California’s government may have a faceoff with a $25 billion budget shortfall in the upcoming fiscal year as tax revenues decline, according to a report issued by the state’s nonpartisan Legislative Analyst’s Office (LAO).
Legislative Analyst Gabriel Petek said during a Nov. 16 video press briefing that if the predicted downturn happens, it will be the Golden State’s weakest revenue performance since the 2008 to 2009 Great Recession.
“It is not insignificant, but it is also manageable,” Petek said. “We don’t think of this as a budget crisis. We just think of it as a notable budget problem that the legislature will have to confront when it begins that process in January.”
The LAO, the state legislature’s fiscal and policy advisor, details the budget shortfall and suggests ways to avoid it in the 20-page “The 2023-24 Budget: California’s Fiscal Outlook.”
The document is released yearly around this time to help guide California lawmakers as they begin to put together budget proposals for the upcoming fiscal year.
Petek said the threat of a national recession and actions by the Federal Reserve played a hand in the report’s outlook, but the predicted numbers are not based on a recession occurring.
“Economic conditions are really weighing on the revenue estimates that are a major influencer of our fiscal output,” Petek said. “With high inflation, with elevated inflation that causes the Fed to have to take action to cool down the economy in its effort to bring down inflation. The longer and the higher inflation remains, the more aggressive the Fed has to be. And the more aggressive the Fed has to be, it really increases the risk that the economy will fall into a recession. So, that being said, our revenue estimates do not assume a recession.”
California taxes wealthy people more than other states, so most of the revenue decline is because the rich aren’t making as much money as they used to. The report details that California could see deficits between $8 billion to $17 billion in the following years.
Less spending on large, onetime allocations is one way the state can offset the revenue losses it is expected to experience.
In response to the LAO budget prediction, Assembly Speaker Anthony Rendon (D-Lakewood) said the state has budget resiliency — $37.2 billion in reserves.
“We can and will protect the progress of the recent year’s budgets,” Rendon said. “In particular, the Assembly will protect California’s historic school funding gains, as districts must continue to invest in retaining and recruiting staff to help kids advance and recover from the pandemic.”
State Senate Pro Tempore Toni Atkins (D-San Diego) said in the past, the dreary budget forecast would have meant program cuts and middle-class tax increases.
“That does not have to be the case this year,” Akins said. “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. 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.”
Petek recommended that legislators not look to the reserves to solve the budget paucity when they begin formulating the state spending plan in early 2023.
“It would be prudent to try and identify other solutions in the early part of the budget period, and then if and when we have a lot more information about the economic situation — if revenues have deteriorated for example or if there were a recession, we are certainly not saying don’t use the reserves,” he said.
“We are saying, keep them on hold and you have them to turn to in that situation if the picture has gone south in May. You have the reserves that we can tap into to really help supplement the other solutions identified earlier in the process.”
Republican Assemblymember Vince Fong (R-Bakersfield) said the report is a wakeup call.
“California’s economy is weakening, and now with persistent inflation, the revenue that is coming into the state of California is coming in way below projection,” Fong said.
“As someone who has been on the budget committee for a number of years, we have been warning about this. The ruling party in Sacramento continues to spend and grow government programs without any accountability and the budget is completely unsustainable. We have to refocus on fiscal responsibility.”
LAO’s budget forecast comes on the heels of Gov. Newsom and the Democratic-controlled legislature estimated $97-billion surplus that led to the expansion of Medi-Cal eligibility to all immigrants in 2024, a boost in the earned income tax credit, and free preschool for 4-year-olds.
A relief package, priced at $17 billion, to help families, seniors and low-income Californians and small businesses was also approved in June by lawmakers.
The surplus is gone once a budget is passed, according to the LAO, so the fiscal outlook provided to legislators assumes that current state laws and policies will remain in place.
“We make adjustments for caseloads and things that influence the budget expenditures, but if you keep the same policies what would your budget picture look like?” Petek said. “That is what we are trying to tee up for them as they await the governor’s proposal.”