Administration presents balanced governor's budget but warns of out‑year risks

The Department of Finance and the Legislative Analyst's Office told the California State Senate Committee on Budget and Fiscal Review that the governor's 2025–26 budget is balanced under current assumptions but faces significant risks in later years.

Bridal Lee of the Department of Finance told the committee the administration now projects about $16.5 billion in higher revenues over the budget window compared with the 2024 Budget Act and proposes a $322 billion total‑fund budget, including $229 billion in General Fund. Lee said the administration would withdraw $7.1 billion from the Budget Stabilization Account (the state's rainy‑day fund) as planned in the 2024 agreement and would leave roughly $17 billion in reserves, including $4.5 billion in a fund for economic uncertainties. "The governor's budget is balanced without the need for further solutions," Lee said, while warning that stock‑market volatility, reemerging inflation and recent wildfires create uncertainty.

The Legislative Analyst's Office echoed that the administration's revenue upgrades are directionally reasonable but cautioned that California's revenues remain volatile and that the state faces a structural spending/revenue gap in the out years. Legislative Analyst Gabe Petek said the LAO and the administration both show operating deficits in future years but differ in scale: the administration's projections show smaller out‑year deficits than the LAO's, which projects larger annual gaps as expenditures continue to outpace revenues. Petek recommended ongoing program reviews to prioritize core legislative priorities.

The administration proposes reforms to Proposition 2 to allow larger mandatory deposits into the Budget Stabilization Account (raising the mandatory cap from 10% to 20% of General Fund revenues) and seeks to exempt those deposits from the State Appropriations Limit. The budget continues funding for education milestones the administration highlighted — including full implementation of universal transitional kindergarten and other K–12 initiatives — while reflecting a larger Prop 98 guarantee driven by upgraded revenues.

The proposal also includes modest discretionary new spending (the administration cited roughly $570 million in new discretionary General Fund spending, about $300 million ongoing), and the governor would shift some climate‑related General Fund spending to the proposed Proposition 4 climate bond. The LAO and Finance noted that much of the near‑term upgrade is tied to market‑sensitive taxes and cautioned that federal policy changes or disaster‑related revenue delays could reverse the picture.

Committee members asked for more multiyear analysis and warned that the positive near‑term balance should not obscure substantial out‑year risks. The LAO urged the Legislature to continue the "momentum" on deficit reduction and recommended program reviews to align existing initiatives with legislative priorities.

Outlook and next steps: the committee will continue oversight hearings and subcommittee reviews through spring—Finance and the LAO will provide more detailed briefings and updates (including a May Revision) as new information about tax receipts, wildfire costs and federal policy becomes available.