SACRAMENTO — California and its state-funded programs are heading into a period of volatile fiscal uncertainty, driven largely by events in Washington and on Wall Street.
Gov. Gavin Newsom’s budget chief warned Friday that surging revenues tied to the artificial intelligence boom are being offset by rising costs and federal funding cuts. The result: a projected $3-billion state deficit for the next fiscal year despite no major new spending initiatives.
The Newsom administration on Friday released its proposed $348.9-billion budget for the fiscal year that begins July 1, formally launching negotiations with the Legislature over spending priorities and policy goals.
“This budget reflects both confidence and caution,” Newsom said in a statement. “California’s economy is strong, revenues are outperforming expectations, and our fiscal position is stable because of years of prudent fiscal management — but we remain disciplined and focused on sustaining progress, not overextending it.”
Newsom’s proposed budget did not include funding to backfill the massive cuts to Medicaid and other public assistance programs by President Trump and the Republican-led Congress, changes expected to lead to millions of low-income Californians losing healthcare coverage and other benefits.
“If the state doesn’t step up, communities across California will crumble,” California State Assn. of Counties CEO Graham Knaus said in a statement.
The governor is expected to revise the plan in May using updated revenue projections after the income tax filing deadline, with lawmakers required to approve a final budget by June 15.
Newsom did not attend the budget presentation Friday, which was out of the ordinary, instead opting to have California Director of Finance Joe Stephenshaw field questions about the governor’s spending plan.
“Without having significant increases of spending, there also are no significant reductions or cuts to programs in the budget,” Stephenshaw said, noting that the proposal is a work in progress.
California has an unusually volatile revenue system — one that relies heavily on personal income taxes from high-earning residents whose capital gains rise and fall sharply with the stock market.
Entering state budget negotiations, many expected to see significant belt tightening after the nonpartisan Legislative Analyst’s Office warned in November that California faces a nearly $18-billion budget shortfall. The governor’s office and Department of Finance does not always agree, or use, the LAO’s estimates.
On Friday, the Newsom administration said it is projecting a much smaller deficit — about $3 billion — after assuming higher revenues over the next three fiscal years than were forecast last year. The gap between the governor’s estimate and the LAO’s projection largely reflects differing assumptions about risk: The LAO factored in the possibility of a major stock-market downturn.
“We do not do that,” Stephenshaw said.
