California Budget Deficit Balloons To $73 Billion According to Legislative Analyst

According to a new updated revenue forecast report released by the Legislative Analyst’s Office on Tuesday, California’s budget deficit for the 2024-2025 year was increased from the previously estimates of $58 billion and $68 billion to $73 billion.

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, businesses moving out of state, delayed tax changes, as well as 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 Governor managed to continue on with a reduced budget, experts warned that the situation would likely grow worse with continued tax shortcomings.

In December, 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 partially 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 only a week later.

However, when Governor Gavin Newsom announced the initial 2024-2025 budget last month, he said that the state deficit was only $38 billion, nearly half of the LAO’s estimate. And, while Newsom did pare down the budget somewhat, he wound up only cutting $8.5 billion from the budget, with the rest of the offset coming from other sources such as tapping the state financial reserves and internal borrowing.

Despite this, the LAO remained adamant that Newsom had woefully underestimated what the real deficit figure was tens of billions more than Newsom claimed. This led to Tuesday’s announcement when the LAO issued a report showing that the estimate deficit went up once again to $73 billion.

“We have just released a post providing an update on the California budget condition based on recent revenue data,” the LAO messaged on X on Tuesday. “The state already faces a significant deficit this year—we estimate it totaled $58 billion under the administration’s revenue forecast at the Governor’s budget. Recent revenue collections data reflect even further weakness relative to those estimates. Our forecast is now about $24 billion below the Governor’s budget across 2022-23 to 2024-25. All else equal, this means the budget problem would grow by $15 billion: from $58 billion to $73 billion.”

“If the budget problem increases by $15 billion, the California Legislature will need to find this amount of new budget solutions. We recommend the California Legislature start by pulling back more one-time and temporary spending augmentations. We estimate the state possibly could reduce one-time and temporary augmentations by: $6.7 billion in 2023-24, $4.1 billion in 2024-25, and $5.1 billion in 2025-26. These estimates reflect the best information we have available currently.”

We have just released a post providing an update on the #CABudget condition based on recent revenue data. https://t.co/cUJfqzc1hS (1/6)

— Legislative Analyst (@LAO_CA) February 20, 2024

In their report, the LAO pointed out several different factors that led to the budget deficit to be increased yet again, including Prop. 98 spending requirements for schools in the state.

“Specifically, our forecast is about $24 billion below the Governor’s budget across 2022‑23 to 2024‑25,” said the LAO in the report. “All else equal, this means the budget problem is likely to be higher at the time of the May Revision. The actual increase in the state’s budget problem will depend on a number of factors, including formula-driven spending changes, most notably Proposition 98 spending requirements for schools and community colleges. (Due to specific circumstances this year, changes in revenues are unlikely to have a significant effect on the state’s other major formula-driven spending requirements, specifically related to Proposition 2.) Roughly, a $24 billion erosion in revenues corresponds to a $15 billion increase in the budget problem. This would expand the $58 billion estimated deficit to $73 billion under our updated revenue forecast.”

In response, the California Department of Finance, which answers only to the Governor, said that the LAO is failing to not work in both income and corporate taxes coming in, and defended both Newsom’s $38 billion deficit figure as well as his $8 billion in proposed cuts to the 2024-2025 budget.

“From now through April, more than $51 billion in income and corporate tax receipts are forecast to come in,” said Department of finance deputy director H.D. Palmer. “No one can say today with certainty how those numbers may change the budget estimate of a $38 billion shortfall. A responsible step would be for the Legislature to act now on the early action budget measures needed for $8 billion in solutions to help close this gap.”

However, financial experts told the Globe that the Governor’s forecast was wildly optimistic, and that the state should prepare itself for the LAO estimate more seriously.

“That $8 billion or so Newsom cut from the budget should have been the start of cuts, and not the end of them, ” said Lee Greenman, a California-based accountant who helps city and other regional entities fix budget problems, to the Globe on Tuesday. “When businesses, or even smaller governments, have a deficit that is larger than normal, they calmly explain the reasons, show people what steps they are taking to correct it, offer a forecast, and most importantly, keep a very close eye on spending.”

“This LAO report shows the need to act rationally and logically during this time. They took the surpluses for granted and increased spending at a time when everyone was warning them that rainy days were ahead. In the last few years, there have been some efforts. For example, many bills were either not passed or vetoed because of budget reasons, but again, you need to go way beyond that. This is $73 billion now. In December, we were only at $58 billion. Reckless spending has been going on like this for too long. The surpluses, which could have been a good point to help level things out, was squandered and now the chickens have come home to roost.”

“The Department of Finance’s response was very protective of the Governor. And they know what is coming. California had a major fiscal crisis in the late 2000’s that was very hard on many people, but the state managed to get by by making hard calls. That included big time budget cuts and reducing worker hours and major reductions. This is an election year, and no one wants to be the person in charge who furloughs thousands of state workers or something else drastic. We’ll have a better idea financially in the next few months, but this $73 billion deficit is huge. You can’t ignore this.”

More on the 2024-2025 state budget proposals are due out soon.