California faces potential $25B budget deficit

California could face a $25 billion budget deficit next fiscal year as economic growth slows and revenues slump, according to a report released Wednesday by the California Legislative Analyst’s Office.

California has enough money saved in budget reserves to cover most of the expected shortfall, the report found.

“It’s not insignificant, but it’s also manageable,” Legislative Analyst Gabriel Petek said during an online briefing with reporters. “We don’t think of this as a budget crisis. We just think of this as a notable budget problem that the legislature will have to confront.”

Revenues could plummet further if a recession hits, and that would worsen the budget hole, the LAO report noted. The agency’s estimate also does not fully reflect the growing cost of providing state services.

The LAO is a nonpartisan government agency that advises the state legislature.

Its report anticipates deficits in future years as well, declining from $17 billion in fiscal 2025 to $8 billion in fiscal 2027. California’s current budget of $308 billion was approved as the state enjoyed a record surplus.

California tax collections have been coming in below estimates for months as the decline in financial markets has lowered income taxes owed by wealthy residents. Moving forward, the economic slowdown may have a broader effect on tax collections, deputy legislative analyst Brian Uhler said during the briefing.

While a cooling economy will affect every state’s budget, many state leaders are still expecting to have surpluses next year. The governors of Mississippi and Montana have already proposed major tax cuts, citing their state’s strong finances.

“Mississippi continues to be in the best fiscal and financial shape in our state’s history,” Gov. Tate Reeves (R) said in his budget recommendation for fiscal 2024 released this week. Reeves wants to eliminate the state income tax.

Only four governors have released budget recommendations so far: Reeves, Montana Gov. Greg Gianforte (R), Arkansas Gov. Asa Hutchinson (R), and Colorado Gov. Jared Polis (D).

Most governors, including California Gov. Gavin Newsom (D), will release budget proposals early next year.