LAO upgrades revenue estimates by $25 billion

The $25 billion--for 24-25, 25-26, & 26-27 combined--seems to assume a mild stock downturn

A new forecasting update from the Legislative Analyst’s Office (LAO) increases California’s General Fund revenue estimates—compared to the Newsom administration’s January 9 projections—by $1.6 billion for 2024-25, $18.1 billion for 2025-26, and $5.1 billion for 2026-27. Reflected in the new projections, I understand, is a “hedge” against a stock market downturn in 2026-27 and 2027-28 (when LAO’s estimates are about $5 billion below the administration’s from January). LAO has noted this hedge does not represent a full-scale stock market crash. Revenues are surging, LAO notes, but stresses these revenues should be treated as unsustainable.

Given how strong the stock market is now—and likely upcoming big initial public offerings (IPOs)—my personal view is that LAO’s revenue assumptions are quite conservative in 2026-27. It seems possible that revenues will be many billions of dollars higher in 2026-27. At the same time, the pressure from federal cuts and rising state costs is very real, as I noted this week. And, certainly, there is a historical basis to expect that stock prices and the technology industry will tumble sharply at some point, but no one knows when that might occur and how big the tumble will be—something one could have observed at various points during the last several years.

Large portions of added revenues must be directed to schools and community colleges (Proposition 98) and state reserves (Proposition 2) pursuant to the California Constitution. This means they are generally not available to reduce budget cuts in safety net and other programs.

The Governor must provide his May Revision of the January budget proposal to the Legislature on or before Thursday, May 14.