California Governor Gavin Newsom’s last year in office may be a difficult one as a looming deficit might affect the state’s operations which will affect counties and municipalities in funding and other services.
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.
Typically, the budget process does not involve large changes in revenue in the prior year (in this case, 2022‑23). This is because prior‑year taxes usually have been filed and associated revenues collected. Due to the state conforming to federal tax filing extensions, however, the Legislature is gaining a complete picture of 2022‑23 tax collections after the fiscal year has already ended. Specifically, it is estimated that 2022‑23 revenue will be $26 billion below budget act estimates. This creates unique and difficult challenges—including limiting the Legislature’s options for addressing the budget problem.
While addressing a deficit of this scope will be challenging, the Legislature has several options available to do so. In particular, the state has nearly $24 billion in reserves to address the budget problem. In addition, there are options to reduce spending on schools and community colleges that could address nearly $17 billion of the budget problem. Further adjustments to other areas of the budget, such as reductions to one-time spending, could address at least an additional $10 billion or so. These options and some others, like cost shifts, would allow the Legislature to solve most of the deficit largely without impacting the state’s core ongoing service level.
These mounting economic headwinds have pushed the state’s economy into a downturn. The number of unemployed workers in California has risen nearly 200,000 since the summer of 2022.
“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 stand ready to work with the state to find real solutions to address the rise in crime, the lack of affordable housing, growing homelessness rates, and climate change. But we will push back on any efforts to raid funding for local programs to make up for the deficit.”
“Cal Cities has evolved considerably since it was created 125 years ago, but our mission to serve our diverse communities and improve the quality of life for all Californians is still the driving force behind our work,” said League of California Cities President and Fowler Mayor Daniel Parra. “We are unified in our commitment to ensure that our cities not only survive but thrive during economic slowdowns and that our most vulnerable residents are well-served.”
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.