Walters: Why the Legislature’s budget proposal digs an even deeper hole

During his annual report on the state’s finances last fall, legislative budget analyst Gabe Petek warned that budget spending was increasing by about 6% a year while revenues were growing by just 4%.

“Taken together, we view it as unlikely that revenue growth will be fast enough to catch up to ongoing spending,” Petek said, adding “in the coming years, legislative action could be necessary to close this gap.”

Petek’s admonition is falling on deaf ears.

Gov. Gavin Newsom’s budget staff agrees with Petek that the state faces what’s called a “structural deficit” in the neighborhood of $10-30 billion a year.

However, the revised 2025-26 budget that Newsom unveiled last month would spend about $20 billion more than projected revenue. He would cover the difference with a $7.1 billion transfer from the state’s emergency reserve, plus deferrals, loans from special funds, bookkeeping gimmicks and a few actual spending cuts to get it in the black.

The reductions would largely be in medical care and social services for the poor, drawing heavy criticism from their advocates and legislative allies.

Not surprisingly, therefore, the budget that legislative leaders countered with this week, at least partially restores those services. It also adds some items that Newsom omitted, including $500 million in homelessness grants to local governments — half of what they had been getting in recent years — and a token $100 million to implement Proposition 36, an anti-crime measure that voters passed last year over Newsom’s opposition.

Both items drew a sharp reaction from the California State Association of Counties, saying that Californians “won’t accept half measures.”

Other additions include some wildfire help for Los Angeles County governments and a bailout for cash-strapped San Francisco Bay Area transit agencies.

The legislative leadership describes its budget as “a fiscally responsible strategy that prepares California for economic uncertainty.” However, it would increase general fund spending from the $226 billion that Newsom proposed to $232 billion, thus expanding the overall gap between income and outgo, which would be partially offset by an additional $2.5 billion in loans from other state funds.

When legislative leaders were going over the budget behind closed doors, they reportedly polled members about raising taxes on corporations to cover the additional spending but apparently there was not enough support such a move, especially since Newsom has refused to entertain tax increases.

In brief, the legislative budget would put the state’s finances in an even deeper hole, making the day of reckoning — when that happens — even more politically difficult.

While the legislative budget will be passed this week to technically comply with the June 15 constitutional deadline, it will merely signal the beginning of negotiations between Newsom and legislative leaders on a more refined, semi-final version.

And when that’s done, the process is likely to continue for months as more economic data surface and as the state learns whether President Donald Trump and a Republican Congress make the deep cuts in federal aid they have threatened.

Even if the budget survives whatever Trump and Congress have in mind, the state’s recent practice of overspending revenues will continue until and unless the governor — and that probably means Newsom’s successor — and legislators bite the bullet and either seriously whack spending or raise taxes.

The situation eerily resembles what Jerry Brown faced in 2011 when he began his second stint as governor. The budget had been clobbered by the Great Recession and Brown cajoled legislators and voters into both reducing spending and raising taxes to close a large deficit.

Brown’s problem was rooted in economic upheaval beyond the state’s control. Today’s problem is purely the result of irresponsible increases in spending on a faulty assumption that the state would see a sustained revenue boom.

That’s an important difference.

Dan Walters is a CalMatters columnist.