As Gavin Newsom enacts his final budget as governor, I have been looking at all eight of his budgets. The first post was about spending on employee compensation and benefits, which is the third largest category of state spending. The second post was about spending on public schools, which is the second largest category of state spending. The third post was about spending on Medi-Cal, which is the largest category of state spending. This post is about what happened to budget reserves under Newsom.
According to the governor, the 2026-27 state budget that he signed yesterday will leave the state with the largest budget reserve in its history. That’s correct, but his statement leaves out how much higher reserves would have been had Newsom not tapped into them during two of his eight fiscal years. According to the budget Newsom signed yesterday, he will leave the state with a $35.2 billion reserve. But Newsom drew down $21.3 billion of reserves in the 2024-25 and 2025-26 fiscal years. Had he not done so, reserves would be $56.5 billion.
It wasn’t because of a recession or for lack of revenues that Newsom drew down reserves. Tax revenues exploded during his two terms, growing from $1.266 trillion during Jerry Brown’s eight years to $2.070 trillion during Newsom’s eight years, a nominal difference of $804.4 billion, which is a real (inflation-adjusted) difference of $532.3 billion. He drew down reserves because revenues in two fiscal years didn’t reach levels he had earlier forecast and upon which spending decisions had been based.
Now Newsom is backing a constitutional amendment to boost the size of the reserve. On its face such a measure might seem appealing but the proposed measure doesn’t touch the withdrawal-side rules at all. That means a future governor could do exactly as Newsom did, which is to dip into reserves simply because revenues didn’t turn out to be as high as that governor hoped. Unless the withdrawal rules are changed, a larger reserve would allow future governors to bake in spending based on optimistic forecasts because they know they can always dip into reserves if revenues fall short. The larger reserve would also continue to reward state pension funds for creating pension debt that the reserve is constitutionally obligated to pay off.
