California Faces Record Budget Deficit of $73 Billion, Exceeding Previous Projections

California is facing a worsening budget crisis, with projections now indicating a possible record deficit of $73 billion, as outlined in a latest report from the state's nonpartisan Legislative Analyst's Office (LAO).

The forecast presented by the LAO in a report on Tuesday warns of a $24 billion decline in revenues, leading to a $15 billion rise in the state's budget issue. As a result, the budget deficit, previously projected to reach $58 billion last month, may now increase to $73 billion, as per Fox News.

California Faces Budget Crisis

(Photo : Justin Sullivan/Getty Images)
SAN FRANCISCO, CALIFORNIA - OCTOBER 01: California Gov. Gavin Newsom speaks during a news conference after meeting with students at James Denman Middle School on October 01, 2021 in San Francisco, California. California Gov. Gavin Newsom announced that California will become the first state in the nation to mandate students to have a COVID-19 vaccination in order to attend in person classes. The mandate will go into effect at all private and public schools in the state when the FDA approves the vaccinations for students age and grade level. It is expected that 7th to 12th graders will likely have to have the vaccine by January of 2022.

The financial outlook for California is experiencing increased vulnerability, as revenue collection data suggests that revenues are declining, according to the Legislative Analyst's Office (LAO). The LAO identified that the upcoming updated projection of the state's finances in May may show a larger budget issue.

The actual budget shortfall, according to the LAO, hinges on various factors, including mandatory Proposition 98 spending on schools and community colleges. The report outlined a worrisome scenario, indicating that a $24 billion erosion in revenues could elevate the estimated deficit from $58 billion to a staggering $73 billion.

Lawmakers are now compelled to seek new budget solutions to ensure a balanced budget for the 2024-25 fiscal year. The LAO proposed potential measures, such as increasing revenue, reducing both one-time and ongoing spending, and exploring options like cost shifts or utilizing reserves.

Identifying areas for cuts, the LAO listed nearly $16 billion in one-time and temporary spending across categories like business and labor, criminal justice, education, health and human services, housing and homelessness, resources and environment, and transportation, according to The Sacramento Bee.

Budget Deficit Increase in California

H.D. Palmer, spokesperson for Newsom's Department of Finance, acknowledged that the state is still expecting over $51 billion in income and corporate tax receipts. However, he stressed the uncertainty surrounding the budget estimate and urged the Legislature to act promptly on early action budget measures to address an $8 billion portion of the projected shortfall.

Governor Gavin Newsom, in his January budget presentation, hinted at revisiting last year's budget to implement changes and tackle the growing deficit. The new projection for fiscal 2024-25 anticipates a $15 billion increase in the deficit, primarily attributed to a significant decline in traditional corporate tax collections and weak income tax withholding and estimated payments.

The LAO's report emphasized that if the budget problem escalates by $15 billion, the Legislature must find equivalent new budget solutions to maintain balance. This forecast raises concerns that Governor Newsom may propose additional spending reductions in his May budget revision, adding to the already planned $8.5 billion in cuts.

Newsom and the LAO have been in disagreement over the size of the deficit, with the governor initially estimating it at $37.9 billion. The state's fiscal outlook is further complicated by a seven-month extension to the income-tax filing deadline, impacting revenue forecasts and leading to over-allocations, especially in education, based on mandatory budget formulas, Bloomberg reported.