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.