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California's Budget Deficit | What To Do Next

This week, the state’s nonpartisan Legislative Analyst’s Office (LAO) released its annual budget outlook. It’s a hard message, but not a surprise.

The LAO projects a deficit for the current fiscal year of $25B – expanding to $41B over the next three years.

The LAO’s no nonsense budget projections have been critical tools for policymakers for decades. But, as the LAO reminds us repeatedly in yesterday’s release, projections are not predictions.

In a recession scenario - which remains quite likely - the deficit over the next several years could soar as high as $90B. It's fine to hope for the best. But we must plan for the worst.

To do that means, first, a larger budget reserve. We have long said that California’s deeply progressive tax structure will work only if we smooth out the volatility. Given the state’s scale, a budget reserve should be at least $50B – roughly double the current reserve – and should be tied to the increasing size of the budget.

Second, we need better numbers. IPO proceeds for California companies plummeted from an average of $16B over the last 5 years to $177M through the first three quarters of 2022. That’s a big hit to the state budget, but policymakers don’t have the data showing just how big it is. Meanwhile, anecdotes about high net worth Californians leaving the state abound, but detailed 2022 tax data showing the impact of those departures won’t be available from the Franchise Tax Board until January 2025.

That’s not acceptable. As lawmakers grapple with budget deficits, they need to know real-time whether they are pushing out the very Californians they wish to tax – on whom our state budget already relies.

Finally, we need legislators not just to legislate, but to govern. As the LAO report indicated, tight fiscal times require systematic program evaluation, and discarding or scaling back those that are not showing results:

Moreover, in light of the magnitude of the recent augmentations, programs may not be working as expected, capacity issues may have constrained implementation, or other unforeseen challenges may have emerged. To address the budget problem for the upcoming year, these cases might provide the Legislature with areas for pause, delay, or reassessment.

At the 21st Century Alliance, smart government is one of our three pillars. That means doubling down on what works, and shutting down what doesn’t.

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