Addressing California’s Budget Shortfall

The Legislative Analyst’s office (LAO) has forecasted a budget shortfall of $25 billion for Fiscal 2023-24 even if a recession does not occur. A recession could trim revenues by an additional $30 billion to $50 billion. Since the state has general purpose reserves of only $23 billion, LAO recommends, and we agree, that the Legislature not dip into reserves to cover a pre-recession deficit:

Screenshot of excerpt from Legislative Analyst’s Office 2023-2024 California Budget Fiscal Outlook report. The excerpt reads: “Save Reserves for a Recession. The $25 billion budget problem in 2023-24 is roughly equivalent to the amount of general-purpose reserves that the Legislature could have available to allocate to General Fund programs ($23 billion). While our lower revenue estimates incorporate the risk of a recession, they do not reflect a recession scenario. Based on historical experience, should a recession occur soon, revenues could be $30 billion to $50 billion below our revenue outlook in the budget window. As such, we suggest the Legislature begin planning the 2023-24 budget without using general purpose reserves.”

Importantly, LAO also points out that its estimate “understates the actual budget problem in inflation-adjusted terms,” which means that maintenance of the current level of services would require additional spending. To preserve services, we agree with LAO’s recommendation that the Legislature pause or delay recent one-time or temporary augmentations and also encourage the Legislature to require state agencies, schools, colleges, universities and all other recipients of state funds to fully utilize federal healthcare benefits in place of state spending on healthcare for retired employees.

While now is not the time to add to reserves, a much larger general purpose reserve should remain a major objective for the Legislature. As Governor Newsom noted on page 264 of his last budget, a recession could trigger “an annual General Fund revenue loss in the range of $30 billion to $40 billion for several years.” (emphasis added). We remain supportive of efforts to permit larger deposits into reserves.