About this time last year the California Legislative Analyst’s Office (LAO) was ringing alarm bells about the state’s next budget. This year, the picture is much less bleak.
In its just-released fiscal outlook for the next year, the LAO described the Fiscal Year 2025-26 budget as “roughly balanced,” with a projected deficit of $2 billion that the Legislature could easily address.
However, the state isn’t exactly out of the woods — the office sees relative economic weakness coupled with rising state spending leading to larger deficits of up to $30 billion by FY 2028-29.
Altogether, the LAO painted a picture of a state with the ability to carry on but not take on much new spending.
Part of the complication in the budget picture is that the state’s solid revenues are now dependent on strong income from high earners — which, in turn, comes from strength in the stock market.
“NVIDIA accounts for about one-third of the improvement in the S&P 500,” said Gabriel Petek, the state’s legislative analyst, on a conference call. “So if the sentiment around that, or the optimism around that, were to shift, it could directly impact our revenue picture pretty quickly … as compared to if we had more of a broad-based underlying economic engine going at a better clip, that would be a more solid foundation for revenues as we look ahead.”
Meanwhile, the unemployment rate has been rising and consumer spending has been declining statewide — signs that would normally point toward decreasing tax revenue.
“If you look across the state, all of the new job creation has really been attributable to government and health-care-related jobs,” Petek said. “So that, to me, is fairly striking.”
LAO officials noted on the call that the Legislature took the “unusual” step last year of addressing the projected deficit for the next budget, which has led to more solid fiscal footing heading into 2025. The state already plans on withdrawing $7 billion from its reserve funds to help cover the FY 25-26 budget, which was figured into the projected deficit.
There would still be another $11 billion left in the reserve fund, which means more assistance planning for future deficits.
Petek noted that there’s uncertainty in next year’s $2 billion projected deficit for a few reasons, one of which is that the current state budget assumed savings from “operational efficiencies” — for example, $763 million saved from not hiring to fill vacant positions. The Department of Finance didn’t provide LAO with information on whether those savings have materialized, the report said. Officials on the call said they’ve been skeptical about those savings coming through since the budget was passed.
Despite needing to address a much larger deficit in the current fiscal year, the state managed to fund many large IT projects.
LAO Projects ‘Roughly Balanced’ Budget, With Warnings
Surprisingly strong revenues mean the Legislature likely won’t need to deal with a big deficit in 2025 like it did in 2024, according to a new fiscal outlook from the Legislative Analyst’s Office. But the problems might begin to mount in coming years.
