Newsom’s tightfisted final budget faces a rough reception in the Legislature

Since the turn of the century, California’s state budget has been plagued by a boom-and-bust syndrome rooted in its lopsided revenue system and a lack of political discipline.

The budget became increasingly dependent on taxes paid by the state’s most affluent residents, whose incomes increasingly came from investments rather than salaries.

Thus state revenues would often spike upwards, only to level off or decline. But governors and legislators would make new spending commitments during the spikes that would become liabilities during the downturns.

It was dubbed “volatility” and it reached an apex four years ago when Gov. Gavin Newsom declared that the state had a $97.5 billion surplus, having decided that a post-pandemic revenue spike would be permanent.

His administration later acknowledged a $165 billion error in a four-year revenue projection. But in the meantime he and the Legislature had raised spending, creating deficits that totaled $125 billion over four years, according to the Legislative Analyst Office. The deficits were papered over with a series of short-term fixes, including loans and accounting gimmicks.

On Thursday, Newsom unveiled a revised version of his final budget and, without saying so, indicated he had learned a hard lesson about managing volatility.

Although the state is seeing a new tax spike and his budget sees a $16.5 billion increase in revenues over three years, Newsom’s $349.4 billion 2026-27 budget takes a cautious approach. He says it would not only erase the structural deficit of the past four years, but it would guarantee that his successor would have a balanced first year budget for 2027-28.

“We’re cutting deficits but not cutting corners,” Newsom said.

The $246.6 billion general fund portion of the budget relies not only on new revenues, including a $3.6 billion boost from several relatively minor tax increases, to be balanced, but it is indirectly helped by big reductions in federal aid for healthcare.

Newsom devoted the first minutes of his budget presentation to bragging about California’s $4-trillion-plus economy, saying “we simply have no peers.” He also trolled those with “California derangement syndrome” and denounced President Donald Trump as corrupt and incompetent.

However Trump’s tightened eligibility for federally subsidized healthcare that could affect hundreds of thousands of Californians also has the effect of reducing the state’s healthcare spending, thus helping Newsom draft a balanced budget.

He could have backfilled the lost federal funds, but that probably would have required him to propose a major tax increase of some kind, which, as a likely 2028 presidential candidate, he is unwilling to do.

However his attitude on healthcare and taxes places Newsom at odds with advocates for poor Californians who would be affected and their allies in the Legislature, many of whom want a tax increase.

Graham Knaus, CEO of the California State Association of Counties, immediately declared that “the governor is proposing to do to counties what he accuses the president of doing to California.”

Chris Hoene, of the left-leaning California Budget & Policy Center, which has been beating the drums for tax increases, said, “The governor promoted California’s economic dominance while, in the same breath, making it more difficult for Californians with low incomes to access healthcare by reinstating harmful Medi-Cal asset limits, expanding work requirements and increasing Medi-Cal premiums for certain immigrants.”

With just a few months remaining in his governorship, Newsom’s ability to bend the Legislature to his will is fading, so the question his new budget poses is whether legislators will go along. Or will they insist that the new holes in the state’s safety net be plugged and support raising taxes to pay for it?