditures into a host of one-time or temporary state programs. 

However, relying on an unpredictable and uncertain stock market for revenue rather than building a strong underlying economy promoting small businesses and job growth didn’t go so well for the Golden State. Downturns in the stock market in 2022 put California in a vulnerable fiscal situation, pushing lawmakers to reconsider the previous investments made into state programs.

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 “We had slower revenue growth than we had had before, and we couldn’t afford all of those temporary commitments that had been made based on the prior revenue anticipated revenue growth,” Petek reflected. 

Facing a $68 billion budget deficit this year, the California legislature slashed expenditures and many “temporary commitments” over the spring of 2024, resulting in an adjusted budget deal announced in June with a projected deficit of $2 billion. 

While the state’s fiscal situation appears far better at first glance now than it did at the start of the year, the Legislative Analyst’s Office’s latest report shows that California’s underlying economy is weak, setting it up for a lackluster fiscal outlook and massive budget deficit increases down the road.

“We’re seeing declining consumer spending. We’re seeing an unemployment rate that’s ticking up and very anemic, job growth, and the job growth we are getting is entirely attributable to government and healthcare, and so that is not a foundation on which our office can project comfortably that we’re going to have robust revenue growth going forward,” Petek said.

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He warned that California’s move to expand commitments in recent years such as expanding its Medicaid program, which is called Medi-Cal, to cover noncitizens, has put it on a troubling path where expenditures outweigh revenues by concerning margins. 

“Our advice to the legislature is that they should conduct oversight of programs and take a take stock of what their main priorities are, and try to, you know, work on addressing that misalignment,” the LAO analyst concluded. 

California’s Democratic lawmakers have met the budget warnings with pledges to “show restraint with this year’s budget.” 

“It’s not a moment for expanding programs,” Assembly Speaker Robert Rivas said. 

With both sides of the aisle promising to make trims, it remains to be seen if Newsom will be successful in his pledge to combat the Trump administration with a barrage of costly lawsuits. 

As lawmakers consider the LAO’s dismal fiscal outlook, Newsom visited Washington, D.C., earlier this month to lobby the Biden administration for funds as he seeks to target the incoming Trump administration.

“Governor Newsom will advocate for key priorities to advance the health and well-being of all Californians — including disaster funding, the approval of state health care initiatives aimed at improving access to health and mental health care for Californians, and crucial climate waivers,” his office said.