The Legislative Analyst’s Office (LAO), the California Legislature’s nonpartisan fiscal and policy advisor, announced on Tuesday that the state would unlikely be able to afford the May revisions to the 2023-2024 budget as proposed by Governor Gavin Newsom, and that the actual budget shortfall is $34.5 billion, not $31.5 billion.
In the last several years, California has seen large budget surpluses, with $38 billion reported in 2021-2022, and $97.5 billion being reported for the 2022-2023 budget year. However, with the post-COVID economy finally stabilizing, and the state losing both businesses and population in recent years, state revenues dropped as many had predicted, leading initially to a leaner budget.
Gov. Newsom unveiled a $297 billion budget proposal with a projected deficit of $22.5 billion in January.
While Newsom proposed many major cuts at the beginning of the year, multiple factors quickly made the situation worse and called for more. Initially, big cuts had been planned for state flood prevention programs, as the state was in a major drought and those funds would not be needed. However, record rain and snowfall throughout the state in the first three months of 2023 quickly quashed those plans.
The storms also dealt the state a major funding delay, as the state allowed most residents to pay taxes later in the year from due to problems associated with the storms and subsequent flooding. While this will help the 2024-2025 fiscal year, it also means that billions less would be going into the state this coming year, as the deadline is now in October rather than the usual April.
As around half of California’s income comes from the top 1% of earners as well as large businesses. Higher federal inflation rates, a chaotic stock market, and many wealthier Californians leaving the state also affected the budget impacting the poor outlook.
Earlier this month, Newsom announced a budget revision increase of $306 billion with a $31.5 billion deficit. The LAO quickly dug into the revision in preparation for Legislative discussion and votes on the budget, with the 2023-2024 budget needing to be passed by June 15th, with the fiscal year to begin on July 1st.
However, on Tuesday, the LAO announced that it is very unlikely the state can afford the May Revision spending levels.
According to the LAO, to eliminate the operating deficit in 2024‑25, revenues would need to be roughly $30 billion higher than their forecast, with little chance that California will be able to afford the May revision spending over the next five years. The $11 billion currently planned as one-time and temporary spending in the proposed 2023-2024 budget is also untenable, with the LAO recommending that it be lowered to around $4 billion.
The LAO also found that the budget deficit is actually $34.5 billion instead of Newsom’s figure of $31.5 billion, with spending projected to be $10 billion more than previous estimates by the time of the estimated 2026-2027 state budget. Overall, the state will also be averaging deficits between $14 billion and $20 billion in the upcoming years as well.
“The state faces annual budget deficits in the range of $14-20 billion per year after the upcoming budget year,” Legislative Analyst Gabe Petek said on Tuesday. “Although we have the budget problem in the coming year that we’ve been talking about, there’s additional problems in the future years throughout 2026-27 at least.”
“Lawmakers should consider cutting spending, shifting costs or raising taxes to help. Reducing one-time spending alone would address about $18 billion. If you first took advantage of the reserves and one-time spending, it really buys us time, buys the state time before they have to go in and make those reductions to the ongoing programs, that’s really the core of what the state provides.”
The higher deficit in the 2023-2024 revised budget
However, despite the larger deficit and other similar grim budget news, the LAO also said there are options remaining before the June 15th deadline, including drastically reducing one-time and temporary spending, tapping into the state rainy day fund, and additional fat trimming to the budget of non-essential programs.
Unusually, rather than dispute the LAO’s findings, Newsom’s administration instead said that the LAO’s report backed up the “caution” being given by the administration in the May revision budget.
“The report’s uncertain outlook for the coming years underscores the importance of the principles reflected in this year’s May Revision,” Department of Finance deputy director of External Affairs H.D. Palmer said on Tuesday. “First: Sustain and protect core programs. Second: Don’t compound the risks that we know exist with higher spending that may not be sustainable. And third: maintain the state’s substantial reserves as an essential insurance policy against further fiscal uncertainty.”
In addition, many financial experts agreed with the LAO report in that spending needed to be slashed soon, along with taking other measures, to ensure that the state doesn’t fall into a spiral of deficit that would last for several years.
“California was just so used to having a lot of money coming in, with those huge surpluses really clouding warnings that this deficit was coming, ” accountant Don Sherman, who has assisted local governments with budget problems in several states, told the Globe Wednesday. “We’ve got to cut spending now in the 2023-2024 budget to make sure California doesn’t create a financial cliff for itself or needs to rely on all those rainy day funds. Lawmakers are primarily to blame for this high spending, but no one wants to back down from programs or grants or whatever they helped pass. Homeless projects especially. But that is something we really need to talk about in the coming weeks. We need to get this budget under control now or the consequences will be dire.”
The 2023-2024 budget will have until June 15th to be passed by the legislature to come into effect July 1st, the traditional first day of the new budgetary year in California.
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