LAO: future deficit estimates similar to Governor's
LAO recommends "at least the level of ongoing solutions proposed by the Governor"
The Legislative Analyst’s Office (LAO) released its updated multiyear budget outlook this weekend here.
The LAO’s new multiyear outlook—consistent with tradition—assumes that the Legislature enacts the Governor’s May Revision budget-balancing and other proposals and reflects the LAO’s independent, recent revenue forecast. (Traditionally, the Legislature’s enacted budget reflects the Department of Finance’s revenue forecast.)
In the new outlook, the LAO notes that its somewhat higher near-term revenue estimates—coupled with higher spending estimates—would, if enacted, improve this year’s budget condition by nearly $2 billion relative to the administration’s projections. (In other words, under LAO’s figures, the 2025-26 “budget problem” seemingly could be characterized as closer to $10 billion, versus the $11.9 billion cited by the administration.)
More importantly, perhaps, the LAO outlook projects future operating deficits in the state General Fund “broadly consistent” with the administration’s multiyear deficit projections. “Both our office and the Department of Finance project operating deficits ranging from $10 billion to $20 billion [per year] over the multiyear period,” LAO notes, as illustrated in the graphic below. LAO adds “history shows that actual revenues can vary from our median projection by billions or even tens of billions of dollars over a multiyear period.
The LAO outlook notes that the Governor’s May proposals significantly reduce growth in the Medi-Cal program, but leave “most other major programs’ growth rates mostly unchanged.” The LAO notes, as shown in the figure below, that the Governor used the state’s huge cash balances—via proposed borrowing—to substantially reduce the need for even more program cuts this year. The LAO adds that much of the proposed new borrowing is not programmed to be paid off during the multiyear outlook (forecast) period, which currently ends in 2028-29
.The LAO report concludes with the following comments:
“Ongoing solutions are necessary given the state’s persistent multiyear fiscal challenges. Even with these changes, however, budget problems are likely to continue. As such, we recommend the Legislature maintain at least the May Revision level of ongoing solutions in the final budget package.” The LAO emphasizes that “the Legislature has flexibility to adopt a different mix of solutions than those proposed by the Governor,” such as different cuts or statutory changes to increase state revenue collections.
Anticipated federal budget changes, such as those the House of Representatives recently passed in H.R. 1, are “likely to create additional fiscal and policy pressure” on the state. The May Revision “appropriately excludes the potential fiscal impacts of pending federal actions, as those effects remain uncertain.”
Future state budget problems likely “will become increasingly difficult to resolve over time, as the state has already relied on the least disruptive solutions—such as reducing one-time and temporary spending, drawing down reserves, and increasing borrowing—although notably the state still has $11 billion in [rainy day fund] reserves under the May Revision proposals.”
“Although there is a possibility that revenue growth could ease future deficits, it is equally likely that the budget problem will grow larger than our forecast suggests,” the LAO notes.