LAO outlook projects deficits after 2025
As planned in the June 2024 budget, however, the 2025 picture is "roughly balanced"
The Legislative Analyst’s Office (LAO) released its annual Fiscal Outlook publication here. (LAO typically posts supplementary items concerning the outlook, and if so, I will add links for them and selected statements from elected leaders about the report later at the bottom of this page.)
What is the LAO Fiscal Outlook? The outlook (a) projects whether the June 2025 budget is balanced or not and (b) makes a rough projection about the prospective condition of the state budget in 2026, 2027, and 2028 as well. The outlook aims to assume current state and federal policies. Accordingly, planned federal policy changes by Republicans that could hurt the economy or hurt programs benefiting Californians are not reflected in this publication.
2025 Budget “Roughly Balanced.” The outlook notes that state revenues have been booming in line with the recent stock market rally, as previously noted on this Substack, observing that the overall state economy is not growing as fast. As such, despite projected spending increases across the budget this year, the LAO finds that the 2025-26 budget condition is “roughly balanced,” with a small deficit. This is consistent with the goal of the 2024 state budget plan: to roughly balance the budget in both 2024 and 2025, a two-year budget balancing exercise without direct precedent in recent state history. Along with tax and spending decisions, a draw of roughly half of the state’s rainy day fund was planned in 2024 and 2025 to help keep the budget in balance over that period.
Significant Deficits After 2025, So “No Capacity for New Commitments.” The June 2024 budget plan anticipated deficits in the years after 2025, as shown in a June Department of Finance projection here. The LAO now anticipates larger deficits after 2025, in part due to a projection of significantly faster spending growth in health and human services programs. For this reason, LAO finds that “while the budget picture is fair for the upcoming year, [the] outlook suggests that the state faces double-digit operating deficits in the years to come.” “While these out-year estimates are highly uncertain,” LAO says, “this is an indication that the Legislature might need to address deficits in the future.” “In our view, this year’s budget does not have capacity for new commitments, particularly ones that are ongoing,” the outlook notes.
Personal Observations About the LAO Outlook. By my count, this is the 30th annual publication of the Fiscal Outlook (previously called The LAO’s Economic and Budget Projections) in its modern form. Similar LAO (previously Legislative Auditor) analyses were released from time to time going back to the 1940s. The LAO provides a valuable service in that this outlook and its other publications facilitate a critique of administration budget projections. That critique allows policy makers to better gauge the risk in each annual state budget plan. Such a risk assessment helps shape decisions in each annual state budget—specifically, whether elected leaders feel able or required to expand or contract funding for programs. While the administration’s projections generally underlie almost every enacted state budget plan, the LAO’s independent analyses often are used to tweak parts of those projections and lay the groundwork for budget safeguards in case state finances trend in a negative direction. Legislative Analyst Gabe Petek recently wrote about the LAO’s independent role in the budget process here. I was involved in the Fiscal Outlook publication for more than 10 years at LAO, and as such, I know what a team effort it is for LAO staff to release it each November. Happy reading!
Other Items Related to the Report. Other items include:
The LAO’s summary of its outlook for school and community college funding here.
The LAO’s summary of its outlook for Medi-Cal costs here.
Response by Assembly Speaker Robert Rivas and Budget Chair Jesse Gabriel here.
Response by Senate President pro Tempore Mike McGuire here.
Response by Assembly Republican Leader James Gallagher here.
Response by Senate Budget and Fiscal Review Committee Vice Chair Roger Niello in Los Angeles Times story here.