LAO Projects Major Budget Deficit

December 16, 2023 - The Rural County Representatives of California (RCRC) report a new report on California’s Fiscal Outlook by the state’s Legislative Analyst’s Office (LAO) projects that the state faces a $68 billion budget deficit, which is far higher than the $14 billion deficit anticipated in the 2023-24 Budget Act.  $26 billion of the deficit is the result of lower-than-anticipated income from the 2022-23 fiscal year.  Depending on how the state addresses the deficit, the LAO predicts longer-term annual budget deficits of roughly $30 billion.  While the LAO projects state revenues to be flat for the next year, it does expect revenue increases in future years.    

The LAO indicated that the state has several tools available to address part of this deficit, including: 

• Withdrawing up to $24 billion in reserves 

• Reducing Proposition 98 spending on education by up to $16.7 billion 

• Reducing $8-10 billion in one-time spending 

• Loaning money from various special funds 

• Increasing state revenues and/or decreasing expenditures 

Given that the LAO projects future structural budget deficits in future years, it seems unlikely that the Legislature would rely upon the entire $24 billion reserve fund to fix the current problem.   

A separate Proposition 98 reserve fund could be used to support education.  While schools already spent money allocated in the FY 2022-23 budget, actual revenues for that year came in far lower than projected.  This means the state cannot claw back money from the education system; however, it could allocate the Proposition 98 reserve monies to backfill that shortfall.  This would reduce the Proposition 98 baseline, but would avoid painful claw backs.   

The LAO projects that the Legislature could rescind or delay roughly $8-10 billion in spending that was included in previous budgets, but which has not yet been spent.  It is currently unclear what programs would be directly impacted, but possibilities include broadband funding, solid waste grants, bond funds, energy programs, and potentially a subset of the $750 million allocated for roughly 500 special ““Legislative Priorities” included in the FY 2023-24 budget.  Given the magnitude of the deficit, the Legislature may explore tapping into cap-and-trade auction revenues to bridge part of this shortfall.  The LAO also noted that the Legislature could repurpose revenues from the new Managed Care Organization (MCO) tax to offset General Fund expenditures for MediCal.  Those taxes were intended to go to provider rate increases. 

State Acts to Reduce Current-Year Spending

In an effort to stop the bleeding, the California Department of Finance issued a Budget Letter on December 12 ordering state entities to take immediate action to reduce current-year General Fund expenditures.  The letter orders all state agencies to: 

• Avoid entering into new contracts or agreements to lease or purchase equipment, goods, or services

• Halt all discretionary and non-essential information technology purchases

• Halt planned vehicle replacements (other than for mission critical and emergency-related vehicles)

• Minimize the purchase of office supplies and scrutinize subscriptions, training costs, and furniture purchases

• Cancel plans for non-essential travel and participation in seminars, conferences, and trainings

• Suspend the annual leave buy-back of accrued vacation or annual leave

The letter notes that exemptions can be made for expenditures to address a declared emergency, provide 24-hour medical care, avoid significant revenue losses, and achieve significant net cost savings

LAO Projects Future Transportation Funding Shortfall

In another analysis, the LAO projected that the state could see $4+ billion drop in gas tax revenue over the next decade.  As the state transitions to electric vehicles, the resulting decline is gasoline and diesel sales will bring $5 billion less in gasoline and diesel taxes to the state.  The LAO projects this loss will be offset by approximately $1 billion in increased fees levied on electric and hydrogen fuel cell vehicles.  These revenue losses are anticipated to reduce the state’s ability to fund both state and local transportation projects.  In particular, the LAO notes “jurisdictions that historically have been more dependent on state funding for their local efforts will experience greater impacts across their transportation systems, likely resulting in reduced services and/or poorer road conditions for their residents.” 

ABOUT RURAL COUNTY REPRESENTATIVES OF CALIFORNIA (RCRC)
The Rural County Representatives of California (RCRC) is a thirty-seven member county strong service organization that champions policies on behalf of California’s rural counties. RCRC is dedicated to representing the collective unique interests of its membership, providing legislative and regulatory representation at the State and Federal levels, and providing responsible services for its members to enhance and protect the quality of life in rural California counties. To learn more about RCRC, visit rcrcnet.org and follow @RuralCounties on Twitter, Facebook and Instagram.
Source: RCRC