SACRAMENTO, CA - July 17: California state Capitol for file art. Photographed at state Capitol on Sunday, July 17, 2022 in Sacramento, CA. (Myung J. Chun / Los Angeles Times via Getty Images)
OAKLAND, Calif. - A new report states California will face an $18 billion budget deficit next year, the fourth year in a row the state's expenses have surpassed its revenues.
The Legislative Analyst’s Office on Wednesday released a new Budget Outlook Report, which is published around this time every year.
"Under our revenue and spending estimates, the Legislature faces an almost $18 billion budget problem in 2026-27. This is about $5 billion larger than the budget problem anticipated by the administration in June, despite improvements in revenue," the report states. "This is because constitutional spending requirements under Proposition 98 (1988) and Proposition 2 (2014) almost entirely offset revenue gains. Moreover we estimate costs in other programs to be about $6 billion higher than anticipated."
The report goes on to state that in the 2027-2028 fiscal year, the deficit is expected to grow to about $35 billion annually, due to spending growth continuing to outstrip revenue growth. Changes to healthcare and food assistance programs for low-income residents are expected to increase costs for the state by $1.3 billion, the report states.
Proposition 98 is a piece of legislation passed in 1988 which established a minimum level of funding for public education based on a percentage of the state’s budget, or a the prior year’s fiscal allocation. Prop 2 was passed in 2014 and requires, among other things, that 1.5% of general fund revenues be transferred annually into the state budget stabilization account, and that half that fund’s revenues be used to repay state debts and unfunded liabilities.
Look past the hype
What they're saying:
The report also warns that both in California and the United States as a whole, excitement over the growth of artificial intelligence may be "overheating" the stock market. While investments in AI have led to billions more in income tax collections, the report warns that the growth can’t last forever.
"With so much exuberance surrounding AI, it now appears time to take seriously the notion that the stock market has become overheated," the report states. "History suggests that the stock market is prone to overreact to major technological advances, even if the technology itself turns out to be revolutionary."
Newsom's turn
The other side:
Newsom will release his own budget estimates in January, ahead of his proposed spending plans for the next fiscal year. His final term in office ends in January, 2027 — California limits governors to serving only two terms — which means his upcoming budget will be his final word on how California spends its money. The state needs to adopt a budget by July, 2026.
The Legislative Analyst Office report recommends that the state address the shortfall by cutting spending or finding more revenue.
The reported revenue estimates are conservative, and protect California against a market downturn but don’t reflect the revenue loss of a recession, and the state’s coffers are already underfunded. California has already used much of its rainy-day resources to address the last three years’ budget shortfalls.