SACRAMENTO, Calif. (CN) — California faces a $68 billion budget deficit, a financial gap stemming from factors like delayed tax revenue receipts, a tightening of monetary policy by the Federal Reserve and a slowdown in the state’s economy.
Reduced income for California’s top earners also has played a role with the budget. However, the state Legislative Analyst’s Office said residents moving from the state wasn’t a cause.
The analyst’s office on Thursday followed up on its budget update from last week, digging into the causes and possible solutions to the problem.
“The state does face a pretty serious budget problem,” said Gabriel Petek, legislative analyst, later declining to characterize it as a crisis. “I’d go with the word ‘serious,'" he said.
Analysts said they anticipate revenues to be $58 billion below estimates for three fiscal years — 2022-23, 2023-24 and 2024-25, with $26 billion of it from 2022-23.
Many California residents had until October to file their state and federal taxes, instead of in April, because of winter natural disasters in 55 counties. If the April deadline had remained, officials would have known about the $26 billion shortfall months ago.
“That is something we only became aware of recently,” Petek said. “This really does complicate the challenge for the Legislature.”
Once an already expected $14 billion deficit for 2023-24 is added into the equation, along with an estimated reduction in spending elsewhere, the total deficit the Legislature must address next year comes to $68 billion.
Additionally, analysts said that the state will face annual operating deficits of about $30 billion through fiscal year 2027-28. Calling the projection “highly uncertain,” that adds up to some $155 billion in deficits between fiscal years 2022-23 and 2027-28.
Petek pointed to the Federal Reserve’s monetary policy, which appears to have an outsized effect on California, as one reason for the shortfall. A slowdown in the state’s economy, flattening of sales tax revenue and higher unemployment are also factors.
Unemployment has risen from 3.8% in summer 2022 to 4.8% currently — a climb of almost 200,000 unemployed residents.
Top income earners taking in fewer stock grants and smaller bonuses has contributed to the shortfall too. And according to Petek, venture capital has dropped in recent years while initial public offerings have dropped significantly since 2021.
“That’s what’s feeding into this downturn,” Petek said all the factors.
Lawmakers have several options to deal with the deficit.
Governor Gavin Newsom could declare a budget emergency, opening a path for legislators to access $24 billion in budget reserves. However, Petek advised lawmakers to use only half of the reserves if that option is taken.
Large surpluses in prior years led to one-time spending commitments. There’s $8.6 billion in such spending for 2024-25. Additionally, there are tens of billions of dollars allocated to one-time and temporary items, some of which could be redirected to the deficit.
Reducing Proposition 98 funding to its constitutional minimum — voters passed the amendment in 1988 to guarantee minimum funding for schools and community colleges — would bring $16.7 billion to the budget problem.
Using other funds instead of the general fund to meet obligations, or using bonds, are other options, as is limiting the use of tax credits, Petek said.
Analysists advised the Legislature to quickly identify spending that’s been committed, but not yet allocated. If lawmakers wait, possible solutions will disappear over the coming months.
The Legislature reconvenes Jan. 3.
Assemblymember Bill Essayli, a Corona Republican, slammed Democrats about the budget in a Thursday post on X, formerly Twitter.
“This is happening because we have unserious anti-business Democrats running the Legislature,” Essayli wrote. “A deficit this big would get you fired in the private sector.”
State Senate President pro Tempore Toni G. Atkins acknowledged the challenges ahead but attempted to strike an optimistic tone.
“The LAO’s fiscal outlook includes challenging news — we can withstand this, but we will need to be cautious and mindful as we approach our budgeting and legislation next year and in the years to come," the San Diego Democrat said. "As I said last week when the LAO issued its revenue forecast, California is prepared to withstand these budget challenges. Our record reserves and other budgeting tools will help us weather this shortfall, while at the same time protecting middle class taxpayers and the programs and resources that help Californians and families.”
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