California Budget Deficit Climbs To $68 Billion

The Legislative Analyst’s Office (LAO) announced on Thursday that the state budget deficit now stands at $68 billion for the 2024-2025 fiscal year, $10 billion higher than initial projections showed earlier this month.

California’s state budget has fluctuated wildly in the past several years. During the COVID-19 pandemic, California saw the largest surpluses in state history, including an unprecedented $31 billion surplus in 2022-2023. However a weakening economy, a massive loss of the state population and companies moving out of state, delayed tax changes and numerous other factors led to a severe deficit the next year. An initial deficit of $25 billion, which was later changed in May to $31.5 billion, rocked the state. While the state managed to continue on with a reduced budget, experts warned that the situation would likely grow worse with continued tax shortcomings.

Last week, the LAO announced that the state would be facing a $58 billion budget deficit for at least the next few years. However, with lower than expected tax revenues coming in because of taxes delayed by atmospheric river storms from earlier this year, as well as recent losses in the tech sector, the amount was adjusted to $68 billion for the upcoming 2024-2025 fiscal year. However, according to the LAO, unlike the budget crisis that struck California during the Great Recession, California’s economic success in the 2010’s put the state in an economically better position today than where it was in 2008.

Notably, the LAO pointed out that a high amount of cash reserves, as well as a flexible education budget, would likely help relieve the deficit figure in the coming years.

“While addressing a deficit of this scope will be challenging, the Legislature has a number of options available to do so,” said the LAO in their report on Thursday. “In particular, the state has nearly $24 billion in reserves to address the budget problem. In addition, there are options to reduce spending on schools and community colleges that could address nearly $17 billion of the budget problem. Further adjustments to other areas of the budget, such as reductions to one‑time spending, could address at least an additional $10 billion or so. These options and some others, like cost shifts, would allow the Legislature to solve most of the deficit largely without impacting the state’s core ongoing service level.”

A looming $68 billion deficit

At a press conference, LAO analyst Gabriel Petek added that “The state remains in a good cash position, and that really wasn’t the case back at the start of the Great Recession. We don’t face the same kind of liquidity challenges that we had at that time, and so I would stop short of describing it as a crisis.”

Nonetheless, the LAO report did say that longer term solutions were needed, and that fixes such as using state financial reserves would only be a one-time-use only solution. Overall spending reductions and new methods of revenue increases would  needed past the 2024-2025 fiscal year with the LAO also noting that the state should keep at least half their fiscal reserves for use in later years to help bridge the spending gap.

“Given the state faces a serious budget problem, using general purpose reserves this year is merited,” added the LAO. “That said, we suggest the Legislature exercise some caution when deploying tools like reserves and cost shifts. The state’s reserves are unlikely to be sufficient to cover the state’s multiyear deficits—which average $30 billion per year under our estimates. These deficits likely necessitate ongoing spending reductions, revenue increases, or both. As a result, preserving a substantial portion—potentially up to half—of reserves would provide a helpful cushion in light of the anticipated shortfalls that lie ahead.”

Faced with slightly more dire news than initially found last week, many lawmakers, including Democrats who had been in favor of more spending on social programs in the past, said on Thursday that new and existing spending would need to be shrunk considerably in the coming years because of the new deficit that the state is facing.

“Our economy is still good, but what we need to do is be incredibly cautious here,” said Senate President Pro Tem Toni Atkins (D-San Diego). “We are in a deficit, and therefore, new programs, new spending — in fact, existing spending — we’re going to have to slow down over time.”

However, many financial experts told the Globe on Thursday that big cuts are now almost essential to keep the state afloat while they adjust to the new tax level reality.

“We were $54 billion in the hole in 2020,” said accountant Lee Greenman, a California-based accountant who helps city and other regional entities fix budget problems. “Then we had a surplus, another surplus, then a deficit. Everyone wants money going somewhere, so the state always compensates financially in weird ways to stay on the road. During the last few surpluses, a lot of money went to new programs rather than to the state reserve, and now look where we are. Now we have to make cuts to things that we shouldn’t have made in the first place.

“Every Assembly race, every state Senate race. This is going to come up for them all, and if they were one of those in office who decided to push for major new programs then, they are going to have a lot to answer for. Financial bona fides are going to be more important than ever in 2024 it looks like..”

Governor Gavin Newsom is expected to make his first draft of the 2024-2025 budget next month.