Golden State no more? California budget deficit balloons to $68 billion

California faces a $68 billion deficit in its budget, largely as a result of a severe revenue decline in the current 2022‑23 fiscal year, the state’s Legislative Analyst’s Office reported Thursday.

“The state faces a serious budget deficit,” the analyst’s office said. “We estimate the Legislature will need to solve a budget problem of $68 billion in the upcoming budget process.”

Gov. Gavin Newsom must present a proposed 2023-2024 budget early next month.

Typically, the budget process does not involve large changes in revenue in the prior year, in this case, 2022‑23, the LAO said, because prior‑year taxes usually have been filed and associated revenues collected. But because of federal tax filing extensions this year, the Legislature is now gaining a complete picture of 2022‑23 tax collections after the fiscal year has already ended.

The LAO said that 2022‑23 revenue will be $26 billion below budget estimates.

“This creates unique and difficult challenges — including limiting the Legislature’s options for addressing the budget problem,” the LAO reported.

For the near term, though the shortfall “will be challenging,” the Legislature has options, the LAO said. The state has nearly $24 billion in reserves to help tackle the budget problem. In addition, there are options to reduce spending on schools and community colleges that could take care of nearly $17 billion of the budget problem. Further adjustments to other areas of the budget, such as reductions to one‑time spending, could address at least an additional $10 billion or so.

These options and some others, like cost shifts, would allow the Legislature to solve most of the deficit largely without impacting the state’s core ongoing service level,” the LAO said.

But the LAO said the Legislature will have fewer options to deal with multiyear deficits in coming years.

“Given the state faces a serious budget problem, using general purpose reserves this year is merited,” the LAO said. “That said, we suggest the Legislature exercise some caution when deploying tools like reserves and cost shifts. The state’s reserves are unlikely to be sufficient to cover the state’s multiyear deficits — which average $30 billion per year under our estimates. These deficits likely necessitate ongoing spending reductions, revenue increases, or both. As a result, preserving a substantial portion — potentially up to half –of reserves would provide a helpful cushion in light of the anticipated shortfalls that lie ahead.”