When Gov. Gavin Newsom declared today that the state will likely receive an extra $42.3 billion in tax revenue over the next three years, thus alleviating a stubborn budget deficit, the inimitable Yogi Berra’s famous observation came to mind.
“It’s like déjà vu all over again,” Berra quipped in 1961, after watching Mickey Mantle and Roger Maris, the New York Yankees’ star sluggers, hit back-to-back home runs.
Four years ago, as the state’s economy rebounded from a pandemic-caused downturn, the state’s revenues saw a brief upward spike. Someone in the administration, perhaps Newsom himself, decided that the revenue jump would be permanent and that it meant a $97.5 billion surplus over several years.
“No other state in American history has ever experienced a surplus as large as this,” Newsom bragged as he unveiled a 2022-23 fiscal year budget that topped $300 billion.
Newsom’s declaration touched off a spending spree that boosted outlays by $14 billion. But the revenues never reached the assumed level and his Department of Finance eventually — and very quietly — acknowledged that the administration had overstated income by a whopping $165 billion over four years.
The additional spending, which outpaced real revenues, created what was dubbed a “structural deficit” in the annual $20 billion range ever since, covered with an array of accounting gimmicks, spending deferrals and raids on special funds and emergency reserves.
A few weeks ago, the Legislature’s budget advisor, Gabe Petek, projected an $18 billion deficit for the 2026-27 fiscal year, rising to $35 billion later.
The draft budget that Newsom’s finance director, Joe Stephenshaw, outlined this week would increase outlays by $27 billion over the current year to $321 billion, including a $248.3 billion general fund, up $20 billion.
The revenue increase projection, which Newsom mentioned in Thursday’s State of the State address, would cover all but $2.9 billion of the new spending plan, Stephenshaw said.
Simply put, if the budget’s projected $42.3 billion revenue increase is real, Newsom can conclude his governorship —– and probably segue into a presidential campaign — with the state’s finances no longer plagued by deficits.
Balancing the budget would also bolster Newsom’s opposition to calls from the left-leaning legislators and activists in his own party for tax increases to cover the shortfall and President Donald Trump’s cuts in federal health and welfare support.
However, we saw the corrosive effects of overestimating revenues in 2022, so the new forecast should be viewed skeptically.
Newsom hedges his bets by portraying the budget as a placeholder that covers little more than spending increases driven by law, inflation and caseload until more revenue data is received.
“While the budget is balanced in the 2026-27 fiscal year, with a discretionary reserve of $4.5 billion, it projects a deficit of roughly $22 billion in the 2027-28 fiscal year and shortfalls in the two years following,” the draft declares. “The administration intends to build on this budget proposal in May with a revised plan — reflecting updated revenue and spending data — that balances the budget in both the 2026-27 and 2027-28 fiscal years with adequate budget reserves.”
Having been burned badly by his phantom surplus in 2022, Newsom is obviously aware that a repeat would be politically poisonous. His more cautious approach was symbolized by how the budget was presented.
In years past, Newsom would personally go through the budget, almost line-by-line, in presentations that sometimes lasted three hours. This time, he dispatched Stephenshaw to face reporters and characterize the budget as a draft that will be updated in May, as Newsom and the Legislature face a June 15 constitutional deadline for enactment.
Dan Walters writes commentaries for CalMatters.
