California is set to experience deficits of $10 billion to $20 billion each of the next several years, according to a new report from the state-funded Legislative Analyst’s Office.
The report warns the “shortfalls will become increasingly difficult to resolve over time” due to reliance on a dwindling number of available “one-time” solutions.
The LAO’s report, quietly released on Saturday of Memorial Day weekend, forecasts “persistent future deficits,” even after accounting for California Gov. Gavin Newsom’s May budget revisions to address a $12 billion budget shortfall. The report indicates that would leave the state’s next governor with a growing, non-recessionary, structural state treasury crisis.
Among the “least disruptive” solutions rapidly becoming exhausted are “reducing one-time and temporary spending, drawing down reserves, and increasing borrowing.”
“To balance the budget going forward, the Legislature will likely need to adopt additional solutions that increase ongoing revenues or reduce ongoing spending — both of which involve the most difficult and consequential trade-offs for policymakers,” wrote the LAO.
The office also noted that the state is relying on borrowing, as it did during the Great Recession, to pay for regular services, which will put further pressure on future budgets — and California’s next governor after Newsom.
“Since 2023-24, the Legislature has addressed a cumulative total of $82 billion in budget shortfalls, with the May Revision reflecting another shortfall,” wrote the LAO. “While the majority of those deficits have been solved using spending reductions, a non-negligible share of the solutions have relied on budgetary borrowing.”
“Some of this borrowing is similar to the measures used during the Great Recession — collectively previously referred to as the state’s ‘wall of debt,’ which was defined as nonroutine borrowing mechanisms enacted to address persistent deficits,” continued the LAO. “The May Revision adds $5 billion in new borrowing, increasing the total outstanding amount from $12 billion to $17 billion.”
“These obligations will place additional pressure on the state’s future budgets,” the office concluded.
Last year, the LAO said the state has “no capacity” for new spending and would face persistent deficits rising to the tens of billions of dollars. As demonstrated by the LAO’s multiyear analysis of the governor’s May revised budget, this core structural imbalance of spending exceeding revenues has not been addressed.
