California Faces $25 Billion Budget Deficit, Could Be Worse If Recession Hits

California Gov. Gavin Newsom speaks at the California Association of Realtors Legislative Day in Sacramento, Calif., on April 27, 2022. Rich Pedroncelli/AP Photo

California could face a $25 billion budget deficit in 2023–24, despite raking in a record-setting $98 billion budget surplus this year, according to an analysis that comes days after midterms election, in a state where the Democratic party enjoys a supermajority.

“The budget problem is mainly attributable to lower revenue estimates, which are lower than budget act projections from 2021–22 through 2023–24 by $41 billion. Revenue losses are offset by lower spending in certain areas,” said the nonpartisan Legislative Analyst’s Office (LAO) of California in its annual fiscal outlook (pdf). The estimated numbers look dismal especially when the analysis has not factored in the inflation or an economic recession.

“While our lower revenue estimates incorporate the risk of a recession, they do not reflect a recession scenario.” The report forecasts that deficits would decline from $17 billion to $8 billion over the subsequent three years.

The revenues and transfers for 2023–24 come around $208 billion, nearly the same as the last fiscal. The expenditures are about $226 billion, a decrease of nearly $3.6 billion. However, during 2022–23, there was a $19 billion fund balance from the prior term, which resulted in a total negative balance of $6.7 billion.

For the upcoming fiscal, the prior year fund balance will be negative $2 billion. Hence, the total deficit will run up to $24.926 billion.

If a recession hits the economy, which many analysts claim is already happening, the state’s revenue could be “$30 billion to $50 billion below” the report’s outlook, which would translate to a worsened situation for California.

“As such, we suggest the Legislature begin planning the 2023‑24 budget without using general purpose reserves,” said the report.

California Economy

A booming stock market and thriving tech sector played its part in making California one of the richest states in the country, and helped Governor Gavin Newson present a record $97.5 billion budget surplus this year. California relies heavily on the capital gains of its wealthiest citizens—1 percent of whom account for nearly half of the state’s income taxes.

However, recent downturns spurred by rising interest rates and mortgage rates had led to dampening demand across the economy, and has negatively affected state revenues.

In this scenario, Newson along with other state legislators will need to decide which programs to slow down and where to make the critical cuts.

The LAO report pointed to a $13 billion estimated reduction in general fund spending on schools and community colleges for 2021–22 through 2023–24 to offset budgetary issues.

However, according to legislative analyst Gabriel Petek, California has about $23 billion in “general purpose reserves,” which could mean school funding will not need to be cut. “We don’t think of this as a budget crisis, we think of this as a budget problem,” he told reporters during a news conference.

The general purpose reserves are adequate to make up for upcoming budget deficits, but “not if a recession occurs,” said the report.

The Legislative Analyst’s Office recommended the state begin planning for the upcoming fiscal year without using general purpose reserves, and “consider saving reserves for a recession when the budget problem could be twice as large as the one identified in our outlook.”