California could face $25B budget problem next year

After a historic budget surplus this year, California could have a $25 billion budget problem on the horizon for next year, according to a new fiscal outlook from the non-partisan Legislative Analyst’s Office.

The multi-billion dollar budget deficit is “mainly attributable to lower revenue estimates,” which are lower than budget act projections for 2021-2022 through 2023-2024 by roughly $41 billion, the LAO wrote in a new report out Wednesday.

“Reflecting the threat of a recession, our revenue estimates represent the weakest performance the state has experienced since the Great Recession,” the report stated.

The report comes after California experienced a nearly $100 billion budget surplus in the 2022-2023 fiscal year. Anticipating a possible economic downturn, state officials estimate they budgeted 93% of the discretionary portion of the surplus on one-time spending.

With the current economic environment posing a “substantial risk to state revenues,” lawmakers could face some tough spending decisions when it comes time to craft the state budget.

Senate President pro Tempore Toni Atkins said in a statement Wednesday that the report “indicates that California faces challenging time ahead,” but highlighted the state’s “responsible budgeting” and building of reserves to “record highs” in recent years.

“Thanks to our responsible approach, we are confident that we can protect our progress and craft a state budget without ongoing cuts to schools and other core programs or taxing middle class families,” Atkins said. “The bottom line is simple: we are prepared to hold onto the gains we’ve made and continue where we left off once our economy and revenues rebound.”

H.D. Palmer, a spokesperson for the Department of Finance, told The Center Square in an email that “the state is in its best-ever position to manage a downturn by having built strong reserves and focusing on one-time commitments.” Palmer noted that the governor stressed responsible spending with the state’s record surplus in case of an economic downturn, leading the state to build reserves, pay down debt, and focus on one-time spending.

The LAO predicts budget deficits could persist past 2023-2024. The report estimates California will face a budget deficit of $17 billion in 2024-2025, with the deficit shrinking to $8 billion in 2026-2027.

The report indicates that the state would end 2023-2024 with about $22 billion in its Budget Stabilization Account – funds that are available to address a budget emergency. Under the state’s constitution, Gov. Gavin Newsom can declare a budget emergency when resources in the current or upcoming fiscal year are not sufficient to “keep spending at the level of the highest of the prior three budgets,” according to the LAO. Without this declaration, the Legislature would not be able to access funds in the BSA.

The state has warned of tax revenues coming in below projections in the first few months of the fiscal year. Through last month, revenue projections were running roughly $7 billion under the 2022 Budget Act forecast.

Gabe Petek, a legislative analyst with the LAO, told The Center Square in an email that they are characterizing the deficit in their fiscal outlook as "not insignificant, though manageable."

"If the economy were to go into a full scale recession, the size of the problem would almost certainly increase in magnitude," Petek said. "Because of this risk, we recommend that throughout the early part of the budget process (January through March, for example) the Legislature identify solutions to the deficit without using state budget reserves."

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