SACRAMENTO — California and its state-funded programs are entering a phase of intense fiscal unpredictability, primarily influenced by developments in Washington and fluctuations on Wall Street.
Governor Gavin Newsom’s budget director cautioned on Friday that the spike in revenues connected to the artificial intelligence surge is being counterbalanced by escalating costs and reductions in federal funding. Consequently, the state is anticipated to face a $3-billion deficit for the upcoming fiscal year, despite the absence of significant new spending proposals.
The Newsom administration unveiled its suggested $348.9-billion budget for the fiscal year starting on July 1, officially initiating discussions with the Legislature regarding expenditure priorities and policy objectives.
“This budget embodies both optimism and prudence,” Newsom stated. “California’s economy is robust, revenues are exceeding forecasts, and our financial standing remains sound due to years of responsible fiscal oversight — yet we are committed to continuing the momentum without overextending ourselves.”
The proposed budget did not allocate funds to replace the significant cuts to Medicaid and other public assistance programs enacted by President Trump and the Republican-controlled Congress, changes anticipated to cause millions of low-income Californians to lose healthcare and other benefits.
“If the state fails to act, communities throughout California will deteriorate,” stated Graham Knaus, CEO of the California State Association of Counties.
The governor is anticipated to update the proposal in May, utilizing revised revenue forecasts post the income tax filing period, with lawmakers required to finalize a budget by June 15.
Newsom’s absence from the budget briefing on Friday was unusual; instead, he appointed California Director of Finance Joe Stephenshaw to answer questions regarding the governor’s financial plan.
“Without significant increases in spending, there are also no major reductions or cuts to programs in the budget,” Stephenshaw noted, indicating that the proposal is still evolving.
California’s revenue system is particularly volatile, heavily reliant on personal income taxes from high-earning individuals whose capital gains fluctuate dramatically with the stock market.
As state budget negotiations commence, many anticipated considerable austerity measures following a warning from the nonpartisan Legislative Analyst’s Office in November regarding a looming $18-billion budget deficit. The governor’s office and the Department of Finance often do not align with or utilize the LAO’s estimates.
On Friday, the Newsom administration projected a significantly smaller deficit of approximately $3 billion, based on expectations of higher revenue over the next three fiscal years than previously predicted. The discrepancy between the governor’s estimate and the LAO’s projection primarily arises from differing assumptions about risks: the LAO accounted for a potential major stock-market decline.
“We do not consider that,” Stephenshaw remarked.
