What do you call a state absolutely flush with cash, with tax revenues booming more than 30% in just three years? If it's California, you call it "Broke."
Wait, wut?
“I once heard that the job of a budget analyst is to find the gray cloud in every silver lining, so unfortunately, along with the silver linings of revenues, we see quite a bit of gray clouds on the horizon,” Rachel Ehlers, deputy legislative analyst for the Legislative Analyst’s Office (LAO), told California lawmakers on Tuesday.
The silver lining is the revenue boom. The gray clouds are the state's structural deficit, "both for the coming budget year, '26-27, as well as forecast for '27-28, even under the governor’s proposals," Ehlers added.
“Really, the only way the budget proposal before you is balanced is by relying on reserves,” Ehlers added during an Assembly Budget Subcommittee hearing. “Under the governor’s proposal, both withdrawals from reserves, as well as suspended requirements to put money into reserves, totals $20 billion.”
Gov. Gavin Newsom's "plan" to close the deficit — and allow me to reiterate, during a stunning increase in tax revenue — is to raid the state's rainy day fund. The LAO says the raid includes $1.5 billion worth of suspended deposits, a $5 billion withdrawal, a $7 billion suspended deposit, followed by another $7 billion withdrawal.
Even so, that still leaves a $16.9 billion hole in the budget.
If you're thinking that boom times are when you're supposed to plug money into the rainy day fund instead of taking it out, you'd never make it in California politics. That's a compliment, by the way.
Imagine you got a $30,000 pay raise but spent so much money that you had to dip deep into your savings, postpone deposits into your IRA, and still had to put $15,000 worth of typical expenses like groceries on the MasterCard.
Crazy, right? But in California, it's the law.
Follow me closely here, or you might not believe just how baked-in the madness is.
See, it doesn't matter how much new revenue the AI boom brings in; Prop 98 — backed by the all-powerful California Teachers Association and passed by gullible voters — forces more money into schools and community colleges when General Fund revenues rise, but doesn't really allow for lower spending when revenues fall.
What if the AI boom proves to be a bubble that goes POP? What if the wealth tax passes in November and more billionaires flee the state? What if the stock market corrects and capital gains taxes crater? In other words, what if the revenue boom turns into a bust? Don't you worry, gentle reader, because those Prop 98 "education" spending increases are more or less set in stone.
Yet while California ranks around 12th place or so for spending-per-pupil, student proficiency is mired in the bottom half of states, and declining.
Medi-Cal — California's version of Medicaid — also features structural impediments to achieving fiscal sanity. Medi-Cal is what happens when Sacramento builds a permanently expanding entitlement on top of a tax base that fluctuates wildly, depending on Wall Street and Silicon Valley. If California's education spending is the very definition of Margaret Thatcher's ratchet effect, Medi-Cal is the never-ending entitlement that blossoms in bad times, and grows only somewhat slower during the booms.
California taxpayers put themselves on a treadmill where no matter how hard they run, it turns even faster.
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