SACRAMENTO, Calif. (KTXL) — On the heels of recording a historic estimated $97 billion budget surplus, a recession could be on the horizon. 

State financial leaders said it could happen soon and because of how Gov. Gavin Newsom wants to spend the massive budget surplus. California may face a significant budget shortfall as soon as next year.

The warning is coming from California’s non-partisan Legislative Analyst Office in response to Newsom’s latest state budget proposal. The LAO said his budget plan sets the state up for a fiscal cliff that could amount to budget cuts in the billions.

“The fiscal cliff that we’re talking about is that the state’s revenue picture is so strong it’s putting us on course to be above the state appropriations limit,” Gabe Petek said.

Petek said the governor’s budget proposal would leave the state $3.4 billion over that constitutional spending limit this year and another $22 billion next year. 

The law — also known as the Gann Limit — is calculated every year based on population and inflation. It requires every dollar over the limit to be associated with $1.60 in required spending to get under the limit. 

Recent years have made it tricky to stay under the limit as the state’s population slightly decreased while revenues have boomed. 

And with more money comes more problems, the LAO notes this issue becomes worse with continued revenue growth, but at the same time, officials said there’s also a heightened risk of recession.

“There is the risk revenues could go down because of a recession. In fact, we think the risk of recession has increased and that would present a whole different set of budget problems of course because we wouldn’t have enough revenue to pay for our existing commitments. That’s why we recommend the state and legislature consider adding to discretionary reserves. The discretionary reserves help us in either scenario,” Petek said.

“We agree there’s a lot of uncertainty out there, but we believe however the governor’s revised version of the state budget places the state in a solid position knowing there’s that uncertainty ahead,” H.D. Palmer said.

H.D. Palmer is the spokesman for the California Department of Finance. He said billions of dollars are going into reserves.

Plus, he said about 95% of the surplus is planned for one-time spending, meaning the projects don’t require ongoing money. With $15 billion in future projects, the administration is prepared to scale back if needed.

“Twenty years ago during the dot-com boom when revenues were riding the rocket and everyone thought that was going to be going on forever, but it went spectacularly bust. And the revenues evaporated overnight. There was still that higher ongoing level of spending that created those multi-billion dollar deficits in California that took us a decade to get off the books. We don’t want to make that same mistake again,” Palmer said. 

The LAO has said the legislature and governor have some time to figure this out and can address state appropriations limit problem in two ways: either cutting taxes over time or asking voters to change the limit. 

Democratic leaders in the state senate and governor have signaled they’ll ask voters to change the limit in 2024.