Tough decisions loom, as lawmakers grapple with a $68B budget deficit

The Golden State’s budget looks decidedly less golden. Last week, the nonpartisan Legislative Analyst’s Office (LAO) said that the state’s budget deficit will likely grow to $68 billion in fiscal year 2024-25. Lawmakers anticipated a budget deficit of $14 billion for 2024-25 when crafting last year’s budget deal.

California’s revenue system relies heavily on income taxes. One reason why previous estimates differed so greatly is because of federal tax filing extensions. Legislators and the LAO did not have a complete picture of the tax collections until after the 2023-24 fiscal year ended. Budget watchers expected some high-wage earners and large corporations to file their income taxes at the November filing deadline. However, that failed to materialize.

“While the state grapples with its budget deficit, we cannot let that slow us down from delivering the critical services our residents need and rely on every day,” said Carolyn Coleman, executive director and CEO of the League of California Cities. “ … we will push back on any efforts to raid funding for local programs to make up for the deficit.”

The LAO projects that 2022-23 revenues will be $26 billion below prior estimates. Collections data shows a 25% reduction in total income tax collections.

Assembly Budget Chair Jesse Gabriel told The Sacramento Bee that “everything is on the table” and “anything that costs money is going to have a huge uphill path” when balancing the budget. He also promised “to avoid cuts to safety net services for our most vulnerable.”

Sen. Roger Niello, vice-chair of the Senate Budget Committee, outlined several possible spending adjustments, including “much wiser spending” around homelessness. Key lawmakers also said they would protect classroom spending.

Still, the state is in a much better position to respond to the deficit than in years past, said LAO legislative analyst Gabriel Petek. The state has closed similar funding gaps before and has nearly $91 billion in unused borrowable funds. This is significant, as the state did not have this luxury when faced with budget deficits in previous years. Petek told CalMatters he would “stop short of calling it a crisis.”

Legislators could also borrow from special funds, pull back allocations, or recalculate the state’s obligation to schools and community colleges. The LAO warned that although tax revenues will likely begin growing next year, recovery will be slow.