Assembly Budget Committee opens review of governor's budget as LAO warns of market-driven revenue risk

SACRAMENTO — The California State Assembly Budget Committee on Wednesday opened its formal review of the governor's January budget, hearing a Department of Finance presentation of a balanced yet cautious "workload" proposal and a Legislative Analyst's Office warning that the state's revenue gains are concentrated and vulnerable to a market downturn.

Erica Lee, chief deputy director of budget for the Department of Finance, told the committee the governor's 2026-27 proposal shows about $350 billion in expenditures, roughly $248 billion in General Fund spending and an aggregate revenue upgrade of about $42.3 billion driven largely by capital gains and higher withholding. "We are looking at roughly 42,300,000,000 in revenues compared to the budget act," Lee said during her overview.

The administration described the plan as a workload budget that emphasizes paying down long-term liabilities and maintaining reserves. Lee said the proposal includes a $4.5 billion Special Fund for Economic Uncertainties, a $14.4 billion rainy day fund and about $4.1 billion in school reserves for roughly $23 billion in total reserves, and that the budget would begin paying down roughly $3 billion in long-term liabilities in the budget year.

But Gabe Petek of the Legislative Analyst's Office told members that while the administration's accounting is not unreasonable, the LAO sees material downside risk. "The 42,000,000,000 upgrade is very much driven by what's going on in the stock market," Petek said, noting indicators such as elevated margin debt and equity exposure that, historically, have preceded market peaks. He added the LAO estimated an $18 billion structural deficit in its November outlook, versus the governor's smaller near-term gap, and recommended more conservative revenue assumptions and stronger reserve treatment.

Petek urged the Legislature to consider not incorporating the proposed $5.6 billion Proposition 98 "settle up" into ongoing spending and instead to set it aside, and to begin a multiyear effort to shrink structural deficits rather than wait until later years. "We cannot advise the legislature to adopt a budget with that assumption," Petek said of relying on elevated market-driven revenue.

Members pressed both offices on specifics including the composition of the revenue upgrade, reserve sizing and proposed budget maneuvers. Lee said some revenues reflect concentrated gains from a handful of technology firms that have driven capital gains and withholding upward.

The administration also highlighted several policy items in the budget: increased per-pupil Proposition 98 funding — DoF said this budget reflects the highest per-pupil funding ever — a proposed one-time $200 million ZEV light-duty incentive, climate bond allocations including $2.1 billion in the second year of a multiyear package, and a proposed sustainable aviation fuel tax credit. Lee characterized the package as a starting point for spring negotiations and said the administration intends to work with the Legislature leading up to the May revision.

The committee left open detailed subcommittee review and reserved time for dozens of public commenters who urged protecting health, food and housing programs from federal changes. The hearing concluded with the chair noting the process would continue through more than 60 planned public hearings and subcommittee sessions.