The 2026-27 Budget: How to Use One-Time Revenue Improvements

The 2026-27 Budget: How to Use One-Time Revenue Improvements Translate Our Website This Google ™ translation feature provided on the Legislative Analyst's Office (LAO) website is for informational purposes only. The LAO is unable to guarantee the accuracy of this translation and is therefore not liable for any inaccurate information resulting from the translation application tool. Choose your language: × Skip to main content Home --> Policy Areas Capital Outlay, Infrastructure Criminal Justice Economy and Taxes Education Environment and Natural Resources Health and Human Services Local Government State Budget Condition Transportation Other Government Areas Publications The Budget Propositions and Initiatives Staff Careers About Us Search LAO Contact Ann Hollingshead See More Publications Like This Back to the Top --> Tweet February 20, 2026 The 2026-27 Budget How to Use One-Time Revenue Improvements Recent stock market performance continues to boost income tax collections. In our Fiscal Outlook , we strongly advised the Legislature to treat near-term strength in tax collections as temporary because we expect these gains to reverse. Further, the state faces significant structural deficits in the future. Accordingly, any windfall received from this revenue uptick represents an opportunity for the Legislature to prepare for future fiscal challenges. Our Revenue Estimates Consistent With $2.5 Billion Upgrade to Budget Bottom Line Compared to January. Our recent revenue post suggests an improvement in revenues of around $5 billion relative to the Governor s budget estimates. Under the state s constitutional budget formulas, a revenue increase of this magnitude would translate, very roughly, into a $2.5 billion improvement in the budget bottom line. Given the recent forecasting differences between our office and the administration, there is a good chance the administration s revenue upgrade at May Revision will be larger than our current estimate. Any additional resources that materialize at that time should be viewed as a one-time windfall. Despite Revenue Strength, Budget Relies on Reserves and Borrowing. This revenue upgrade comes in addition to already strong revenue growth forecasted in the Governor s budget. At the same time, the state would continue to use $10 billion in reserves in 2025-26 under the administration s plan. In addition, recent budgets have relied on nearly $30 billion in borrowing to address deficits, and the Governor s budget proposes almost $6 billion in additional borrowing (see Figure 1). A period of strong revenue growth is not an appropriate time to draw down significant reserves or continue to rely on borrowing. Further, despite large revenue upgrades since June, the budget for this year remains roughly balanced. Recommend Using Windfall to Reduce Reliance on Reserves and Borrowing. Accordingly, if windfall resources are available at the May Revision, we recommend the Legislature use them to reduce the reliance on the use of reserves and borrowing in the current year. For example, we recommend the Legislature: Do Not Suspend the $3 Billion True Up Into the Budget Stabilization Account (BSA). The Governor s budget proposes suspending a roughly $3 billion true-up deposit that otherwise would be required in 2025-26. We recommend the Legislature not suspend this deposit. Make a Smaller Withdrawal From the BSA. The Governor s budget also maintains a $7 billion withdrawal from the BSA in 2025-26. If a May Revision windfall exceeds the amount needed to fund the true up, we recommend the Legislature use those resources to reduce the size of this withdrawal. Repay Budgetary Borrowing. Alternatively, or in combination with the above actions, the Legislature could use windfall resources to repay budgetary borrowing undertaken in recent budgets. Although the state faces significant cost pressures due to reductions in federal funding, using one-time resources to backfill those ongoing reductions would put the state on even worse fiscal footing going forward. Instead, using one-time resources to improve budget resilience would help the state meet its coming fiscal challenges. Figure 1 The State’s New Wall of Debt (In Billions) Borrowing Type Amount Outstanding Repayment Period Existing Business tax credit limitation $6.8 2026 27 to 2034 35 Proposition 98 maneuver (cash borrowing) 6.2 2027 28 to 2039 40 Special fund loans a 4.5 2026 27 to 2032 33 Medi Cal maneuver (cash borrowing) 4.4 2027 28 to 2033 34 Proposition 98 settle up (2024 25) b 1.9 2026 27 (proposed) Payroll deferral 1.6 No plan for repayment Special fund loans (Control Section 13.40) 1.5 No plan for repayment Middle Class Scholarships arrears budgeting 1.1 No plan for repayment University payment deferrals 0.3 2027 28 Total $28.3 Proposed in 2026 27 Governor’s Budget Proposition 98 settle up (2025 26) $5.6 No plan for repayment Grand Total $33.9 a A share of these loans are outstanding from 2020 21. Of this total, $961 million is proposed for repayment in the 2026 27 Governor’s Budget . This does not include interest. b Entire amount is proposed for repayment in the 2026 27 Governor’s Budget . Note: Includes actions taken to address budget problems in 2023 24 and later. Prior versions of this table did not include the business tax credit limitation, but upon further review, we have determined this action should be included. Subscribe | California State Legislature | Online Voter Registration | Privacy Policy | Accessibility Legislative Analyst's Office | The California Legislature's Nonpartisan Fiscal and Policy Advisor 925 L Street, Suite 1000 Sacramento, CA 95814 | (916) 445-4656